Bear Market

Late Night Comments

February 28, 2009 by · Leave a Comment 

For the grim economics news, please see my earlier post with 20 graphs: February Economic Summary in Graphs

Just a few comments on comments …

I’m working with JS-Kit. They have moved all the old comments over to the new database.

Hopefully we can have the default be “flat”. And we can add a refresh (that takes the user to the bottom).

JS-Kit will also be adding the following features:

  • number of users on-line, this is in discussion and has no ETA date
  • no preview button (comment form is WYSIWYG), but they are adding an “edit” button so users can change their comments later.
  • visitor URL in comment will be added soon.
  • number of comments within pop-up will be added.

    Best to all. And thanks for your patience.

    Read more….

  • Reader Sanity Check on What to Do Next With Banks

    February 28, 2009 by · Leave a Comment 

    I was in Kansas City at a econbloggers conference hosted by the Kauffman Foundation, and one of the breakout discussions was on the fate of finance.

    One participant who claimed to be have a basis for his view (it could be based on private polling or focus group research, or less scientific methods) said that Americans don’t want more regulation of financial firms, “they just want some public hangings.” Perhaps more important, he said that was what policymakers believed, that Americans were not in favor of regulation.

    A recent Gallup poll served to illustrate how susceptible poll results are to how the survey question is phrased:

    Would you be satisfied if some of the executives at financial firms who helped bring them and the economy to the brink were brought to justice, or do you think additional measures are necessary? Have any friends, family, or co-workers given their views on this question? If so, where do they stand?

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    AIG Near Deal On New Terms For US Bailout: Report

    February 28, 2009 by · Leave a Comment 

    By Paritosh Bansal, Reuters

    American International Group Inc is close to a deal with the U.S. government that would ease the terms of its bailout, provide a further equity commitment and help it pay down debt, a person familiar with the matter said on Saturday.

    The board of the troubled insurer is due to meet on Sunday to vote on the deal, which could be announced when AIG reports its quarterly results on Monday, the source said.

    The revised agreement is expected to include an additional $30 billion equity commitment from the government, more lenient terms on an existing preferred investment, and a lower interest rate on an existing $60 billion government credit line, the source said.

    The new equity commitment would give AIG the ability to issue preferred stock to the government at a later date, the source said.

    The London Interbank Offered Rate floor on the interest rate AIG pays on the government’s credit line is expected to be removed under the new terms, which would save the insurer about $1 billion a year, the source said. The company currently pays 3 percentage points above Libor.

    AIG will also give the Federal Reserve ownership interests in American Life Insurance (Alico), which generates more than half of its revenue from Japan, and Hong Kong-based life insurance group American International Assurance Co (AIA) in return for reducing its debt, the source said.

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    Global Recession’s Personal Economics: Fear, Anxiety, Stress

    February 28, 2009 by · Leave a Comment 

    Eileen Griffin always wanted to own a bookstore. So three years ago, when she retired from her job as a national account manager for Random House, she took all her savings and opened the Griffin Bookshop and Coffee Bar in downtown Fredericksburg. It became a local favorite, with live music performances on Friday and Saturday nights. “This is my big dream. When I retired, I thought, ‘This is great — I’m going to open a bookstore and a coffee bar,” she said. “Then the economy started doing what it’s doing.”

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    REIT Dividends Crumbling With Commercial Real Estate Values

    February 28, 2009 by · Leave a Comment 

    There were $16.6 billion in dividend cuts in the S&P in the first quarter, and REIT dividends were not immune as commercial real estate values and NOI came under pressure with rapidly deteriorating economic conditions. Arbor Realty Trust (ABR), iStar Financial (SFI) and Grammercy Capital (GKK) all eliminated their fourth quarter dividends. Click here for more background on declining values in commercial real estate (includes charts and market analysis).

    Market Watch reported that Friday’s stock market fall had the S&P 500 Index near its bear-market low as companies listed on the broad-market index engaged in another record-breaking quarter of slashed dividends. Unfortunately, it is not likely that REITs will buck the trend. As you may already know, fear drove gold futures above the $1,000-an-ounce mark.

