Q1 2008 Bank Report Card

I thought I'd make it a pretty post but didn't feel like spending any more time on it. So how did the good, smart and "prudent" banker do... Let's look at some numbers they reported.. and compile the hall of shame..

Citibank : lost $5.8 Billion.
Merrill Lynch - lost $2 Billion.
Wamu - lost $1.1 Billion.
Wachovia - lost $393 Million.

We now look at those that said they did not end the quarter by having just lost money.

Suntrust - (Net Income Down 44%) +$290.6 Million.
Bank Of America - (Profit Fell By 77%) +$1.21 Billion.
Wells Fargo - (Profit Fell By 11%) + $2 Billion.
JP Morgan Chase - (Profit Fell By 50%) +$2.37 billion

The banks need to be renamed from Money Banks to Money Losers and an irresponsible bunch of overqualified fools that were ripped off by ordinary people. I wonder why the CEO's of these banks should be paid anything to do what they do - just lose money - give it to a little kid and the kid would do the same.

Inflation Genie Is Out...Does It Really Matter???

Source : Various Reports

I'm sure there is not a single source that needs to be listed for this. People don't have to look far beyond their monthly expenses to see that inflation is through the roof. While everyone seems to be focussed on whether the economy is in a recession or headed for one, the federal reserve seems to be caught up in a mess of their own creation... a severe housing deflation on one hand and excessive inflation due to the massive liquidity infusion measures (be it rapid interest rate cuts, various hip-hop acronyms for liquidity injections and bail-out talk and backstops). One of the most important achievements of the Bernanke led fed is the conversion of "efficient" markets to "risk-free" markets.

The fine print on investment banks products seems to be replaced by a bold new statement ("We are too big to fail and have full faith and support of the US federal reserve and backed by the US tax payer in our daily operations and investment choices").

One of the questions is absolutely whether the federal reserve got in way too early in the deflation cycle and let the inflation genie get out way too rapidly?

I'll not try to answer that question or debate about but take a up a different one .. Is this Inflation really important in the grand scheme of things (I won't make any effort to say how to solve it either - thats the federal reserves job)... At the heart of the problem in the housing deflation seems to be affordability i.e. borrowers can be classified to fall into one of the following categories.

1. Borrowers that took on more debt than they could afford to repay.
2. Borrowers that owe more than their home is worth.
3. Borrowers that were financially balanced and were considered the prime/prudent ones.

It is these 3 types of borrower classes that are at the heart of the deflation challenge. Each one has a different balance sheet but rising inflation in food and energy costs pushes the living cost higher and pushes them closer to default [border line cases will tip into default rather than being pushed outward].

In short, deflation impacts the perceived wealth whereas inflation impacts the actual wealth so by opting to let the inflation genie out and adding additional stress to the consumers back may be a self-inflicted wound by the federal reserve rather than a helpful choice.

Paulson Says Developing Countries Should Avoid Price Controls

Source : Bloomberg

"April 13 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson advised developing nations struggling with soaring commodity costs against using price controls because they may do more harm than good to long-term economic growth.
Governments ``need to resist the temptation of price controls and consumption subsidies that are generally not effective and efficient methods of protecting vulnerable groups,'' Paulson said in the text of a speech to the World Bank's development committee in Washington."

Well I'm not really sure if Mr. Paulson is done with all his work on the domestic front with a deflating housing bubble caused by in-sufficient oversight and regulation. The problem being faced in the US today is due to the fact that the federal reserve and regulators stood on the sidelines when an asset bubble was being formed in one of the basic necessities (shelter). Food is one of the basic elements that needs to be kept out of the reach of speculators. Price stability and market regulation are not things that should work when prices are coming down Mr. Paulson, they are supposed to be in place to prevent bubbles in other areas that impact the daily lives of ordinary people and consequently the entire economy. If farmers are wiped out because they made improper bets on crop that may give them a higher yield, not only would we see the farmer get wiped out, we'd also see secondary effects in crops that the farmer chose not to be involved in. Strictly in the context of the US, the massive shift into corn primarily due to the viability of it being a bio-fuel is quite troubling to say the least.

I'm sure Goldman and others that Mr. Paulson speaks for would like price controls to be out of the picture and would like intense speculation driving up the prices so they can profit from those spikes - with price controls there will be losses for the firms speculating in the prices going up.

Volcker urges extended role for Fed

Source: FT

"Paul Volcker, former chairman of the US Federal Reserve, said on Tuesday that the Fed's role as bank regulator and lender of last resort should be permanently and formally extended to include investment banks."

