The big event of this weekend was in the New York Times and entitled: A ‘Moral Hazard’ for a Housing Bailout: Sorting the Victims From Those Who Volunteered.

A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government — now that it is in trouble.

The proposal warns that up to $739 billion in mortgages are at “moderate to high risk” of defaulting over the next five years and that millions of families could lose their homes.

To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.

“We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,” the financial institution noted… (Feb/23/02)

Finding a solution to this unprecedented crisis is needed… but let’s bear in mind that any intervention will come down to making debts to pay debts…. the problem is just delayed while making the outcome M-U-C-H worse… In real economics, debts that cannot be paid are destroyed.

The world credit situation darkens on a daily basis and you shouldn’t expect to hear the ugly truth from the mainstream media.

For example: German State-Owned Banks on Verge of Collapse, Der Spiegel said today. The German government has had to bail out state-owned banks with taxpayers’ money after their managements recklessly gambled away billions on subprime investments. But if a state-owned bank were to go under, the consequences could be disastrous for the whole economy…. Ortseifen and Matthäus-Maier are perfect examples of the fatal mix of amateurism, greed and political protection that is symptomatic for many of Germany’s state-owned, partially state-owned and public sector banks. It is an environment that can only thrive in the shadow of the state — and that has drained more than €20 billion from the public treasury within the last decade. Until now, the government has always been there to pick up the tab in the end. Fully aware of this safety net, the executives at state-owned banks gambled with their employers’ assets as if there was no tomorrow. Munich-based BayernLB did it with stocks in Singapore, Bankgesellschaft Berlin with real estate investments, and WestLB with holdings in British companies….Anyone who is not responsible for bearing the consequences of the risks he or she takes can easily turn into a gambler. And the bets kept increasing in recent years, getting more and more public-sector banks into financial hot water. Now the banks find themselves lacking the assets they need to weather the turmoil of an international financial crisis.

In Australia, a country that is not even a major economy like Germany, things have gone from bad to worse too.

Australian Banks on Hook for 117 Times Worth according a scary article titled: Bomb ticking for off-balance banks, released by theaustralian.com. A TICKING bomb for the banking sector is its off-balance sheet activities, which at last count stood at $12.9 trillion.

We live in a world in which it is no longer possible to know who is borrowing/lending from to/who.

Today one could read on bloomberg.com: Dresdner Bails Out $19 Billion SIV, Follows Citigroup, HSBC in Fund Rescue. A short while back if you remember well, the Citigroup, Barclays, Merrill Lynch, Morgan Stanley and UBS rescue package found admirers. Here is an excerpt from the NYTimes:

In a $12.5 billion convertible preferred issue, Singapore’s GIC led with $6.88 billion, while the Kuwait Investment Authority kicked in $3 billion. The New Jersey Division of Investment, part of the state treasury department, invested $400 million. Extrapolating from Securities and Exchange Commission documents and other sources, a Los Angeles-based money manager the Capital Group of Companies, Citigroup’s largest institutional shareholder, appears to have invested $1.75 billion, while Saudi Prince Al-waleed bin Talal, the bank’s single biggest individual shareholder, put up $450 million. The former Citigroup chief, Sandy Weill, tossed in an additional $20 million, the same documents appear to indicate…

Don’t let the monetary jargon blur your mind. This means that the countries having accumulated a huge reserve of USDs are now lending to troubles European and American banks. But the problem remains. Debts are still alive and kicking! This is called debt laundering at the expenses of the gullible taxpayers.

Closer to us, Nouriel Roubini predicted (as of Feb 19) that 10 to 15 Million Households will Likely Walk Away from their Homes/Mortgages and that it will Lead to a Systemic Banking Crisis. He continues:

Then, the losses for the financial system from this massive defaults will be of the order of $1 trillion to $2 trillion, a multiple of the $200 to $400 billion of losses currently estimated for mortgage related securities.

This housing tale was a real mania involving fraud and lies at every level.

