SUPER-IMPERIALISM: The Shameful Legacy Of Liberal Democrats

April 29, 2007

By Carolyn Baker

It is a war against the globalization of the market, against the destruction of nature adn the confiscation of resources, against the termination of indigenous peoples and their lands, against the growing maldistribution of wealth and the consequent decline in standards of living for all but the rich.

Andrew Kopkind

Professor Michael Hudson, an independent Wall St. financial economist, has written an extraordinary book entitled Super Imperialism: The Origins and Fundamentals Of U.S. World Dominance. I first heard of Michael Hudson when browsing Bonnie Faulkner’s “Guns And Butter” website, and as I listened to him, I knew that I needed to read Super Imperialism for many reasons, not the least of which is that I am not an economist and am only beginning to educate myself on how the money works in the domestic and world economies. For this reason, I have been reluctant to write a review of Hudson’s book; I am still learning, as are many of my readers, about dysfunctional and oppressive economic systems and how they work, as well as learning about how a healthy economy might function to meet the needs of its citizenry without harming them or the ecosystem. That said, as an historian, I believe that in order to fully appreciate the current tyranny of centralized financial systems, it is necessary to understand how they evolved within the past six decades.

While reading Hudson’s book I quickly realized that it is a crucial companion to Chalmers Johnson’s trilogy of books on U.S. imperialism, namely, Blowback, The Sorrows Of Empire, and Nemesis. Johnson’s emphasis is primarily on the military aspects of U.S. imperialism since the end of World War II, with much less focus on American economic imperialism during that era.

In the current milieu of blatant neo-conservative world domination rhetoric and behavior, it is oh so tempting to believe that the Republican Party and political conservatism have been historically at the forefront of an imperialist foreign policy. What is crucial to understand is that from an historical perspective, the economic imperialism engineered by the United States was overwhelmingly the brain child of the liberal wing of the Democratic Party.

Bretton Woods

Hudson takes us back to 1945 when the United States was the most powerful creditor nation on earth, having lent billions to other nations during and after World War II. Today, the U.S. is the most powerful debtor nation on earth, and Super Imperialism describes and documents superbly how such a stunning reversal of economic positioning occurred.

Although corporations and centralized financial systems were the means by which economic imperialism was implemented, …it is not to the corporate sector that one must look to find the roots of modern international economic relations as much as to U.S. Government pressure on central banks and on multilateral organizations such as the IMF, World Bank, and World Trade Organization….At the root of this new form of imperialism is the exploitation of governments by a single government, that of the United States, via the central banks and multilateral control institutions of intergovernmental capital rather than via the activities of private corporations seeking profit. What has turned the older forms of imperialism into a super imperialism is that whereas prior to the 1960s the U.S. Government dominated international organizations by virtue of its preeminent creditor status, since that time it has done so by virtue of its debtor status. (23-24)

The genesis of this re-positioning was the International Monetary and Financial Conference of 1944 held in Bretton Woods, New Hampshire out of which was born the Bretton Woods System of “international monetary management for commercial and financial relations among the world’s industrial states.” It was there that the World Bank and International Monetary Fund were established, and as Hudson notes, “The U.S. economy was enabled to draw the finances of other governments into an international cartel directed by its own policy-makers, dominated by U.S. officials and their appointees.” (139)

As I have noted in my recent book U.S.HISTORY UNCENSORED: What Your High School Textbook Didn’t Tell You, the ultimate “cure” for the Great Depression was not the New Deal and its economic programs, but World War II, out of which the U.S. emerged not only as the most powerful nation militarily, but economically as well. A number of modern historians have speculated that one reason Franklin Roosevelt’s administration failed to intervene economically to undercut Hitler’s rise to power was Roosevelt’s ultimate dream: that the U.S. would emerge from war as the most powerful nation on earth economically and militarily, forever precluding, in Roosevelt’s mind, the possibility of another Great Depression. FDR’s dream was realized, making possible the economic supremacy of the United States during and subsequent to the Bretton Woods conference, without which the U.S. could never have achieved the commanding position it assumed at the momentous gathering of nations.

Hudson seems unable to overemphasize the auspiciousness of America’s post-war preeminence:

What occurred after World War II was nothing less than an inversion of the law of nations as it had been evolving for centuries, at least on the part of Europe if not that of the United States. The most basic principle of international law is that nations are equals with regard to their rights and policy-making autonomy. In addition to this legal principle is a basic behavioral law of diplomacy: in a world of nation-states it is unnatural for any nation to abrogate its international position voluntarily….Europe demurred from pressing its self-interest at any point where this conflicted with that of the United States. Exhausted by war, it voluntarily abrogated what had been more than four centuries of imperial ambitions. (265)

To American diplomats the United States simply was living up to its historic destiny as world leader when they formulated their plans for the postwar world at Bretton Woods. In their idealism they anticipated that the breakup of nationhood—at least on the part of foreign countries—would inaugurate a world economy of peaceful interdependence and perhaps even altruism. They did not ponder how alien this concept was to the basic principle of nationhood, that no nation can be expected to relinquish its independence with regard to economic policy-making. Nonetheless, American now asked, and received, European capitulation on every major point of postwar relations. (265)

Pegging international currency to the dollar, backed by the gold standard, the U.S. continued to exert economic supremacy throughout the Cold War era. Although the Bretton Woods system “officially” collapsed in 1971 when the U.S. suspended convertibility from dollars to gold, America’s economic dominance did not subside with abandonment of the gold standard.

In fact says Hudson, “The key to understanding today’s dollar standard is to see that it has the form of gold bullion. While applying creditor-oriented rules against Third World countries and other debtors, the IMF pursues a double standard with regard to the United States. It has established rules to monetize the deficits the United States runs up as the world’s leading debtor, above all by the U.S. government to foreign governments and their central banks.” (35)

Everyone got something as a result of Bretton Woods, but ultimately the cost was untenable. Europe received resources it could have never acquired otherwise and assistance in rebuilding after the World War II, but its war debts remained on the books. Developing nations, particularly the agriculturally backward ones, received resources as well, but the price they have paid has been nothing less than brutal. Hudson states that the United States “simply anticipated that these countries would increase their purchases of American farm products, which they could have produced for themselves if only they had set out to restructure their agricultural sectors.” (186) The World Bank and IMF were “protectionist” in the sense that they protected U.S. investors against foreign commercial nationalism. Any movement by developing countries toward industrial and agricultural self-sufficiency was halted and reversed, leading to increased impoverishment of developing countries since World War II. (187)

Throughout the book, Hudson is perhaps kinder than he should be. Although he does not use the term, what he is superbly describing and documenting in his book is economic warfare far more brutal and merciless than the limited-hangout offered by John Perkins’ Confessions Of An Economic Hit Man on which Catherine Austin Fitts comments:

In the process of providing a colorful account of a 1970s whodunit (complete with low tech strategies devoid of the dazzling technology toolkit that is now an essential part of the economic hit man's weaponry of economic warfare), Perkins delivers to readers the "big lie": he reveals the secret that there is no greater conspiracy. This is simply globalization run amok, he would have us believe. Somehow, this particular conspiracy theory seems charmingly credible as part of a "confession." Perkins admits to what is known and then uses the credibility created by his "limited hangout" to further obscure the reality of who's who in the real governance of global investment and risk management. We are to presume that the investment networks in and around the Harvard Corporation, the City of London, the Vatican and investment managers and bankers for the proceeds of transnational organized crime are simply good-hearted fellows who let things get out of hand.

What the United States never addressed in developing countries, and still is not addressing, are the oppressive and corrupt institutions of those nations that manage inequity in land distribution, tax structures, and the allocation of natural resources. One consequence of refusing to do so was “to draw population from the countryside to the cities in search of employment. But the growth of industrial hiring was insufficient to absorb this rural exodus.” (207)

In recent years, living as I do near the U.S./Mexican border, I have observed firsthand the myriad ways in which this destructive pattern plays out. Hundreds of thousands of dispossessed people from rural Mexico, particularly its southern regions, migrate to Mexican border towns where if they are fortunate, they find jobs in maquiladoras which are overwhelmingly owned and managed by U.S. corporations. Currently, many of these corporations are leaving Mexico and moving their operations to China or Southeast Asia where labor is even cheaper and tax loopholes even sweeter than they are in Mexico. As they do so, they leave behind environmental devastation and a large number of unemployed, dispossessed people who end up on the streets or make desperate attempts to enter the U.S. illegally. Saul Landau’s excellent documentary on these issues, “Maquila, A Tale Of Two Mexicos”, may be watched online.