Is there anything else you'd like on the side - may be privatization of the social security funds ??? It's really smart that the federal reserve should be giving all the speculators money to make any and all bets and help cover for them. Totally absurd proposition from a really smart person. Investment banks can go talk to their investors and explain how they plan to protect their interests and do a proper job and show they can - the federal reserve can become a seperate private entity and support the investment banks but no public tax payer funds to be used. If social security funds were involved it would have been shut down in 2008 and not 2041 as planned (all of the money would have been just blown away in the subprime investment vehicles).

"Unless the Fed's initiative can somehow be contained to a single aberrant incident - which seems quite unlikely - a direct responsibility for oversight and regulation follows. "

There is always a way to correct mistakes of the past - we don't just have to live with them all the time.

Citigroup, Wells Fargo May Loan Less After Downgrades

Source : Bloomberg

A couple of reports caught my attention today. The first one was the minutes from the previous federal reserve meeting. It was even more cryptic and unclear whether the federal reserve has a proper reading on where things are headed. At least the agreement is that we are slowing because of an excess that took place with irrational lending - we call the normalization now a "credit crisis". Should we get the "lax" lending back and feel prosperous for some more time??? It seems like a pipe dream trying to convince investors that it is really fun just watching your investment blow up in smoke.

The second one was that of Washington Mutual getting funding and selling there shares at a discount of 32% from the current market value. There are 2 parts to this which are that a) Wamu doesn't think their own value is even what they are traded at and b) TPG has also had its share of goof ups with the latest being a blow up of their own hedge fund so I'm not sure if this is a smart buy or Wamu got some cash dressing up their junk well or something else all together that only time will tell.

The final report that caught my attention is the anticipated tightening on part of Citibank and Wells fargo and how that is going to be bad for everyone - Shouldn't it all be considered natural that a result of the lax lending and the losses for the investors, now there is no more easy money available (there is from the fed at 0.33% - no ideas why that's pushing up savings rates at the banks - they can go to the fed and borrow as much as they like right.... why pay savings accounts 5-10 times more ??? - looks like they cannot borrow from the fed and need the consumer afterall to deposit some money ... not just take loans and vanish).

Writing Web Services In C/C++

Source: gSoap

Ever felt the need to take a C/C++ application and want to bridge to new languages such as Java or the .Net framework. This could be from a high powered massively parallel computer or a really tiny hand-held or a robot that runs some small code in C. Fortunately there is a really good toolkit called "gSoap" that will come really handy. The general sequence to build the bridge is as follows:

1. Build an interface definition file with SOAP data types [similar to the IDL file for those that ever used RPC].
2. Generate the client and server stubs - This is where gSoap really comes handy.
3. Implement the interface routines - These map from the SOAP data types to internal calls that can be linked with the application in question.

That's pretty much it for the interface part. As for a listener or a web-server, anything that can listen on a specific port is good enough. If you really want to use a web-server that's also an option though in most tight applications, there isn't that much space available. The code generated seems to be highly modular and there is provision to handle binary data as well which make this toolkit very useful for small or large datasets. In case there is any application that is under consideration for a massive re-write or brushed aside for lack of web-interfaces, think again .. gSoap is right there to help.

Fed's Yellen Hints at Recession, Rates Uncertain

Source : Reuters

"For the second time this week, a senior Federal Reserve official conceded the United States economy could slip into recession, but suggested the central bank should wait to see if more rate cuts are needed.

"The economy has all but stalled and could contract over the first half of the year," San Francisco Federal Reserve President Janet Yellen, who is not a voter on the policy-setting committee in 2008, said on Thursday.

"Current indicators suggest that, starting in the fourth quarter, the economy, at best, slowed to a crawl," she said, adding later that the Fed is still battling a "negative feedback loop" of tight credit conditions, falling house prices and low consumer confidence."

Wonder who's trying to convince whom. Somehow the fed seems to be trying to say, we "could" slip into a recession. Most experts believe we are already in one and the only thing that seems to be debatable is whether we meet the classical definition of a recession - it's merely academic and theoretical at this point in time. The important question is ... when does the fed let capital markets function - they'll start functioning at some point when artificial back stops are gone - injecting massive amounts of liquidity isn't going to address some of the problems - bailouts are not going to make the problem go away either - excess has gotten built-up into the system and has clogged all of it completely - the recession will help in rationalizing and justifying getting rid of some of the excess in a very short order of time.

Taxpayers to Foot Homebuilders' Losses?