There are consumers who bought a condo or a house even knowing that the monthly mortgage payments could be hardly met - but thought that the ever increasing estate value would save them eventually. Of course, it didn’t play out this way:

For months, we’ve fretted about the Armageddon that will hit when subprime adjustable rate mortgages start resetting to much higher interest rates. What’s happening is even worse. It turns out that massive interest rate spikes aren’t the problem — many borrowers couldn’t afford these mortgages even at the low, introductory interest rates… (CNN-FEB 20)

Here is our advice - fasten your seat belts if not done yet!

While many people believe that the credit crunch has been contained, the sad fact is that it has cost a globally $7.7 trillion dollars in stock market value since October. Some even say more than that, speaking of $8.6TN. A reason why we shouldn’t expect the mainstream media to air any interviews of desperate borrowers and investors who supplied the funds to fuel a housing boom turned into bust. If they would they would freeze the markets instantly. It is very bad out there. Truth to be told, the subprime losses already outweigh ‘The Great Depression’. While it may not be very obvious at this stage, Wall Street is bracing for a wave of fury over subprimes.

If you remember well, Greenspan was utterly confident in the housing boom and applauding the so-called new financial instruments, telling us that they helped stabilize the market volatility. Back to present, today Bernanke speaks a different language and warns us that broad economy is worsening…

… The Fed chief told senators the “virtual shutdown” of the market for subprime mortgages given to people with blemished credit histories or low incomes — and a reluctance by skittish lenders to make “jumbo” home loans exceeding $417,000 — have aggravated problems in the housing market. “Further cuts in homebuilding and in related activities are likely,” he said….

Though the Fed chairman insists that there is no recession, just a sluggish growth which will be countered by the the impacts of the Fed’s rate cuts and the $168 billion economic stimulus package of tax rebates…. honestly can you believe that? Who is paying for the banks’ bailout and where do you think this stimulus package actually comes from: the treasury… it is all new DEBTS for the taxpayers!! We are merely delaying our day of reckoning and its ensuing fury tsunami.

What we’re seeing is a repeat of the S&L Crisis. Why? Because those who draft the regulations leave loopholes on purposes that suit their interests. Today they want us to believe that they are rescuing the market while in fact they are covering-up their own losses and underlying scandals. There is a book available for free on the net currently and titled: ‘The Bubble That Broke The world’, the story of a investment craze and easy money that led to the infamous 1929 crash. Nothing has changed and real changes will come when economics 101 will be taught in high school.

The cherry on t cake this week was most likely the speech given by Elliot Spitzer. He pointed to Federal agency that made it all worse for unwary borrowers. He explained:

The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency, or OCC. The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers…. In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions pre-empting all state predatory lending laws, thereby rendering them inoperative against national banks. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation in 2005 of possible discrimination in mortgage lending by a number of banks, including national banks, the OCC filed a federal lawsuit to stop the investigation against the national banks.

Throughout our battles with the OCC and the banks, the mantra of the banks and their defenders was that efforts to curb predatory lending would deny access to credit to the very consumers the states were trying to protect. But the curbs we sought on predatory and unfair lending would have in no way jeopardized access to the legitimate credit market for appropriately priced loans. Instead, they would have stopped the scourge of predatory lending practices that have resulted in countless thousands of consumers losing their homes and put our economy in a precarious position…

All this for the love of money?

Greed is a bottomless pit, which exhausts the person in an endless effort to satisfy the need without ever reaching satisfaction. — Erich Fromm 1900-1980, American Psychologist.

So where does it leave us?

Oh yes, the SEC Probes Dozens of Subprime Lenders, teaming with the FBI, the regulator wants to determine whether the crisis is criminal. To know whether we should hold our breath, let’s make a quick reality check… how many people involved in the Enron or the Worldcom cases are in jail today?