When super-imperialism is fully understood, the “mystery” of illegal immigration will immediately be resolved. It is as if the international corporatocracy of world dominance functions like a giant broom sweeping the dispossessed into the United States where they are greeted by the domestic corporatocracy and further exploited as wage-slave laborers with all the accoutrements of “the good life, huaraches exchanged for vinyl sandals made in China and corn tortillas supplanted by “happy meals.” One can only wonder what this government’s policy will be when the dire consequences of Peak Oil and climate-chaos drought hit the fan. What then will be America’s border policy? Today, gorging itself on cheap labor, the corporatocracy sucks up taxpayer money to build meaningless border fences that it knows will not deter the illegal workers it needs, but when Walmarts have weeds growing in their parking lots and thousands of meat packing plants have shut down because only the very wealthy can afford to remain carnivorous, we will see how many new immigrants will be allowed to inhabit the U.S. and consume the last drops of its water and oil.

As a result of the mass exodus to cities, food prices have soared in numerous developing countries so that people who have relocated in cities are working primarily to get the money to buy the food they eat. Thus, says Hudson, the World Bank has been “pauperizing the countries it had been designed, in theory, to assist.” (208)

According to Hudson, “Freeing debtor, food-deficit countries from their yoke of obsolete political and social systems therefore must entail not only a re-education of U.S. strategists, but at some point direct political action by the developing countries to thwart their strategies. The ultimate action would be for these countries to withdraw from the World Bank, GATT, and the IMF altogether and to form a new set of development institutions run by themselves and in their own interests.” (209)

Increasingly, Latin American countries, whom Hudson asserts have been intentionally managed and contained by the World Bank and IMF in order to prevent their autonomous departure from the economic control and management of the U.S., are doing exactly what he prescribes. Venezuela has taken the lead in rejecting World Bank and IMF carrot and stick economics, and more recently, Ecuador and Bolivia have joined Hugo Chavez in working to create Latin American self-sufficiency apart from the control of the U.S. Just this week, Ecuadorian President, Rafael Correa banned a World Bank official from the nation. Currently, Ecuador, Argentina, and Brazil are discussing the creation of a Southern Bank, operated by and for Latin Americans, as an alternative to the World Bank.

The Power of Debt

Today, the United States, through the issuing of treasury bills and various forms of borrowing from other nations, has risen to the status of Planetary Debtor In Chief, and in stark contrast to its position of planetary creditor sixty years ago, it now rules the world economically. Hudson comments:

In sum, the United States is able to rule not through its position as world creditor, but as world debtor. Rather than being the world banker, it makes all other countries the lenders to itself. Thus rather than its debtor position being an element of weakness, America’s seeming weakness has become the foundation of the world’s monetary and financial system. To change this system in a way adverse to the United States would bring down the system’s creditors to America. (386)

But changing that system is indeed what America’s myriad creditors intend to do, and many are strategically working toward economic self-sufficiency in order to walk away from the stranglehold that the World Bank and the IMF have held on them for six decades.

Neoliberalism: The Offspring Of Liberalism

Overwhelmingly, Latin American nations and their leaders are rejecting neoliberalism and speak freely of doing so. One of the most informative and succinct primers on neoliberalism can be found at Corpwatch where Elizabeth Martinez and Arnoldo Garcia explain that:

"Liberalism" can refer to political, economic, or even religious ideas. In the U.S. political liberalism has been a strategy to prevent social conflict. It is presented to poor and working people as progressive compared to conservative or Rightwing. Economic liberalism is different. Conservative politicians who say they hate "liberals" -- meaning the political type -- have no real problem with economic liberalism, including neoliberalism.

"Neo" means we are talking about a new kind of liberalism. So what was the old kind? The liberal school of economics became famous in Europe when Adam Smith, an English economist, published a book in 1776 called THE WEALTH OF NATIONS. He and others advocated the abolition of government intervention in economic matters. No restrictions on manufacturing, no barriers to commerce, no tariffs, he said; free trade was the best way for a nation's economy to develop. Such ideas were "liberal" in the sense of no controls. This application of individualism encouraged "free" enterprise," "free" competition -- which came to mean, free for the capitalists to make huge profits as they wished.

It is extremely important to understand that the New Deal policies of Franklin Roosevelt which gave birth to the Bretton Woods system were engineered by Democrats, Cordell Hull and Harry Dexter White, the two principal architects of the system and two of the most powerful bureaucrats close to Roosevelt. Further left of center than Hull, White was an avid internationalist and was later accused during the McCarthy Era of being a member of the Communist Party.

During the Great Depression the New Deal unarguably brought economic relief to millions of Americans and their families who otherwise might have starved. It is also true that just as the so-called “reforms” of the Progressive Era under another President Roosevelt (Teddy), were legislated from a fundamental underpinning of social control, the essential intention of the New Deal’s framers was to ward off a revolution in the United States that, left unchecked, could easily have spiraled out of control, driving an increasingly desperate populace into the arms of Soviet-style Marxism.

Since the United States Civil War, reform in America has always been wedded to the principal assumptions of the capitalist economic system, namely, that corporate capitalism, the maintenance of order, and the passage of laws that enforce the predominance of the business class and contain the unruly have-nots, is preferable to any possible alternatives. To succinctly describe this, historian Gabriel Kolko in The Triumph Of Conservatism uses the term political capitalism to define a political system engineered to meet the needs and serve the interests of business. Of the Progressive movement he states that: “Progressivism was initially a movement for the political rationalization of business and industrial conditions, a movement that operated on the assumption that the general welfare of the community could be best served by satisfying the concrete needs of business. But the regulation itself was invariably controlled by leaders of the regulated industry, and directed toward ends they deemed acceptable or desirable.” (3)

The Bretton Woods system was yet another milestone of political capitalism in which, in the name of world peace and “stability”, the United States would dominate the world economically. As with domestic political capitalism, it was motivated by the necessity of restraining the influence of the Communist bloc and managing impoverished nations that were likely to align with it as a result of their fundamental survival needs. The engineers of that system were not ideological conservatives but liberal members of the Democratic Party.

Whereas the Bretton Woods system was constructed largely by New Deal liberals, the resultant policies of the IMF and World Bank have transmuted into the current neoliberal paradigm, bolstered by the Council on Foreign Relations (CFR) of which Harry Dexter White was a member, embracing an internationalist, globalist perspective which shares more than less in common with the neoconservative ideology of blatant geostrategic hegemony as typified by the Project For The New American Century (PNAC). Differences in rhetoric between the two organizations imply a divergence in policy, yet historical functioning reveals otherwise. The endgame of both is geopolitical dominance politically, economically, and militarily by the United States. Whereas the neoconservative agenda envisions an ever-expanding military to accomplish blatant conquest and subjugation of nations, the neoliberal vision would be realized by the dissolution of nation-states altogether under the economic administration of transnational corporations.

Thus, we should not be surprised by the close ties developed in recent years between the Bush family and the Clintons. The Bush crime family has multigenerational experience in waging super-imperialist economic warfare on the world and on American citizens, and it appears that the Clintons have become two of their most prodigious pupils—their “entrance examinations” being the creation of NAFTA and throwing masses of welfare-dependent individuals into “welfare to work” jobs on which no one in America could survive.

In the current political milieu, no candidate who is not committed to a policy of super-imperialism has the slightest chance of ascendancy to the Presidency of the United States. Echoing her CFR colleagues, Hillary Clinton states, “First, and most obviously, we must by word and deed renew internationalism for a new century.” And Barack Obama chimes in with, “Whether it’s global terrorism or pandemic disease, dramatic climate change or the proliferation of weapons of mass annihilation, the threats we face at the dawn of the 21st century can no longer be contained by borders and boundaries.”

I am not suggesting that the United States become an isolationist country in the sense that we have nothing to do with all of the other nations with whom we reside on planet earth. What I am declaring is that I support no leader who is unwilling to radically alter the super-imperialist trajectory on which the United States has traveled since World War II. Having said that, I am well aware that no one who would do so could ever be nominated, let alone elected President of the United States.