Source : Web Posts

As people rubberneck the Bear Stearns (BSC) demise, one of the most questionable legislative moves in the modern era is getting rammed down taxpayers' throats without nary a peep by the mass media.

I'm talking about the proposed loss carryback provision, which would allow homebuilders to recover taxes paid during the bubble years by offsetting the income with the losses they're incurring now.

In essence, taxpayers will give back to the Robert Tolls (Toll Bros. (TOL)) and Ara Hovnanians (Hovnanian (HOV)) of the world millions of dollars to prop up their closely held companies, i.e. companies in which they have majority interest and/or control, whose stocks these individuals had the magic foresight to dump by the millions of shares right before the whole Ponzi scheme collapsed.

If ever there was an action that should undermine investors' confidence in the U.S. market system and reinforce the view that the government exists to grease the palms of those who pay their way into influencing the government, this is it.

This topic definitely seems to be actively debated, tossed around, beaten up and worked on so may be I'll throw in my little rant as well and help the home builders. It will be interesting to see what it will really mean in the end. It most likely will be a "dud" - something you can launch but it just fails to fly - Overall what's the tangible benefit to the tax payer to help the home builders when they are in "pain"... yes we'll help reduce the pain... but what do we get in return from you.. oh rich home builders or beggars shall I say if you need a hand out ... Are you going to be making cheaper homes... heck no.. it don't make good business sense to you right?

A $10k-20k tax credit over 2 years isn't going to make any "sane" tax payer run out and buy an overpriced home - the subprime borrower is already in or packing up now - for now we've given them a $2 million debt forgiveness from the IRS so they can get out of the debt trap.

The entire subprime ponzi scheme is over and it's busted now - thanks to the great efforts and skills - home builders packed one too much junk through the machinery all at once as fast as they could - with the entire financial structure around it in shambles and tatters - you can squeeze the system but it ain't gonna give anything but pain across the board (the cash cow cannot be milked anymore - it's been milked so much that the cash cow is really-really sick fighting for survival because you fed it too much garbage and it is being operated upon by Benny boy and Paulson daily along with various checks performed by interns at the fed hoping and praying it will just get or feel better - thinking it will spring back to it's prime and do a little sprint - yeah right... good luck - you should know better) - Home builders just hang in there and sit tight with the money you made in the good days and when the cash cow gets better we'll slowly let you near it to try to milk it again :)

I'd propose a slight variation of the rule... The loan loss provision will be given only to home builders that demonstrate they did not make a subprime loan in the past 3 years i.e. if you did not contribute to the mess and were just caught up... we'll help you however you'd have tough luck finding such a dumb "home-builder".

Price of corn reaches a record of $6 per bushel

Source : AP

"Corn is in demand to feed livestock and make biofuel.

NEW YORK (AP) — Corn prices jumped to a record $6 a bushel Thursday, driven up by an expected supply shortfall that will only add to Americans’ growing grocery bill and further squeeze struggling ethanol producers.

Corn prices have shot up nearly 30 percent this year amid dwindling stockpiles and surging demand for the grain used to feed livestock and make alternative fuels including ethanol. Prices are poised to go even higher after the U.S. government this week predicted that American farmers — the world’s biggest corn producers — will plant sharply less of the crop in 2008 compared with last year.

“It’s a demand-driven market and we may not be planting enough acres to supply demand, so that adds to the bullishness of corn,” said Elaine Kub, a grains analyst with DTN in Omaha, Neb.

Corn for the most actively traded May contract rose 4.25 cents to settle at $6 a bushel on the Chicago Board of Trade, after earlier rising to $6.025 a bushel — a new all-time high."

Many economic forecasts call for food grains to be pushed higher over the next 10 years, feeding a frenzy of rampant speculation in some of the basic commodities. Demand and Supply ... wonder how many times it has been used to justify a run up in prices to support the speculations of many and on the way down.. it's always "too big to fail". It will be interesting to see how this one turns out and who gets whacked in the end. For now .. it looks like "corn" will be going off the table as food and be flying away like "hot cakes".

Is the Bear Stearns Rescue "Worth-It"?

Past week has been a little hectic and I did try to listen to justifications and the explanations given by Dr. Bernanke on this and others. While a lot of the discussion was about .. what the fed knew, when it knew and whether they acted appropriately and with-in their rights, a fundamental question that just seems to have gone un-answered is whether the Bear Stearns Rescue is/was going to be "worth" the tax payer money being put in. There are 2 main reasons for this question:

1. Consumer is tapped out, do you want to tap out the tax payer completely with no return.
2. Tax payer is currently looking at some systemic failures such as social security, medicare and is also a class of "vulture" investors constantly on the look out for distressed assets.