Any one familiar with our work will easily remember that we told you - at the moment of the release of our documentary - that the impact of so much predatory lending would affect the practically everything. So we weren’t much surprised to read in the NYTimes as of 01/12 that the Mortgage Crisis Spreads Past Subprime Loans.

Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or subprime, credit. “This collapse in housing value is sucking in all borrowers,” said Mark Zandi, chief economist at Moody’s…

Was the ‘housing miracle’ synonymous with the Myth of Homeownership for all?

While it is understandable that stabilizing the economy ought to be a priority, we have concerns when reading headlines such as this one: The Six U.S. Banks Plan to Step Up Efforts to Avoid Foreclosures. Here is an excerpt:

Feb. 11 (Bloomberg) — Bank of America Corp., Citigroup Inc. and four other lenders will announce new steps tomorrow to help borrowers in danger of default stay in their homes, according to three people familiar with the plans. The banks will start “Project Lifeline,'’ offering, on a case-by-case basis, a 30-day freeze on foreclosures while loan modifications are considered, two people said on condition of anonymity. The companies met with Treasury officials over the past week to discuss ways to encourage homeowners to get in touch with their mortgage servicers, one person familiar with the deliberations said…

Where will the money be coming from?… The taxpayers again!

Yesterday, as of Feb. 6, CNN had a simple explanation for the stock market mixed outcome: many investors, still uneasy about the economy, cashed in earlier gains after a Federal Reserve official suggested that rising inflation could prevent the central bank from making further interest rate cuts.

What does it mean? It means that stock market players have not forgotten the era of cheap money and its ensuing boom. If the fed’s rates were going back to 1%, we’re willing to bet that we’d have DOW 20,000 by now… Sweet nostalgia! They still think that it only takes to print more money to make the recession go away while forgetting what got them into this mess in the first place - with the help of the three major credit rating firms, the real culprits.

As to wonder when the those credit rating agencies will be downgraded. Alex Wallenwein has investigated:

Somewhere in the distant past, in the early 1970s, they were paid by the investors who needed to tap them for their information so investors could make educated judgments on investment risks. That is no longer so. Now, they serve two masters at the same time - but only one master really gets the benefit: the one who pays them.

So there we have it: that are monstrous conflicts of interest that made confidence in credit run amok.

The problem is not a liquidity crisis per se but too much money flooding the market and whose value is getting more and more worthless because too much money is purchasing goods and services. But once a currency is close to junk, we easily can imagine the amount of banknotes that are needed to achieve the same results. So indeed, more money is needed to help the system stay afloat.

2007 may come to associated with the start of the “big” credit crunch. 2008 has begun with a number of “unresolved” items. Hope of an early resolution seems to be fading. In the words of Lily Tomlin, the American comedian: “Things are going to get a lot worse before they are going to get worse.” … Satyajit Das - 03.02.2008

Bank woes are ‘poetic justice’ Buffett said:

“I wouldn’t quite call it a credit crunch. Funds are available,” Buffett said during a question and answer session at a business event. “Money is available, and it’s really quite cheap because of the lowering of rates that has taken place.” … He added: “What has happened is a repricing of risk and an unavailability of what I might call ‘dumb money,’ of which there was plenty around a year ago.”

While ‘dumb money’ is about to engulf the planet slowly but surely, US Homeowners Confound Predictions.

But the downgrades have also left policymakers and analysts scrambling to determine what has gone so badly wrong. As this search intensifies, some economists are starting to suspect that the answer lies in a striking recent change in American household choices – a shift that could have important implications for policymakers and investors alike…. In particular, it seems that mathematical models used to predict future default rates, based on past patterns of losses, have gone wrong because they did not adjust to reflect shifts in household behaviour. Or, to put it another way, financiers have been tripped up because they ignored one of the most basic rules of investment, which is usually found in product literature: the past is not always a guide to the future… “There has been a failure in some of the key assumptions which supported our analysis and modelling,” Mr McDaniel admits. “The information quality deteriorated in a way that was not appreciated by Moody’s or others.” Mortgage borrowers, in other words, did not behave as expected…

To be continued

If some pundits see deflation coming our way while others regard hyperinflation as the biggest threat ever could be debated endlessly. What truly matters is that the majority believes that the economy will enter a death spiral around the end year.