Inextricably tied to the super-imperialism project is the $4 trillion dollars stolen from the U.S. Treasury in the past decade, the unanswered questions regarding September 11, 2001, the USA Patriot Act, Peak Oil, the privatization of water and other resources, the cesspool of corruption surrounding government contracts in Iraq and Afghanistan, and the domination of U.S. money supply and fiscal policy by the Federal Reserve and other centralized financial systems.

Each of these issues is beyond the scope of any president or party to thoroughly remediate. Only one thing is absolutely certain regarding super-imperialism—its collapse. Whether collapse occurs suddenly or gradually, before, during, and after, there will be many opportunities for those of us residing in the belly of the beast to create new economic and social structures. The pivotal question is: Will we be prepared to do so?

Did I watch the Democratic candidates’ debate, April 26? No, I was sitting in a local movie theater watching the film “Shooter” which, in my opinion, rips the mask off the current political landscape and ventures into territory where no candidate anointed by the corporatocracy is willing to travel. “Shooter” is the real deal; presidential debates, yet another distracting soap opera. A line from that film now comes to mind, depicting the essence of super-imperialism: “There is no Sunni or Shia, no Democrat or Republican—only the have’s and have-not’s.”

Credit counselors overwhelmed by U.S. mortgage crisis

By Andrea Hopkins Thu Mar 22, 8:26 AM ET

Until last year, financial counselors at the Home Ownership Center of Greater Cincinnati spent most of their time teaching Americans how to buy a first home. Now, they're deluged by broken and bereft homeowners facing foreclosure.

"Oh Lord, there is no way we can keep up with these calls," said Kaye Britton, a foreclosure counselor at the downtown nonprofit group that promotes home ownership to minority Americans, among others.

Britton has been helping clients reach the American dream of owning a home since 2002. Handmade wall signs urge would-be buyers to "sweat the small stuff" and note the lender's golden rule: "They have the gold, they make the rules."

Foreclosures were formerly rare, caused mostly by the loss of job, divorce or medical bills.

But when rising interest rates began driving up mortgage payments last year, homeowners started to feel the pain. Phones at credit counselors across the country are now ringing off the hook.

The industrial heartland has been particularly hard-hit. Ohio had the highest number of home foreclosures in 2006, while neighboring Michigan and Indiana -- all sideswiped by the faltering U.S. auto industry -- were close behind.

Housing analysts predict between 1 million and 3 million U.S. homes will be foreclosed upon in 2007. Already a wave of defaults on subprime mortgages held by those with poor credit have caused a crisis in parts of the industry, and some economists believe a recession could result.

"We knew it was going to be bad, but we didn't think it would be this bad," said Britton, echoing many who warned that increasingly exotic mortgage programs -- including those that required no down payment on home purchases -- would come back to haunt home buyers.

PREDATORY LENDING

Subprime loans allowed many Americans with spotty credit to buy into the housing boom, driving home ownership to nearly 69 percent nationwide in 2006, up from 65.4 percent a decade earlier. But teaser rates that kept interest payments low for two or three years have begun to expire, driving monthly payments through the roof.

Shanna Smith, chief executive of the National Fair Housing Alliance, said lenders often targeted the most vulnerable borrowers for subprime loans, even if they were eligible for loans with lower rates. More often than not, the borrowers had little understanding of mortgages.

"All the predatory lending that has gone on, all of the pushing of exotic loans on people of color, female-headed households, families with children, people with disabilities -- it's all coming home to roost," Smith said.

Britton said borrowers and lenders share the blame for the crisis. She sees many borrowers who simply didn't understand their interest rate was only fixed for two or three years, then could rise along with market rates.

"That's all they hear -- that it's fixed, not that it's only fixed for the first two years," Britton said. "They don't know their payment's gone up until they get the notice in the mail. And then they don't have the money."

Not all of the problem is in the subprime market. Many Americans with good credit but low income or no savings signed up for adjustable rate mortgages or interest-only loans to get into the market. As rates rise, they too feel the pinch.

At the nonprofit Consumer Credit Counseling Service in suburban Cincinnati, counselor Darcy Blankenship sees a steady stream of people who knew their payments would be going up, but signed the loan anyway because they just wanted a house.

"People are so excited about wanting that house, they don't look at the whole picture. They just want the keys," she said.

CREDIT COUNSELING

Demand for counseling appointments at CCCS's Cincinnati offices has risen 87 percent from a year earlier.

Blankenship said one client started out with a 3.9 percent interest rate on his 30-year mortgage. Now it's rising to 11 percent -- and he can't meet the higher payments because once he bought the home he piled up debt furnishing the home.

"Now he can't refinance either, because of the debt. He just said, 'There's no way,"' she recalled.

Once borrowers fall 90 days behind on payments, lenders can start the foreclosure process, which can take up to a year. Owners can try to sell the house, but with prices falling and foreclosed homes flooding the market, borrowers often end up still owing more than they can get for the house.

Britton said people should call a reputable credit counselor as soon as they're in trouble. Loans can be restructured, and emergency funding may be available. But she admits the counseling industry is already overwhelmed.

"If I stop answering calls to actually talk to a client and help them, the messages pile up, and there's no time to call them all back," Britton said. "It's only going to get worse."

Victim of Real Estate Bust: Your Pension

Friday, 23 March 2007 Written by Garrett Johnson Part 1

It's the dirty little secret of Wall Street. "U.S. lenders will make about $2.8 trillion in home-mortgage loans this year, according to the Mortgage Bankers Association. The MBA estimates that about 80% of these loans will end up in mortgage-backed securities. Mortgage-backed securities outstanding at the end of the first quarter totaled $4.61 trillion, up 61% since the end of 2000. In the same period, total Treasury securities outstanding grew 35% to $4.54 trillion. Who buys those mortgage-backed securities? Pension funds have been one of the largest buyers for many years now. What is a Mortgage-Backed Security? A mortgage-backed security (MBS) is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. These are usually packed and sold in bulk, and then are often resold. Quite often the person buying them has no real idea just how safe these mortgage loans are. Are they a bunch of subprime, house-flippers with no downpayments? There is usually no way to tell by the time the MBS has been sold and resold. The banks that originally made the mortgage loans don't care about the quality of the mortgage because they have already made their profit and off-loaded the risk to the pension fund, or insurance company, or foreign investor that bought the MBS. How did we end up in this condition. Jim Jubak explained that the coming Baby Boomer retirement is a prime culprit. State and local government budgets are stretched thin. So do they raise taxes to pay for the coming flood of retirees? That's poltiically unpopular. So they change their investment strategy to get better returns, and that requires more risk. However, with so much cash moving towards higher yielding investments, that pushes down the returns for those riskier investments. Pension funds that should be investing in low-risk treasuries are investing in agency bonds. When agency bond yields are too low then they invest in MBS. And so it goes until pension funds are investing in MBS from subprime lenders. The spread between the yield on high-yield bonds -- known as junk bonds -- and relatively safe U.S. Treasury bonds has averaged 5.24 percentage points since 1986...The spread is now a paltry 2.88 percentage points. The trend toward less yield for higher risk has been in place pretty much without interruption since the third quarter of 2001, when spreads maxed out at better than 10 percentage points. It's well known that loan standards have been beyond loose in recent years. What isn't always known is that this has been true for more than just the sub-prime market. The next step up from subprime, known as Alt-A, has been the epicenter of this risky financing. In 2006, according to UBS, interest- only loans, 40-year mortgages and option-adjustable-rate mortgages comprised more than 75 percent of Alt-A issuance. These loans often have little documentation of a borrower's income and rack up higher mortgage debt against the value of the underlying collateral (i.e., the house). UBS said that 76 percent of adjustable-rate interest- only loans written in 2006 had low documentation, while 57 percent had loan-to-value ratios greater than 80 percent. No surprise, then, that 3.16 percent of these loans are already delinquent by two months or more. If you think we've already seen the worst of the RE Bust, think again. The resetting of subprime loans (i.e. when the "teaser" rates expire and they readjust to standard market rates) won't peak for another 10 months. Alt-A's peak for resetting is nearly two years off. Even the IMF has noticed that America's real estate market is out of control and a danger to the overall economy. I think Bill Fleckenstein said it best. As the credit bubble in real estate dies a dramatic, not-pretty death, a very simple truth has resurfaced: It's not a viable business when you lend money to people you know can't pay it back. Of course the damage will be spread far and wide, and some of it will require a federal government bailout. How big of a bailout? No one knows because no one is counting. The city of Charlotte does not count foreclosures. Neither does Mecklenburg County. Nor the state of North Carolina. Nor the federal government. Even the Federal Housing Administration, which insured many of the failed loans, didn't track the concentrations. The Observer on Sunday profiled Southern Chase, a neighborhood of 406 houses in Concord built by Beazer Homes USA. Seventy-seven buyers lost their homes to foreclosure. Forty-five of the failed loans were insured by the FHA. [...] None of the government agencies contacted by the Observer plans to start tracking foreclosures. Part two to follow. Garrett Johnson, gjohnsit@nospam.yahoo.com Permalink | 0 Comments | Post A Comment

Freddie Mac warns on subprime turmoil

By Daniel Pimlott in New York

Published: March 23 2007 12:44 | Last updated: March 23 2007 13:57

Freddie Mac, the US mortgage finance provider, warned that the turmoil in the subprime mortgage market was bound to spill over into consumer debt, as it revealed a loss in its fourth quarter.