    Banks also got killed, with shares of Bank of America and Citigroup among the leading decliners. “Given the uncertainty with corporate earnings, gold is one area investors should be looking at to hedge themselves against the perception that the dollar decline is somewhere on the horizon,” said Dan Greenhaus, an analyst at Miller Tabak.

    Dividend reductions within the S&P 500 in the fourth quarter of 2008 came to a record $15.9 billion, according to Howard Silverblatt, senior index analyst, Standard & Poor’s.

    “Now, 50 days into the quarter, the record has already been broken, with 26 issues cutting $16.6 billion,” the analyst said, adding that further cuts are expected. First quarter REIT dividends have yet to be fully declared, but sector-wide ugliness will likely prevail in parallel with the S&P pay outs. It is quite likely that the majority of whatever is declared and paid will be paid in stock. Click here for a list of REIT Dividends being paid in stock. And stay tuned for a run-down of next quarters’ dividend declarations.

    REIT Wrecks

    Disclosures: None at the time of publication
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    Pounds of gold silver recycled from cell phones

    February 28, 2009 by · Leave a Comment 

    ReCellular world’s leading electronics sustainability firm recycle 21 000 pounds of copper 954 pounds of silver and 96 pounds of gold from recycled circuit board and acessories. They recycled 5.5 mn phones equivalnet to the weight of three Boeing 747 400s.

    gold-silver-recycled-from-cell-phones-15621-3-1.html>Read more….

    Averting Massive, Sector-Wide REIT Defaults: Non-Traded Equity May Be Part of the Answer

    February 28, 2009 by · Leave a Comment 

    The REIT sector is in all sorts of unprecedented trouble. They depend on leverage, and to the extent that it can be had at all, it’s become more expensive and tougher on terms. Consequently, the weighted average cost of capital (debt and equity combined) for REITs will increase by an average by 100-200 basis points, to 7-8% all-in, according to Goldman Sachs. With the cost of capital going up, cap rates must also increase and consequently commercial real estate values will inevitably drop further. This creates a kind of negative feedback loop that even Harry Houdini could not escape.

    This will not only affect the ability of REITs to refinance their own debt, reduced availability of capital will dramatically impact the clients of many Mortgage REITs. These borrowers have historically sold assets or refinanced their loans via the secured debt markets to repay Mortgage REIT loans. They can no longer do so, and Mortgage REITs like iStar financial (downgraded to junk status by Moody’s yesterday) have seen their balance sheets turn to cement. If this environment persists, there could be a massive wave of defaults on REIT-related debt.

    While Goldman Sachs’s REIT research team recently issued a report that was cautiously optimistic on a few names, they also noted that commercial real estate is eroding at a pace indicating that occupancy and rental declines should match the deep recession of the early 1990s. Read Goldman’s full report on REITs here (courtesy of Zero Hedge)

    With the availability of credit vastly reduced and commercial real estate values likely to drop by 30-40%, REITs will need to contribute a considerable amount of equity in order to successfully refinance approximately $20-$30 billion of debt coming due in 2010. The problem is compounded by the fact that “asset sales are not currently a viable option, given the lack of funding alternatives available to buyers and the uncertainty over pricing (rising cap rates and falling NOI levels)”

    So REITs must conserve what little capital they have by paying dividends in stock, and by attempting to raise capital in whatever markets may be open to them. According to Robert A. Stanger & Co., one of those markets may be the “non-traded” equity market, which raised over $9.5 billion in REIT equity during 2008, including over $2 billion during the fourth quarter alone.

    Much like a preferred issue, non-traded REIT equity is issued to a stable group of retail investors and offers a predictable yield, paid monthly, and none of the gut wrenching daily price gyrations seen in the common. Whether this market is deep enough to absorb the daunting capital requirements of many capital-starved REITs remains to be seen, but an increasing number of such REITs will undoubtedly be taking a hard look at non-traded equity in 2009.