Today, the stocks were pounded as recession fears spread. What else could we expect? The true President Bush’s deficit is set to reach $3 trillion as announced at the end of last week and that Homeownership Plunged At Record Rate since tracking began in 1965. There is more, ‘Focus Property Group, one of the largest developers in Southern Nevada, has stopped making interest payments on $500 million in land-backed loans.

While new regulations to prevent abusive lending has to remain a priority, a crackdown on U.S. subprime lenders is only going to make a bad credit situation even worse because the Americans have basically used debt as income. The big credit contraction is coming…

U.S. debt service load higher now than days of double-digit interest rates … We have taken out so much debt as a society to finance a consumption boom and asset boom…that total interest payments are a bigger drag today than they were 25 years ago when the prime and conventional mortgage rate were both north of 16%,� Mr. Rosenberg said in a research note. This is rather unbelievable. (nationalpost.com/01.01)

Let’s face it: America’s middle classes are no longer coping.

…. The fact is, middle-class families have exhausted the coping mechanisms they have used for more than three decades to get by on median wages that are barely higher than they were in 1970, adjusted for inflation. Male wages today are in fact lower than they were then: the income of a young man in his 30s is now 12 per cent below that of a man his age three decades ago. Yet for years now, America’s middle class has lived beyond its pay cheque. Middle-class lifestyles have flourished even though median wages have barely budged. That is ending and Americans are beginning to feel the consequences….

Meanwhile the biggest joke today was probably Moody’s offers to change debt rating system for complex debt securities that would rely on numbers rather than letters. So there you have it, during all these years as the debt orgy was ever prospering, the people in charge of the economy were disregarding real hard mathematics to make their projections.
Faith in the Federal Reserve will be the last bubble to pop… ouch!

When the stakes are so high and that debts must be paid, the first reaction is protectionism. Alas this is a wrong attitude that ends generally with a self-fulfilling prophecy. The pundits know that very well but cannot do much against it because the pressure always comes from the lobbies protecting consumers and workers. Unfortunately debt liquidation is always linked to joblessness and inflation.
However, last January 25, one could read on CBSmarket watch that the banks may need $143 billion in fresh capital to rescue the junk-bond market. On the telegraph.uk online, there was a headline saying that Banks ‘face a further $300bn sub-prime hit‘ … Let’s do not forget that the estimates are about $1,300bn worth for sub-prime mortgages industry. How far and low can it go?

Lenders are so hungry for cash that they are contemplating to raise the ATM fees up to 3 dollars. Late credit card fees are likely to increase next. It is going to backfire.

But for today the most frightening news was most likely the following headline: S&P Lowers or May Cut $534 Billion of Subprime Debt.

Jan. 30 (Bloomberg) — Standard & Poor’s said it cut or may reduce ratings of $534 billion of subprime-mortgage securities and collateralized debt obligations, as home loan defaults rise… The downgrades may increase losses at European, Asian and U.S. regional banks, credit unions and the 12 Federal Home Loan Banks, S&P said. Many of those institutions haven’t written down their subprime holdings to reflect their market values and these downgrades may force their hands, S&P said…

Yes, dear readers, all this leads to wonder as if our banking institutions are still solvent.

In the UK this week, Chancellor Alistair Darling has proposed that failing banks should be able to receive help from the Bank of England in secret. No joke. On the top of that, Dominique Strauss-Kahn at IMF called for more government spending worldwide to reverse our current credit crunch that is is so severe that lower interest rates alone will not be enough “to get out of the turmoil we are in”. it will go worse before it gets better. Really: In Europe, ECB secretly rescued Spanish banking system.