Richard Syron, chairman and chief executive of the giant government-chartered group, said that following the massive expansion in the availability of credit for mortgage and borrowing-hungry consumers in recent years, the meltdown of the market for mortgages to people with patchy credit history could spread.

The rest of this article is for FT.com subscribers only

Toxic Waste in the Sub-Prime Market: Waiting for the Bodies to Float Up

March 22, 2007

By ROBIN BLACKBURN

In recent times high-profile Wall Street investment banks have brought slick financial reasoning to the base art of loan-sharking. The most vulnerable Americans have been targeted for loans they can ill afford. Those with poor credit histories can be charged at double or treble the interest of a customer in good standing with the rating agencies. By the end of last year housing loans to six million unrated customers ­ 'sub-prime' mortgages ­ totalled $600 billion.

Three or four years ago Citigroup, Bear Stearns, Goldman Sachs, Lehman Brothers and HSBC acquired 'sub-prime' lenders ('loan sharks') which they historically regarded with disdain. Citigroup acquired Associates First Capital, and HSBC bought Household Finance, blazing a trail others were to follow. Finance houses have long teamed up with retailers to shower so-called gold and platinum cards on all and sundry with the hope of ratchetin up consumer debt - rising from 110 per cent of personal disposable income in 2002 to 130 per cent in 2006 - and subsequently charging an annual 18 or 20 per cent on money for which the banks are paying four or five per cent. Such hot rates of return gave the banks a taste for seamy lending. They discovered how to limit their own exposure, while raking in the charges, by re-packaging the debts as CDOs (Collateralised Debt Obligations) in which they capture the risk premium while sloughing off the risk.

With direct access to sub-prime mortgages, the banks and hedge funds bundle together and divide up the debt into ten tranches, each of which represents a claim over the underlying securities but with the lowest trench representing the first tenth to default, the next tranche the second poorest-paying tranche and so on up to the top tenth. Borrowers who can only negotiate a sub-prime mortgage have either poor collateral or poor income prospects, or both, and that is why they must pay over the odds. Of course the bottom tranche of the CDO ­ euphemistically designated the 'equity' ­ is very vulnerable but can still be sold cheaply to someone as a bargain. The purchaser will also be assured by those assembling the CDO that they can hedge the possibility of defaults in the 'equity tranche' by taking out insurance against it. The bank will ­for an extra fee ­ also arrange this insurance, making the entire 'credit derivative' product very complex and difficult to value.

The top tranches, and even many of the medium tranches, will be more secure yet will pay a good return. The chief executive of a mortgage broker explains: 'Sub-prime mortgages are the ideal sector for the investment banks, as their wider margins provide a strong protected cash-flow and the risk history has been favourable. If the investment bank packages the securities bonds for sale, including the deeply subordinated risk tranches, it can, in effect, lock in a guaranteed return with little or no capital exposureGenerally investment banks do not like lending money but they are good at measuring risk, parcelling this up and optimising its value.' For such reasons Morgan Stanley purchased Advantage Home Loans, Merrill Lynch bought Mortgages PLC and Lehman Brothers acquired Southern Pacific Mortgages and Preferred Mortgages.

The investment banks are playing a rapidly-moving game of 'pass the parcel'. Ideally the loans are bought one day, packaged over-night in India, and then sold on to institutional investors the next day. In recent months 'sub-prime' defaults have jumped. A Lehman Brothers analyst warns that some $225 billion worth of sub-prime loans will be in default by the end of 2007 but others say the figure will be nearer $300 billion. The 'equity tranch' is now dubbed 'toxic waste' by the insiders and analysts are waiting to see which bodies float to the surface. In early March the New York Stock Exchange suspended New Century Financial, a company which had taken on insurance obligations for submerged tranches of mortgage debt for most of the big banks.

The vulnerable in today's America certainly include the aged and unemployed who risk their one possession by re-mortgaging their home to an investment bank. But many of the middle class find themselves vulnerable too. In recent years they have lost health care and pension benefits and have been tempted by easy credit into purchases they discover they can ill-afford. The Wall Street Journal reports:

Last week, HCBCs chief executive officer, Michael Geoghegan, sought to dispel the notion that the bank had lowered its lending requirements. The typical customer of HSBC Finance Corp., which oversees the bank's U.S. consumer finance business, has an average household income of $83,000, is 41 years old, has two children and a home worth $190,000. Mr Geoghegan told investors: "This is Main Street America", he said'.

Helped by their role in packaging and selling such 'credit derivatives' as mortage-backed CDOs the banks achieved remarkably good profits right through the post-bubble trough and well into the subsequent recovery. However indebted consumers were not so good for non-financial corporations in the post-bubble era since demand was dampened - by 2003 18 per cent of the disposable income of US consumers was required to service debt and only a housing price boom and re-mortgaging maintained consumer purchasing power. Neither the Fed nor the SEC were keen to crack down on the mortgage bonanza because it helped to maintain consumer demand and market buoyancy. The default crunch will not only cause great unhappiness to the victims ­ who stand to lose their homes - it hurts the housing market and increases the chances of a downturn.

Robin Blackburn is the author of Age Shock: How Finance Is Failing Us (2007), a comprehensive account of risk and social insecurity in the age of financialization. See also Blackburn's, 'Financialization and the Fourth Dimension', New Left Review, May-June 2006. He can be reached at robinblackburn68@hotmail.com

Rough Start in '07: 5 Newspaper Companies Report Slides

By E&P Staff

Published: March 21, 2007 9:45 AM ET

CHICAGO Several newspaper companies today reported big hits to their revenues in early 2007.

Tribune Co. said today its publishing revenues were off 5.1% for February with circulation revenue off 7% (see separate story).

Advertising revenue at The New York Times Co. plummeted 6% in February due to weakness at its flagship and regional papers, the company announced yesterday. Total revenue for the company was down 3.6%.

Hammered by double-digit decreases in automotive, real estate and help-wanted classified ad revenues, Sacramento, Calif.-based The McClatchy Co. reported Wednesday that, on a same-property basis ad revenues in February fell 5.2%, and total revenues dropped 5.1%.

Total classified on a pro-forma basis -- counting results from the 20 dailies acquired in the Knight Ridder Inc. acquisition and excluding the recently sold Minneapolis Star Tribune -- fell 12.4% to $59.4 million.

Newspaper automotive classified plunged 15.4%; real estate dropped 16.3%; and help-wanted fell 11.6%.

McClatchy said Internet advertising, while up 1% for the month and 7.6% year-to-date, was affected by the new affiliate agreement with CareerBuilder for online employment advertising.

"This agreement is helping to grow online employment revenues at the legacy McClatchy newspapers, (which was) up 40.7% in February and 31.0% year-to-date in this category, and is an attractive agreement for these papers," McClatchy CFO Pat Talamantes said in a statement. "However, under the new affiliate agreement selected products are no longer available to be sold by the 20 acquired Knight Ridder newspapers, which is depressing their Internet revenues. We will begin cycling through this change in August 2007. We believe our underlying online advertising is quite healthy, as represented by our February growth of 19.8% in online advertising excluding the employment category."

Ad revenues by market were down pretty much across the board.

Meanwhile, newspaper publisher Media General Inc. said Wednesday it expects to report a first-quarter loss on a weaker-than-expected start to the year for its publishing and broadcast businesses and loss on its investment in a recycled newsprint manufacturer.

The publisher of the Tampa Tribune, Richmond Times-Dispatch, and Winston-Salem Journal forecasts a quarterly loss between 26 cents to 30 cents per share. Analysts polled by Thomson Financial were looking for a profit of 20 cents per share.