    One of the first out of the gates was Pacific Office Properties Trust (PCE). PCE is an Office REIT, and they disclosed goals to raise $350,000,000 in a February 6th registration with the SEC. Pacific Office hopes to tap into a stable capital source that, because of its modest yield (7%), will be accretive to the holders of its listed common shares. Interestingly, because PCE’s non-traded equity is a so-called “Covered Security”, it will not be subject to expensive and arduous “blue-sky” registration in many states. This represents a significant advantage over a typical non-traded publicly offered REIT.

    Despite its ambitious fundraising goal, at the time of the filing PCE had not even identified a broker to sell the shares. However, the PCE offering could be the first of many such deals for undercapitalized REITs reluctant to offer dilutive follow-on offerings of common at current prices. Offering non-traded senior common or unrated preferred stock to investors may help solve some REIT balance sheet issues as well as address looming 2010 debt rollovers. These rollovers will require more equity in order to be successful, and without that the REIT world will almost certainly get even uglier for shareholders and lenders.


    Disclosures: None at the time of publication

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    Who Bears the Burden for a $3 Trillion Mistake?

    February 28, 2009 by · Leave a Comment 

    Citigroup plunged 39% on Friday to $1.50, a price last seen in 1992.

    The plunge was in response to a Citigroup U.S. Accord on a Third Bailout that will convert the government’s preferred shares to common, thereby diluting existing common shareholders and exposing US taxpayers to more losses.

    Citigroup Inc. and the federal government agreed to a third rescue that will give U.S. taxpayers as much as 36% of the bank but expose their ownership stake to greater risk from the recession and housing crisis. The deal will punish existing shareholders of Citigroup, who will see their stake diluted by 74%, and likely do little to change the awkward relationship between federal officials and management of the New York company.

    Depending on how many current holders of Citigroup preferred stock agree to a similar move, the company’s tangible common equity could surge to $81.1 billion from $29.7 billion at Dec. 31. That would reverse the recent slide in tangible common equity — a gauge of what shareholders would have left if the company were liquidated — that fueled a downward spiral in Citigroup shares.

    The conversion leaves taxpayers exposed to the risk of greater losses. The government’s preferred holdings had stood ahead of common stock in Citigroup’s capital structure, meaning they were less likely to lose value if the company’s woes continue to mount. In addition, by converting much of the U.S. stake to common shares, Citigroup won’t have to pay the hefty dividend payouts that were attached to the preferred stock.

    “The government is bending over backwards to not go along the lines of nationalization,” said Bernie Sussman, chief investment officer of Spectrum Asset Management, a unit of Principal Financial Group Inc. that manages about $6.9 billion in assets. “They had the alternative to completely zero out the common stock.”

    Mysterious Plans Revisited

    Let’s take a look one more time at Krugman’s article Mysterious plans

    What Treasury now seems to be proposing is converting preferred to common.

    [Mish: No longer a proposal but a done deal]

    It’s true that preferred stock has some debt-like qualities — there are required dividend payments, etc.. But does anyone think that the reason banks are crippled is that they are tied down by their obligations to preferred stockholders, as opposed to having too much plain vanilla debt?

    I just don’t get it. And my sinking feeling that the administration plan is to rearrange the deck chairs and hope the iceberg melts just keeps getting stronger.

    Shared Sacrifice

    I had the pleasure of meeting Michael Mandel, chief economist for BusinessWeek, at a economic conference sponsored by the Kauffman Foundation last Thursday and Friday. I spoke with him at great length about the preferred conversions at Citigroup.

    Mandel advised what was happening could be found in column he wrote last October called Shared Sacrifice Will Ease the Credit Crunch.

    Over the past four years the U.S. private sector has borrowed an astonishing $3 trillion from the rest of the world. The money, directly and indirectly, came from countries such as China, Germany, Japan, and Saudi Arabia, which ran huge trade surpluses with America. Foreign investors trusted their funds to U.S. financial institutions, which used much of the money for mortgage loans.

    But American families took on a lot more debt than they could comfortably afford. Now no one is sure how much of that towering sum the U.S. is going to pay back—and all the uncertainty is roiling the financial markets.

    The Washington bailout debate boils down to this question: Who is going to bear the burden of the $3 trillion mistake?