David Owen, Europe of Dresdner Kleinwort, said Spain could face serious difficulties this year as the excesses of a decade-long boom finally catch up with the country…. “The size of the Spanish corporate sectors financial deficit is truly is really scary. It rose to 14.5pc of GDP in the third quarter of 2007 from 10pc in the first quarter. This must be a record for a relatively large economy. Clearly this is not sustainable. Cost imbalances have a nasty habit of unwinding, quickly and very painfully,” he said.

The credit deterioration going on right now worldwide is so monstrous that there are almost no words to describe the horror we are in.
In America now every household owes the government more than $400,000. And this doesn’t include mortgages, student loans, credit card debts and other leases. If it is too hard to swallow, please watch this YouTube video with the anchor Glenn Beck interviewing the head of the GAO. This is The Real Story, Touching the Third Rail.

http://www.youtube.com/watch?v=I-16u9×3tfE

When we see that a record amount of homeowners contemplate the idea to run away and instead of fighting for their properties because they realize that refinancing their mortgage won’t do fix anything as the real estate prices are now going down inexorably, we should be very - extremely - concerned. Please take the time to sit down and click here to play the CBS video related to the latest 60 minutes show which seems to be taking side with the homeowners who have decided to walk away from their duties, as reported by Michael Shedlock on his blog. Here is an excerpt:

Steve Kroft: “It sounds complicated but it’s really very simple. Banks lent hundreds of billions of dollars to homebuyers that can’t pay them back. Wall Street took the risky debt, dressed it up as fancy securities and sold them round the world as safe investments. If it sounds a little bit like a shell game or a ponzi scheme, in some ways it was” …They cannot refinance because the value of the house fell below the existing mortgage. They say they can afford the higher payments but see no point in making them.

Matt: The value of the house keeps going down and the payments keep going up. Where’s the logic in that?

Stephanie: Why make a $3200 a month payment on a 1200 square foot home? It makes no sense.

Steve Kroft: But that’s what you agreed to do when you bought the house.

Stephanie: Fine if the value was going up. The value is going down.

Steve Kroft: You are saying essentially you are going to stop making payments.

Stephanie: The only advice we’ve gotten so far is to walk away.

The LA Times is writing A tipping point? “Foreclose me … I’ll save money”
A homeowner who can’t sell his house tells the L.A.Times, “Foreclose me. … I’ll live in the house for free for 12 months, and I’ll save my money and I’ll move on.”

Banks and lenders fear this kind of thinking — that walking away from a house could be the smart economic move — appears to be on the rise. Wachovia, in a conference call yesterday, warned investors that increasing numbers of homeowners are walking away from their homes by choice: “… people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they’ve lost equity, value in their properties…”

If we really want to sort things out efficiently we ought to regard the unfolding crisis with a centrist state of mind. Our credit based financial system has flawed our entire ’system values’.

In good times, the policy makers want us to believe in free enterprise but in bad time seem to be rediscovering socialism to resolve the issues and protect their businesses. Does this make sense to you?

The origins of the current credit crisis lie in loose monetary policy and excessive capital flows that was turbo-charged by “financial engineering” techniques used by banks. Borrowing bought more borrowing fueling price increases in financial assets - debt, equity, property, infrastructure… more

Furthermore, George Soros himself declared as of January 25:

… “The current crisis is not only the bust that follows the housing boom, it’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency,” Soros said in a debate today at the World Economic Forum in Davos, Switzerland. “Now the rest of the world is increasingly unwilling to accumulate dollars.”…

So was that all the globalization was about - a giant debt boom leading to nowhere?