The company said revenue from its publishing division fell 4.2 percent in February, reflecting a decline in national and classified advertising. Broadcast revenue dropped 2.7 percent, excluding revenue from stations acquired last June.

Declining newsprint prices had both a positive and negative effect on results.

"While lower newsprint prices have enabled the publishing division to hold expenses almost even with last year, we expect a loss of more than $2 million from our one-third interest in SP Newsprint in the first quarter, with continued downward pressure expected as the year unfolds," President and Chief Executive Marshall N. Morton said in a statement.

Publisher and broadcaster Journal Communications Inc. said Wednesday that total February revenues fell 3.5 percent on weakness in publishing and broadcasting and the absence of Olympic revenue.

Sales at the daily newspaper and community newspaper and shopper segment declined last month to $22.9 million from $24 million in the year-ago period.

Monthly advertising revenue slid 4.6 percent to $32.6 million from $34.2 million.

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E&P Staff (letters@editorandpublisher.com)

Manipulating Stock Prices and Oil Prices: It's in the Air

03.22.2007

Raymond J. Learsy

In a revealing lapse, given his turbo charged cadence, CNBC's host Jim Cramer bragged about manipulating stocks. And then Cramer, no dummy he, added that the strategy -- while illegal -- "the Security and Exchange Commission never understands this," according to the New York Post.

Coincidently just a few days before, this writer appeared on a March 14 CNBC segment "Can We Trust OPEC".

My sparring partner , Jerry Taylor, a CATO Institute senior fellow opined that OPEC was merely a grouping of oil producers who played no significant role in oil pricing, "Prices are established by global supply and demand", he went on "OPEC ...has a minority control over global supply. It influences prices, perhaps, but it certainly can't establish prices. All they can effect is how much member states produce".

Liz Claman, hosting the segment for CNBC, pointed to the trading floor pictured in full action behind her, and rightly asked, isn't this where the market price is determined?

Demurring I pointed out that who is to say that the trading in oil futures isn't doctored as well. Taylor interjected that there is no way that the market could be manipulated. Trades are realized in markets all over the world, and the volume is massive. Further there was no academic evidence of such activity.

I countered that not only were OPEC supply constraints largely responsible for the 300-400% crude oil price increases over the last half dozen years but that BP was already under investigation by the CFTC for manipulating oil futures trading. That even though the trading in oil futures was massive, OPEC had the resources at its disposal that could readily permit it to deliberately influence price actions on the trading floor or the electronic ether. Time ran out and never was able to opine that it was not only within OPEC's capability, the very fact that it was a huge and diverse world market lent itself to opaque trading with minimal oversight. In consequence the possibility of manipulation by those with the means and interest becomes totally feasible (An Energy Agenda For a Newly Energized Congress, Part IV: Need For Urgent Congressional Oversight of Oil/Gas Futures Trading).12.11.06

Jim Cramer in admitting to doing what he did rendered an important service. He brought a human dimension to the reality of how readily markets can be manipulated. Multiply Jim Cramers' capabilities by the resources and world wide connections of OPEC and you begin to picture the possibilities. For a Jerry Taylor to dismiss it out of hand is, to my mind, nonsense. For a Liz Clayman to interject the question she did is exactly as it should be. At least at CNBC there is no slavish piety that it is always the invisible hand of market forces that bring us the price of goods and commodities.

Raymond J. Learsy is the author of the book Over a Barrel: Breaking the Middle East Oil Cartel. A graduate of the Wharton School, he made his life in the fast-paced, risk-filled world of commodities trading, beginning in 1959. In 1963, he started his own firm and over twenty years expanded from the U.S. into Canada, the United Kingdom, Luxembourg, Brazil, and Pakistan, trading in an array of bulk raw materials and commodities, shipping to customers worldwide. In the 1980s, he shifted gears as a private investor, from 1982 to 1988, served as a Reagan appointee to the National Endowment for the Arts. Currently, he is a member of the Woodrow Wilson International Center for Scholars. Learsy's richly-informed analysis of the international oil trade, OPEC, and its impact on the American and world economy has been featured in the National Review Online and the New York Times. He currently resides in Connecticut, and can be reached at triduane@aol.com.

Asia must prepare for dollar collapse, says bank

'Asia must prepare for dollar collapse'

East Asian economies need to prepare for a possible collapse of the US dollar, the Asian Development Bank says.

ADB: Possibility of a dollar collapse small but fallout huge

The warning comes as the US trade deficit reaches a record high and global interest rates continue to rise.

Masahiro Kawai, the ADB's head of regional economic integration, said on Tuesday: "Any shock hitting the US economy or the global market may change investors' perceptions given the existing global current account imbalance.

"Our suggestion to Asian countries is: Don't take this continuous financing of the US current account deficit as given. If something happens then East Asian economies have to be prepared."

He said because of the highly interdependent nature of East Asian economies, if countries worked together to allow their currencies to collectively appreciate against a tumbling dollar then the cost of adjustment would be spread.

"The possibility of a US dollar collapse or sharp decline may be small at this point but it would generate very significant turmoil so East Asian economies ... ought to be ready for that."

The Manila-based ADB is working on several indices of Asian currencies that could be helpful to monitor exchange rate movements in the case of a sharp dollar decline, although its main intention is to help develop regional bond markets.

Political sensitivities

However, the ADB is still trying to decide which currencies to include in this Asian Currency Unit (ACU) amid political sensitivities about the inclusion of the Taiwan dollar given China's claim over the island.

The ADB had apparently been aiming to launch the ACU - a weighted basket of Asian currencies - before the bank's annual meeting in May, but Kawai said this would not be possible.

He said there was no specific launch date yet but hopefully it would be unveiled "in the next few months".

But Kawai played down suggestions that the ACU could foreshadow a single Asian currency like the European Currency Unit (ECU), which existed for two decades before the creation of the euro in 1999.

He said: "The ECU had an official status but the ACU has no such official status. We are not in the position to decide whether this should become a real currency or not."

US Dollar Hit By Another Meltdown in the Dow

Japanese Yen Soars as Carry Trade Liquidation Resumes • New Zealand Dollar Sees Majors Losses Against the US Dollar and Yen

Wednesday, March 14 - 2007 at 01:49


US Dollar -The problems in the sub-prime lending market have become too much for even the most optimistic trader to handle. New Century Financial Corp, the poster child of the meltdown in the sub-prime lending sector had its shares suspended from trading on the NYSE today and will most likely be de-listed in the near future. Although the market had become somewhat accustomed to hearing about the problems at New Century Financial, it was not prepared to hear that mortgage delinquencies hit a 4 year high in the fourth quarter. In the sub-prime market, delinquencies reached 13.33 percent and even though non-subprime borrowers are far less likely to be delinquent on their loans, the rate has been growing since the first quarter of 2006. With the housing market just beginning to turn, the worst may be yet to come. The Dow has fallen close to 245 points or 2 percent today, marking the biggest one day sell-off since the 3.3 percent move on February 27th. Risk aversion has returned to markets with traders liquidating all of their risky and high yielding positions. Carry trades have been hit the worst with NZD/JPY falling by 2.2 percent, AUD/JPY falling by 1.51 percent and USD/JPY falling by 1.12 percent. In addition to the problems in the sub-prime sector, consumer spending fell short of expectations for the month of February. Headline sales rose a meager 0.1 percent while sales excluding autos fell 0.1 percent. This is the first drop in sales excluding autos since Oct 2006 and suggests that first quarter GDP will be particularly weak since sales were flat in the month of January. Cold weather and a downturn in the housing market are to blame as sales of furniture and building materials slip significantly. Weaker consumer spending at a time when the sub-prime lending sector is in disarray could force the Federal Reserve to cut rates as early as this summer. With both stock market and housing market wealth of Americans slipping, future growth looks extremely bleak. At this point, the US dollar has few reasons to rally but any further extension lower may not come until Thursday when we have producer prices, net foreign purchases of US Securities and the Philadelphia Fed index on the docket.