    Will low- and middle-income borrowers have to cut back on spending to pay their mortgage bills? Will taxpayers have to chip in big bucks to pay for defaults on those debts? Or will Washington act in a way that imposes large losses on foreign investors—in effect, repudiating some of the debt? The best outcome is shared sacrifice among borrowers, taxpayers, and foreign investors—but that result may be politically difficult to achieve.

    Too Big to Bail

    The next piece of the puzzle can be found in the Institutional Risk Analyst article Too Big to Bail: Lehman Brothers is the Model for Fixing the Zombie Banks.

    Remembering that half of the liabilities of C, BAC and JPM are funded out of the bond markets and not via deposits, it should be clear to one and all that the US taxpayers are not in a position to subsidize the bond holders of these three banks, representing some $1.5 trillion in debt, if the deposits of these banks are to be protected. Some people, indeed, many people believe that we must avoid another Lehman Brothers type resolution where bondholders take a loss, but to us the only scenario where depositors of C, BAC, JPM do not take a loss is if we haircut the bond holders.

    There are no easy answers here, but the guiding principle left by the Founders that bankruptcy be used to quickly and finally resolve insolvency is instructive. In that sense, Lehman Brothers is the ideal example, not something to be avoided.

    What is required in Washington is an adult conversation, between the US government on the one hand and the holders of the bonds of the largest banks on the other. Many of the bond holders of the large banks are foreign governments, central banks and investment funds and not a few of these sovereign names are in really serious financial difficulties. Since the receiverships for Lehman Brothers and Washington Mutual, where bond holders took a near total loss, these foreign investors have been vocal in demanding that US taxpayers protect them from further harm.

    But to deflect these cowardly, expedient arguments, the US government must be willing to lead by example to show that there really is only one way to restore confidence in zombie banks: use receivership to wipe out the common and preferred shareholders, conserve the deposits and sell the good assets to new investors, and then restructure the remaining operations of the bank to maximize recovery to the bond holders and other creditors.

    Frogs Slowly Boiled In Order

    Finally, in The Great Repudiation Revisited, Mandel mentions the above Institutional Risk Analyst article and concludes “At some point the bondholders are going to have to take a big haircut.

    We can now see that the plan is to slowly boil the frogs in order. In other words, the government preferred shareholders need to be wiped out first in a manner that offends foreign investors the least. That manner was to wipe out US government (taxpayer) preferred shares along with foreign governments common equity and preferred positions.

    The next frog to be boiled will be after Citigroup fails the stress test. At that point, there will be no way to avoid “an adult conversation” between the US government and foreign bondholders.

    Meanwhile, the government is avoiding an outright nationalization of Citigroup hoping to avoid pressure by foreign governments for the US to make good on a full repayment of bank bonds. If the government limits its stake to 40% or less, US Government guarantees of bank debts may be skirted, or at least postponed.

    Tying it all together, what’s really happening has nothing to do with the announced plan to boost banks’ TCE, tangible common equity. Rather, the plan is to repudiate the bondholders, step by step, boiling each frog in order, hoping to minimize the fallout from foreign bondholders.

    Mike “Mish” Shedlock
    Click Here To Scroll Thru My Recent Post List

    Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
    Visit to learn more about wealth management and capital preservation strategies of Sitka Pacific.

    “Nationalization” and the Semantics of Manipulation

    February 28, 2009 by · Leave a Comment 

    February 28, 2009

    Manipulation via semantics has a long history in politics and its well-cloaked twin, propaganda. The “nationalization” issue is a textbook example of manipulation in progress.

    Knowledgeable correspondent Craig M. recently alerted me to the crass dishonesty of framing the bank cleanup/recapitalization issue with the hot-button word “nationalization” rather than the more accurate and less inflammatory word “reorganization”:

    This is an excellent article on the “nationalization” issue: Bank Nationalization Is Done Deal, Let’s Move On: David Reilly (Bloomberg)

    However, it misses a critical point in the debate over the banks. Those opposed (i.e. Geithner, Bernanke, banksters, etc.) to a RTC/FDIC reorganization of the banks have framed the discussion around the word “nationalization”, which is “knee-jerk”/pejorative word in the American vocabulary with negative connotations.