The big event this week was the confessions of Jim Cramer hosting Mad Money on CNBC. You can listen to the video here. There is too much fiction involved here, he yelled as of 01/07…

We now banks which do not know what they are doing… Where the heck is the S.E.C? … I have never seen this level of fiction… I don’t know if I would want to tell the truth: this is too dangerous… the American people should be fed up with

On the real estate front, the series of bad news continues: Merrill Lynch says U.S. nationwide home prices may fall 30%… Stunning jump in foreclosures (500% in California)… Fannie, Freddie May Face $16 Billion Losses, Credit Suisse Says …
The consumer and real estate-led recession in America is going to have dire consequences. IMF’s Strauss-Kahn warned, as of 1/21, that an American recession would spread globally. Even the financier Soros acknowledged that it is the worst market crisis in 60 years. At the at the World Economic Forum in Switzerland, rumors concede that Europe and Asia face hard landings as bubbles burst:

Prof Roubini said Eastern Europe faced the biggest risk of a dramatic upset. “All the way from the Baltics down to Turkey there are countries with large current account deficits. People have been borrowing in foreign currencies, the euro or the Swiss franc, to buy houses, and so the situation could be like Argentina or Mexico where homeowners went belly-up. There is a severe risk of a crunch leading to a financial crisis,” he said.

Very deja-vu indeed!

This is so bad out there that the stimulus plan is most likely doomed from the start. First we’ll have to wait for at least 6 months before the effects are felt. But if we take a look at the big picture, it becomes obvious that something is amiss. The foolishness of economic ’stimulus’ . It is another deception in disguise because we’ll pay it back instantly via inflation; the money will come from the Federal Reserve, no matter how we look at the picture - not to mention that the USD will depreciate even further:

Such stimulus, however, is futile. Government cannot create genuine spending power; the most it can do is to transfer it from Smith to Jones. If the Treasury sends a stimulus check to Jones, the money comes from taxes, from borrowing, or is newly created…. Stimulus funded with newly created money is especially harmful. Most obviously, the inflation it causes prompts investors to flee the dollar. But because inflation can take time to show up, injecting new money into the economy can create a temporary sense that consumers and investors are wealthier than they really are. Such a false sense dangerously delays the necessary pruning of unfruitful investments. A bad economy is prolonged.

Many now worry that the Good Times were mostly a mirage. This global upcoming credit crunch will be a Crisis that may make 1929 look a ‘walk in the park’ and is going to morph middle-class citizens into ‘Tycoons of Debt’.

Banks, worldwide, are getting prepared for a brutal stock market capitulation. They just want you to know that and expect that consumers’ confidence in the system will soften the damages. Alas, we’re dealing with hard mathematics here.

The Fed’s relationship with Wall Street led to a very high-risk policy that is throwing us into a recession. How could the pundits at the Fed ignore the kickbacks and abusive lending going since 2001? The problem is that we are dealing with harsh mathematics, which means that we can just delaying the outcomes while making matters much worse. Confidence can’t do nothing against.

The big event today reported by the media is Bush’s proposal to stimulate the economy by offering rebates of $800 for Individuals, $1,600 for Couples. What a pity. Since so many households have accumulated debts like never before, the rebates will only delay the pain by a few weeks or months. This brings us to Hilary’s stimulus program… all what Congress can do is borrowing. Making holes to fill other holes. Let’s admit it: this is ‘The Great American Ponzi Scheme’.

… a five-part program estimated to cost between $75 billion and $110 billion. Four parts of the plan would increase entitlement programs for low-income Americans, including $30 billion to states to deal with housing issues related to the subprime mortgage issue...

Another Reuters excerpt reads:

Banks will continue to suffer into 2009 as turmoil in the credit markets drags on, credit ratings agency Standard & Poor’s said on Friday.

Just wait and soon, you will see that stock market players are going to take their money out of stocks and running to the safety of cash. That is how it plays out when the ‘R’ word becomes official. Then we’ll be seeing more people losing their jobs… the rebates offered by Bush will be looking insignificant.

However, for Comstock Funds Inc. which analyzes economic and financial conditions from a long-term macro-economic perspective, and whose analyzes have been proven right on the target so many times, today acknowledges: the ‘Bear Market’ is only beginning.