Euro - On a day when we have seen a massive liquidation of many currency pairs, the fact that the Euro has been able to remain unchanged is quite remarkable. The strength in the German ZEW survey is sure to have helped. Even though analyst sentiment deteriorated between February and March, the deterioration was far less than expected as concerns about the Value Added Tax increase and the recent interest rate hike remains limited. In today's market, it is all about relative performance and right now the outlook for the US economy is far more concerning than the outlook for the Eurozone. In fact, Bundesbank President Weber joined ECB's Liebscher in saying that the risks to price stability remain strong and because of that, the ECB will need to raise rates again. Compare that to the Federal Reserve who may need to cut interest rates before August and we have a very clear explanation of why the EUR/USD is still holding strong. Eurozone industrial production and French and Italian consumer prices are due for release tomorrow. None of these reports will be particularly market moving. Traders will have their eyes pinned on USD/JPY and the US stock market to see if both will continue to sell-off.

British Pound - The British pound has sold off against everything in sight as the pair comes under the pressure of carry trade liquidation. Having been one of the market's favorite carry trade currencies to invest in over the past few years, it has also become one of the first to be sold in this wave of carry trade liquidation. UK data released this morning was mixed. The RICS house price balance reported the weakest growth in prices in 9 months. Although this is the first of many indexes to report softer price growth, traders should not completely ignore it. The key to figuring out whether the BoE will raise rates again this year is housing. It is important to keep on top of how the housing market is faring because it is a key component to their decision making. Looking ahead, we have unemployment data tomorrow. The report is expected to be positive for the British pound with the number of claimants dropping and average hourly earnings rising.

Japanese Yen - Once again, the Japanese Yen has stolen the show by ending the day with the biggest movements in the currency market. Over the past few weeks, if you want trade volatility, you have to be in the Yen. With no economic data released last night, the move today was completely driven by the liquidation. The Dow and USD/JPY relationship remains very much intact, but even though USD/JPY sold off first, the sharp reversal in the Dow appears to have exacerbated the sell-off in USD/JPY. We will probably see a bit more liquidation since prior waves of carry trade selling over the past few years have resulted in an average loss of 8 percent. So far, USD/JPY has fallen approximately 4.5 percent. We are only expecting the revision to industrial production tonight. There are no Japanese data of consequence until the Bank of Japan monetary policy meeting next week so flows will continue to drive the fluctuations in the Yen.

Commodity Currencies (CAD, AUD, NZD) - The Australian, New Zealand and Canadian dollars have all sold off significant today as traders liquidated all risky assets. Even though the market was very bearish US dollars today, they were even more bearish the Australian and New Zealand dollars since these pairs offer a higher interest rate than the US and because of that, they have been the preferred carry trade currencies for the market. The New Zealand dollar fell 1.45 percent against the US dollar while the Australian dollar fell 0.57 percent. The stronger Australian business confidence and job advertisement reports may have helped to limit the slide in the Aussie. Meanwhile the Canadian dollar dropped because traders were concerned that the down turn in the US housing market and the US economy as a whole could have a spillover effect on the Canadian economy. Looking ahead, we are expecting New Zealand manufacturing activity and Australian consumer confidence tonight. These reports will most likely do little to shift the current market sentiment.

Late mortgage payments surge in U.S.

Related

Stocks slip on subprime, economy worries AP

Accredited, New Century lead subprime meltdown Reuters

Subprime loans boost late payments, foreclosures
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Late mortgage payments reach high

By JEANNINE AVERSA, AP Economics Writer 12 minutes ago

Late mortgage payments shot up to a 3 1/2-year high in the final quarter of last year and new foreclosures surged to a record high as borrowers with tarnished credit histories had trouble keeping up with their monthly payments.

The Mortgage Bankers Association, in its quarterly snapshot of the mortgage market released Tuesday, reported that the percentage of payments that were 30 or more days past due for all loans tracked jumped to 4.95 percent in the October-to-December quarter.

That marked a sharp rise from the third-quarter's delinquency rate of 4.67 percent and was the worst showing since the spring of 2003, when the late-payment rate climbed to 4.97 percent.

The association's survey covers 43.5 million loans.

The latest snapshot of the mortgage market comes amid mounting concern on Wall Street about troubles facing subprime lenders who make loans to people with poor credit.

The percentage of mortgages that started the foreclosure process in the final quarter of last year rose to 0.54 percent, a record high. The previous high, 0.50 percent, occurred in the second quarter of 2002 as the economy was recovering from the blows of the 2001 recession.

Delinquency and foreclosure rates were considerably higher for higher-risk "subprime" borrowers, especially those with adjustable-rate mortgages.

Lenders to subprime borrowers — people with blemished credit histories — have been battered. Rising interest rates and weak home prices have made it increasingly difficult for these borrowers — especially those with adjustable-rate mortgages — to keep up with their mortgage payments. Delinquencies and foreclosures in the subprime mortgage market are spiking.

The late-payment rate for all subprime loans jumped to 13.33 percent in the fourth quarter, up from 12.56 percent in the prior period and the highest in four years. The delinquency rate for subprime borrowers with adjustable-rate mortgages was even higher — 14.44 percent, also the highest in four years.

The rate of all subprime loans starting the foreclosure process at the end of last year was 2 percent, the highest in three years. The percentage of subprime adjustable-rate mortgages entering foreclosure was 2.70 percent.

Doug Duncan, the mortgage association's chief economist, suggested that borrowers having difficulties making payments contact their lenders as soon as possible to work together on the problem. "It is in everyone's interest to keep the homeowner in their home paying their bills on time," he said.

Concerns about risky mortgages are making investors jittery. Those fears also contributed to a worldwide stock meltdown on Feb. 27, where the Dow Jones industrials suffered a 416-point plunge.

Worried about defaults on high-risk mortgages, federal bank regulators earlier this month called on lenders to use caution in making subprime loans and strictly evaluate borrowers' ability to repay them.

New Century Financial Corp., which was the nation's second-largest subprime mortgage maker, is scrambling to stay afloat after all its bank lenders cut off funding or informed the company of their intent to do so because of its failure to make payments. The Irvine, Calif.-based company already has stopped accepting all new loan applications.

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On the Net:

Mortgage Bankers Association: http://www.mortgagebankers.org/

New Century Gets Default Claims, Says It Lacks Cash; Fed warns of more subprime problems

Related
Fed warns of more subprime problems
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(Update8)

By Bradley Keoun and Yalman Onaran

March 12 (Bloomberg) -- New Century Financial Corp., the nation's second-biggest subprime mortgage lender, said it doesn't have the cash to pay creditors who are demanding their money, increasing speculation that the company will go bankrupt.

The New York Stock Exchange, citing the credit crisis, halted trading of New Century this morning until it decides whether to keep listing the company's securities. Shares of the Irvine, California-based company, already down 90 percent in 2007, lost half their remaining value in pre-market trading, and rivals fell as much as 25 percent today.

``They're one step closer to bankruptcy,'' said Bose George, an analyst at Keefe Bruyette & Woods in New York who rates the shares ``market perform.'' ``The only possibility for survival now is for someone, potentially an investment bank, to step in.''

New Century may be insolvent because too many of its own customers -- most of whom have poor credit histories or heavy debt burdens -- aren't repaying their loans. Bad U.S. subprime mortgages are at a seven-year high, forcing more than two dozen lenders to close or sell operations. Their woes may contribute to more than 1.5 million Americans losing their homes and 100,000 people losing their jobs, according to real estate executives, economists, analysts and a Federal Reserve governor.

New Century said in a federal filing it doesn't have funds to repay lenders including Morgan Stanley, Citigroup Inc. and Goldman Sachs Group Inc. The creditors want New Century to repurchase all outstanding mortgage loans they financed.

Shares Plunge

The company's shares traded for as little as $1.36 in pre- market trading, compared with $3.21 on Friday, a day when the stock hit an eight-year low. The company said March 2 that U.S. prosecutors in Los Angeles are investigating trading in New Century's securities before a Feb. 7 announcement that it planned to restate earnings. Investigators also are examining New Century's failure to properly account for the cost of bad loans.

``It's kind of the perfect storm,'' said Vince Arscott, an analyst in the financial institutions group at Fitch Ratings. ``You throw in accounting issues and delayed filings, you throw in a criminal inquiry, and then the whole secondary market is really sour on subprime.''

Rival lenders including Fremont General Corp., Accredited Home Lenders Holding Co., and NovaStar Financial Inc. have shed more than half their value this year, and Countrywide Financial Corp., the nation's biggest mortgage company, has tumbled 17 percent.