    If the debate was being framed honestly, the discussion would be how to best reorganize the banks instead of hiding behind the pejorative word “nationalism” as an excuse to continue the current crony-capitalism. The American taxpayers deserve better from their leaders than being manipulated by semantics as the banking system fails.”

    Thank you, Craig, for this timely insight. As I wrote in Collapse of Complex Systems I: Nationalization and Shadow Capitalism (February 23, 2009), the same semantic manipulation is in play with the powerful word “Capitalism,” which is constantly used as an ideological cloak to “sell” blatant crony-capitalism and central-state-planned actions as “good old American capitalism.”

    In case we forgot, these are simulacrums of capitalism, semantic constructs designed to confuse illusion and reality, as they contain none of what defines Capitalism: free markets, transparency and capital put at risk for an uncertain return as dictated by the “invisible hand” of the market.

    The classic text on semantic influence/manipulation is How to Do Things with Words by J.L. Austin. It may well be the most marketable knowledge gained by English majors (presuming current English majors are still being assigned this text.)

    Here are a few classics in the “political marketing/manipulation” field:

    The Hidden Persuaders by Vance packard
    The Selling of the President 1968 (used hardback editions)
    The Selling of the President 1968 (new paperback)

    Spin Cycle: How the White House and the Media Manipulate the News (as I recall, the subtitle used to be punchier: “inside the Clinton propaganda machine”)

    On Bended Knee: The Press and the Reagan Presidency

    And the book which provides a revolutionary account of the power of the Web to change the MSM/spin game by the master of Howard Dean’s Internet-based campaign: The Revolution Will Not Be Televised: Democracy, the Internet, and the Overthrow of Everything

    Shameless pitch for my own book on marketing in the Depression and leveraging the power of the web for your own business/livelihood:
    Weblogs & New Media: Marketing in Crisis

    Of Two Minds reader forum (hosted offsite, reader moderated)

    What’s for dinner at your house?
    has been updated with two new recipes:
    Quick Easy Vegetable Soup and Pork Butt Stew

    New Operation SERF Installment:
    Operation SERF, Part 11
    Chris Sullins’ “Strategic Action Thriller” is fiction, and on occasion contains graphic combat scenes.

    Thank you, Dan L. ($30) for your stupendously generous second contribution to this site. I am greatly honored by your support and readership.

    Go to my main site at
    for the full posts and archives.

    Two more banks fail

    February 28, 2009 by · Leave a Comment 

    Regulators closed two more banks Friday, bringing the number that have failed since the first of the year to 16.

    The operations of both banks – Security Savings Bank of Henderson, Nev., and Heritage Community Bank of Glenwood, Ill,. were taken over by other institutions.

    One of the acquirors was a bank whose own finances were strengthened by taxpayer capital from the Treasury Department‘s $700 billion Troubled Asset Relief Program.

    Ten of the 16 banks that were seized by regulators this year have been absorbed by others that got TARP funds.

    The Nevada Financial Institutions Division closed Security Savings and appointed the Federal Deposit Insurance Corp. as receiver. It arranged for Bank of Nevada, based in Las Vegas, to acquire its $175.2 million in deposits and its two branches.

    Bank of Nevada also agreed to buy $111.3 million of the failed institution’s $238.3 million in assets.

    The Illinois Department of Professional Regulation seized Heritage Community and appointed the FDIC as receiver. It struck a deal with MB Financial Inc., which has headquarters in Chicago, to take over the bank’s $218.6 million in deposits and its four branches.

    MB Financial agreed to buy $230.5 million of the bank’s $232.9 million at a discount of $14.5 million. In addition, the FDIC entered into a loss-sharing arrangement on $181 million of those assets.

    MB Financial got $196 million in TARP money in December, selling preferred stock and warrants to the Treasury Department as part of its plan to inject capital into banks to shore up their balance sheets and help spur lending.

    The FDIC estimated that the two latest bank closings would cost its deposit insurance fund about $100 million. It said in a report this week that 252 banks and savings institutions were on its “Problem List” at the end of 2008, up from 171 three months earlier. It noted that the number was the highest since the middle of 1995.

    Read more….

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