In trying to determine the true return for the tax-payer, there seems to be little mention except that it is expected that the tax payer will not lose money and that JP Morgan will take the first $1billion loss first and then the tax payer takes up to $30 billion. What about profit? How does the tax payer benefit if JP Morgan makes a wind-fall profit from the "distressed" assets of Bear Stearns? There seems to be absolutely no provision to the up-side for the tax payer and significant share to the downside (1:30) . The real "worth" in the deal just does not seem to be visible and probably the only consolation the tax payers will have to live with is that the Fed prevented a broader meltdown (which may or may not have been good for the tax payer).

All in all it's now a question of whether the tax payer will lose money and if so how much on this deal but the idea of making money... we'll leave that to Jamie Dimon!

Buddy, Can You Spare a Billion?

Source : Washington Post

"As the chief executive of Bear Stearns, he's getting rather more public assistance than your typical welfare mom -- specifically, $30 billion in federal loan guarantees to help J.P. Morgan Chase take over his firm. But then, Schwartz has had rather more than his share of suffering of late.

As his firm collapsed, he was forced to forgo his entire 2007 bonus, leaving his compensation for the past five years at a paltry $141 million, according to Business Week. Things have become so bad that, the Wall Street Journal discovered, Schwartz has had to rent out his 7,850-square-foot home on the ninth green of a suburban New York golf course -- leaving the poor fellow with only his 17-room, seven-acre home in Greenwich, his condo in Colorado and the athletic center he built for Duke University."

.. And how did he make all this... by putting people into homes they could not afford to be in and collecting commissions in between by selling some toxic junk that was designed to fail right from the beginning.

"Due to the stressed condition of the credit market as a whole and the unprecedented speed at which rumors and speculation travel and echo through the modern financial media environment, the rumors and speculation became a self-fulfilling prophecy," Schwartz told the senators. "There was, simply put, a run on the bank."

... The run "to"/"on" the bank was when the banker decided to just dole out money - this was just pay-back time to the investors that Bear was goofing off with.

"Sen. Richard Shelby (R-Ala.) asked the corporate-welfare recipient whether he shares any blame for his indigent circumstances. "Do you believe that your management team has any responsibility for the company's collapse?"

Schwartz could think of no missteps -- not even his decision to remain at a conference at the Breakers in Palm Beach while his firm was imploding. "I just simply have not been able to come up with anything, even with the benefit of hindsight," said the blameless chief executive, escorted into the hearing room by superlawyer Robert Bennett.

Fortunately for Schwartz, he had a sympathetic audience in the banking committee, whose members have received more than $20 million in campaign contributions from the securities and investment industry, according to the Center for Responsive Politics. "I want the witnesses to know, and others, that as a bottom-line consideration, I happen to believe that this was the right decision," Chairman Chris Dodd
(D-$5,796,000) said before hearing a single word of testimony.

In a way.. everyone did make the right decision by shutting down Bear and finishing off the game - From a sound-ness perspective - the party is now over and it's time for the cleaners to come in and pickup the trash and clean up the place and set the stage for the next game. However I'd say .. confidence is something that will take a long time to heal - people just don't like to get burned - be it tax payers or investors.

Fannie Mae says no to credit scores below 580

Source : Business Weekly

"Fannie Mae is setting new rules about what mortgages it will buy, including, for the first time, a credit score threshold.

The District of Columbia-based mortgage giant has told lenders it will no longer buy most loans made to borrowers with credit scores below 580, nor will it buy loans that have been more than 60 days past due within the past year.

Without evidence that extenuating circumstances led to a foreclosure, it also will no longer buy mortgages made to borrowers who have lost a home to foreclosure within the past five years. Fannie Mae currently considers mortgages after four years have passed.

The new rules go into effect June 1."

I can never understand the concept of "new rules" go into effect... A year back someone from Fannie (if I'm not mistaken) said .. we'll not be doing any more NINJA loans (No Income-No Job-No Assets) loans from August. To which it's a question of why were you doing it all along? Did it make any sense in the first place besides trying to make some money in between. With an almost implicit tax payer backing shouldn't Fannie and Freddie be indulging in more prudent lending ir-regardless of whether it is the "in-thing". Subprime was the "in-thing" a few years back - now everyone dreads the word and all we hear from Fannie is we're going to tighten a few months from now.