Ripple Effects

Accredited, which fell 28 percent today, was ``considered a better player in the space,'' said Matt Howlett, an analyst at Fox-Pitt Kelton in New York. ``But they're not immune to the deplorable conditions in the subprime space. You can't create any value in this market, and the likelihood of a sale, which we thought was really the only exit, just seems more unlikely every day.''

Fremont, which shut its subprime lending operations last week under pressure from U.S. regulators, lost 16 percent today. NovaStar shed 19 percent and Countrywide declined 2.7 percent.

Analysts including Merrill Lynch & Co.'s Kenneth Bruce predicted last week New Century will go bankrupt. New Century has used up cash as rising default rates forced it to buy back loans it sold to investors when borrowers didn't make their payments. The company said last week it's in talks with lenders and potential partners about refinancing or ``other alternatives.''

`No Assurance'

New Century's financing agreements have so-called cross- default provisions that trigger accelerated payments. Should all of its creditors force it to repurchase their loans, the total obligation would be about $8.4 billion, New Century said today.

``Medium, small-size players who were addicted to Wall Street financing are at most risk,'' said David Hendler, an analyst at CreditSights Inc. in New York.

Talks with lenders are continuing, and New Century can give ``no assurance'' that efforts to refinance the debt will succeed, the company said.

Standard & Poor's cut New Century's counterparty credit rating today to D, for companies that are in payment default, from CC.

New Century has received about $975 million of financing from Morgan Stanley. Part of the money from the New York-based securities firm was used to pay Citigroup Inc. about $717 million on March 8, after Citigroup demanded repurchase of its loans, New Century said in today's filing.

Subprime Loans

Subprime loans, a term applied to some of the riskiest home mortgages, are made to borrowers unable to qualify under traditional, more stringent criteria. The loans often carry interest rates 2 to 3 percentage points higher than regular mortgages and sometimes have low initial ``teaser'' rates that adjust higher in later years. Some lenders also lowered their standards last year to bolster revenue because slumping home sales had hurt demand.

The combination made the loans more prone to default, with delinquencies at more than 12 percent in the third quarter, according to the Mortgage Bankers Association. The Washington- based trade group is scheduled to release updated numbers for the fourth quarter tomorrow. Investors are increasingly shunning bonds backed by subprime loans.

``It's like a hot potato with these loans, no one wants them,'' Fitch's Arscott said.

OceanFirst Financial Corp., the holding company for OceanFirst Bank, said today it will revise 2006 earnings because buyers of some of its subprime loans are forcing the company to take them back. Borrowers of the loans -- which the bank offered starting last year through the Columbia Home Loans unit -- are already defaulting, the Toms River, New Jersey-based lender said. The loans offered to cover 100 percent of a home's value.

Countrywide's Report

Countrywide said late payments on home loans that it manages for others held steady last month. Loans at least 30 days past due remained at 4.71 percent of total loans serviced, the same as in January, the Calabasas, California-based company disclosed in monthly data released on its Web site. A year earlier, 4.29 percent of those loans were late.

Jim Shanahan, a senior analyst at Wachovia Capital Markets, cut his rating today on Countrywide to ``underperform'' from ``market perform.''

``While the origination and sale of subprime mortgages represents only a small part of the Countrywide story, we are more concerned that the weakness has spread to other sectors of the residential mortgage market,'' Shanahan wrote.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net ; Bradley Keoun in New York at bkeoun@bloomberg.net .

Last Updated: March 12, 2007 17:28 EDT

Listen to Mr Greenspan - there's nothing so fragile as a bubble

William Keegan
Sunday March 11, 2007

Observer

After the January World Economic Forum I expressed some concern about the remarkable optimism - nay, complacency - manifested there about the course of the world economy. Earlier in the month I had quoted Herb Stein, an adviser to President Nixon in the 1970s (on economics, not burglary or cover-up). The quotation was: 'If something can't go on forever, it will probably stop.'
An alert reader challenged the 'probably' (which originated via an American economist 'correcting' Professor Wynne Godley, who had used the quotation without 'probably'), and sent me an article written by Stein himself, in which 'probably' does not appear, and 'cannot' (rather than 'can't') does.

You pays your money and you takes your choice. It often happens with famous quotations. Incidentally, Stein quotes Nixon as having once said: 'Honesty may not be the best policy, but is worth trying once in a while.' That may explain quite a lot. Anyway, Stein tells us that 'Stein's Law' was first pronounced in the 1980s, and elaborates thus: 'This proposition, arising first in a discussion of the balance-of-payments deficit, is a response to those who think that if something cannot go on forever, steps must be taken to stop it - even to stop it at once.'

The implication, I take it, is that policymakers don't necessarily have to do anything about what will stop anyway. One does not know whether former Federal Reserve chairman Alan Greenspan had this in mind when saying last week about the so-called 'carry trade' (the huge amounts of money converted from yen to other currencies to take advantage of differentials between interest rates, which have driven the yen down and made Japanese exports more competitive than ever) that 'at some point it's got to turn'. But recent shenanigans in the financial markets seem to indicate that riskier investments are not as popular as they were.

So far, most of my fellow commentators seem to be relaxed about stock markets and the outlook for the world economy, and dismissive of Greenspan's assessment that there is a possibility of a US recession later this year.

The difference between Greenspan now and Greenspan when the great man was chairman of the Fed is that he can now say what he thinks, as opposed to what he thinks he ought to say. The reason for the insouciance of many financial market operators and commentators is that there is an assumption that the central banks (considered all-powerful except by central bankers themselves) can be relied upon to bail the US and other economies out as soon as trouble appears. There is empirical evidence for this in the past decade, and it is quite a contrast with the pre-Keynesian days of the inter-war years.

This is all very well as long as the central banks do not panic about inflation. There has been precious little reason to do so in recent years, because the weakening of the unions and the impact of 'globalisation' have together produced what is known in the trade as a 'benign' inflationary environment. Why, in Japan they have even been trying, without much tangible success, to inject a little inflation into the system.

As Professor Lord Desai puts it in his compulsively readable Marx's Revenge - The Resurgence of Capitalism and the Death of Statist Socialism: 'Democratic power can push the bargaining strength of the worker up to a certain point. If it threatens profitability too much, then capital withdraws or migrates .... Social-democratic parties everywhere [at the end of the 1980s] saw that restoration of profitability mattered once capital became mobile. But once it had become mobile, it demanded co-operation from the workers, not conflict. And it got that co-operation.'

It has become clear in recent months that trade unions are beginning to think they have been far too co-operative. One sees this in the bitter outbursts about the behaviour of hedge funds, private equity groups and senior corporate executives by such models of moderate trade unionism as John Monks, former general secretary of the TUC and now representing the much wider group of European trade unions.

One also sees it in the sporadic outbursts of discontent about low wage deals, not least in the UK public sector. But apart from the factors highlighted by Desai (whose book was published in 2002), we have witnessed the additional disinflationary factor in recent years of the remarkable influx of Continental workers to the UK - and not just from eastern Europe. French is rapidly becoming London's second language.

The small inflationary bubble of recent months has been associated with the lagged impact of earlier rises in the price of energy. Now the prospect is of lower energy prices later this year, and, according to the Governor of the Bank of England, Mervyn King, there is the possibility of quite a sharp fall in inflation. Yet there continue to be noticeable worries among central bankers about 'asset bubbles' - not least in housing.

A vogue phrase among financial regulators has been 'the underpricing of risk'. The convenient reaction to recent upheavals in the financial markets is that there has been a 'healthy and necessary correction'. Has been? All over? One wonders. The problem with the modern phenomenon whereby it is assumed that the central banks will always bail the system out is that there is an inherent bias in favour of bubbles and the traditional excesses of capitalism. There is an uneasy feeling in the air that all is not quite right.

Guardian Unlimited © Guardian News and Media Limited 2007

Hobson's choice

Mar 10, 2007

By Chan Akya

The past two weeks have provided us with a tantalizing glimpse of what lies ahead for the US economy, with the blow-up in subprime mortgages helping to unravel market confidence around the world. Global equity declines have wiped out some US$2.5 trillion of wealth, the conversion of which to consumption implies a fall of between 1% and 2% of global gross domestic product.

That kind of decline cannot be made good by growth improvements in China or India; indeed, the decline hits these countries quite hard unless they can diversify their own sources of growth.

In a previous article, [1] I wrote the following:

Dependent on the munificence of strangers like no other superpower in history, a US decline is unstoppable. That said, the surge in the value of Chinese stocks underlines the desperation rather than genius of global investors ...

If the sting of a scorpion surprises a burglar, he is caught between the need to scream, risking capture, or silently bearing the pain before gingerly withdrawing into the night. Much the same logic rules the financial markets these days, where the poor returns to be had in the US markets have driven many investors to search for alternatives, even if these appear overvalued themselves. This global epidemic of pseudo-logic will end in tears for many investors, but at least the people with the real savings have the ability to recover, which the US economy appears to lack.

Both parts of this scenario have come about, namely an obvious decline in global stock markets, which was prompted both by economic concerns in the United States and maladroit financial-markets regulation by China. [2]

Borrowers and ultimate lenders

It is a good old rule of banking that when you borrow $1 million from the bank and cannot repay, you are in trouble, but if you borrow $100 million from the bank and cannot repay, the bank is in trouble. In the above scenario, linkages through the global financial system mean that Asian banks and investors were holding a substantial portion of risk linked with the poor borrowers in the US. These are the same people whose inability to repay prompted the bankruptcy of some specialist firms that lend money to poor Americans, in turn touching off the crisis described above for global equity markets.

My point in repeating the story is to highlight the fact that the other shoe has not dropped yet - ie, Asian lenders who suffered losses from buying these securities are unlikely to purchase other US obligations until a clearer picture of the economy emerges. This translates to a withdrawal of liquidity from US financial markets, adversely affecting the prospects for the rest of the year. Americans, who are used to consuming more than they produce, will have to reverse course. The result will be akin to a fat person going on a bread-and-water diet for six months: painful, but necessary.

The likely pain of the adjustment for Americans will depend much on how quickly the rest of the world goes into recession with the US. It is important to note that any "lag" will only make the US recession more painful for Americans. For example, if only the US economy goes into recession, then oil prices will likely remain near current levels, which, combined with a falling US dollar, will keep inflation too high for any interest-rate cuts. Without such cuts, which would help to reduce monthly mortgage payments for Americans, it is likely that more people will have to declare bankruptcy, which feeds the vicious cycle of falling stock markets.

In contrast, if the rest of the world catches the recession fever from the US right away, oil prices will fall and central banks around the world can cut rates. As I explain below, the second scenario is not likely, therefore the US will have to endure a painful recession all alone.

Readers looking at this week's mild recovery in asset prices should be cognizant of this risk. I expect further downturns for US equity markets in coming weeks and months; it is likely that the widely watched Dow Jones average will close this year below the level of 10,000 from about 12,200 currently as investors adjust downward their earnings expectations as well as the multiple of earnings they are willing to pay for owning shares. In turn, this would prompt declines in other stock markets around the world, particularly in South America, whose economy, if not its politicians, depends almost entirely on US economic growth.

Why the US will stand alone

In past crises, such as the 1987 stock-market crash or the recession in the early 1990s that sank the administration of president George H W Bush, the US could depend on the munificence of strangers. In particular, the world's sole superpower attracted enough money from risk-averse investors to refloat its economy. That time has, however, come and gone as developing countries no longer "need" to buy US government bonds. Indeed, as I argued in a previous article, [3] they are better served by investing in physical assets such as commodities directly rather than diverting their savings to the low-return US markets.

In addition to the economic rationale of protecting their own growth, the world's investors are also not interested in US assets for political reasons. A quick look at the world's largest repositories of savings shows the extent of the problem: Middle Eastern investors will buy anything as long as it is not American, while Asian investors are likely to be scared off by recent losses on mortgage holdings. Other countries such as oil-rich Venezuela and Russia explicitly use their reserves as diplomatic tools.

With friends like these ...

Perhaps a diversion to consider the fragile reputation of America's politics is necessary here. The lost war in Iraq has failed to make the US government honest - indeed, the opposite appears to have happened. Like an alcoholic on the run from his treatment clinic, wrecking drink cabinets, Vice President Richard Cheney stomped into the capitals of US allies as the unapologetic face of the most unpopular US administration in recent history.

In so doing, he caused more damage to America's friends than its enemies could possibly inflict in a one-week window. To name just two, Cheney's visit has virtually guaranteed Prime Minister John Howard's re-election defeat in Australia, [4] and rendered precarious the position of Pakistan's unelected President General Pervez Musharraf, who had the indignity of being admonished by the petulant "veep".

At home, the conviction of Lewis "Scooter" Libby has added another layer of concern for the besieged White House, while the poor treatment of its war veterans in hospital will likely depress even diehard Republicans. That leaves the field wide open for a Hillary assault on the presidency next year. I expect that on her way, Senator Clinton will put into play everything that the Republicans stood for, including free trade and a measured approach to China.

This is where the Asian response becomes critical. Expecting no help from the American consumer is one thing, but also to confront political assaults is an entirely different matter. The upshot is that Asian countries will be forcefully cajoled into allowing their currencies to appreciate against the US dollar in coming months, with people like US Treasury Secretary Henry Paulson urging action (as he did this week) sooner so that these countries do not have to confront something worse later on, viz a Hillary presidency.

China has the most to lose from a currency appreciation. In addition to the accounting losses on its foreign-exchange reserves, the country will also have to set aside money to rescue its banks, whose bad debts will mount precariously when the economy suddenly lurches from export orientation to domestic consumption. The only reason to rush this through now is that waiting a few more months would make the eventual impact worse for both the US and China.

Notes
1. The thief and the scorpion, Asia Times Online, January 13.
2. India 1, China 0, ATol, March 3.
3. Sun Tzu's art of investing, ATol, February 10.
4. Newspoll survey conducted March 2-4.

Copyright 2007 Asia Times Online Ltd.

Fed warned of foreclosure crisis as loan growth slows

business

By Craig Torres and Carlos Torres
Bloomberg News
Denver Post
Article Last Updated:03/08/2007 10:00:37 PM MST

Federal Reserve Chairman Ben Bernanke and other policymakers were warned that rising mortgage foreclosures are likely to get worse, as the central bank on Thursday reported the slowest pace of loan growth in four years.

The Federal Reserve Board's Consumer Advisory Council, including consumer advocates and banks, met in Washington, with Bernanke and Fed Governors Susan Bies, Randall Kroszner and Frederic Mishkin in attendance. Home-mortgage foreclosures were the first agenda item, and the officials heard anecdotes of default and families at risk.

"We have found neighborhoods with abandoned homes, 200 at a shot," said Louise Gissendaner, senior vice president and director of community development in Cleveland at Fifth Third Bancorp, the 10th-biggest U.S. bank by assets. She said abandoned housing has "devastated our city to a great degree."

Mortgage borrowing rose by $792.5 billion last year, the smallest gain since 2002, according to the Fed's quarterly Flow of Funds report. The increase last quarter was the smallest since 1998, as two years of Fed interest-rate increases depressed loan demand and slowed the housing industry.

The Fed raised its benchmark rate to 5.25 percent in June, compared with an average target of 3.2 percent in 2005, a year when net new mortgage borrowing soared by a record $1 trillion. Economists surveyed by Bloomberg News expect the Fed will hold the rate through the third quarter, the median estimate shows.

Fed officials heard stories from Denver, Cleveland, Philadelphia and New York, where neighborhoods are deteriorating as borrowers struggle to pay loans or abandon their homes in foreclosure, a process where lenders take possession of property.

Bernanke and the other governors didn't comment on interest rates, the economy or the direction of regulatory policy. They listened to comments from advocates and bankers, who indicated that foreclosures are likely to increase further.

"We feel like a canary in a coal mine," said Stella Adams, executive director of the North Carolina Fair Housing Center in Durham. "It is sad for us to know that there are 1.2 million families at risk from foreclosure."

Some 1.2 million foreclosures were reported nationwide last year, up 42 percent from 2005, according to Irvine, Calif.-based RealtyTrac, which has a database on foreclosed properties.

Delinquency rates on real-estate loans rose to 2.11 percent for all banks last quarter, the highest in four years, according to Fed data unadjusted for seasonal patterns.

Much of the deterioration in mortgage quality was the result of subprime loans, or credits to borrowers with little or poor credit history. Banking regulators on March 2 issued proposed guidance on subprime mortgages.

Consumer advocates at Thursday's meeting said poor underwriting standards in the subprime market were behind the rising foreclosure rates.

"We are facing a foreclosure crisis in this country," said Adams. "There is a distinct problem in the subprime market that is contributing to the foreclosures."