ImaginativePRO Blog

FINANCIAL PANIC SWEEPS EUROPE AS THE HEAD OF THE IMF WARNS OF A “1930s DEPRESSION”

Are we on the verge of another Great Depression?  Christian Lagarde, the head of the IMF, said this week that if dramatic action is not taken immediately we could actually see conditions "reminiscent of the 1930s depression" and that no country on earth "will be immune to the crisis".  Right now, financial panic is sweeping across Europe, but most Americans are not too concerned about it because they simply don't understand how important the EU is.  The truth is that the EU has a much larger population than the United States does.  The EU has an economy that is nearly as large as the economies of the United States and China combined.  The EU has more Fortune 500 companies that the United States does, and the banking system of Europe is substantially larger than the banking system of the United States.  Anyone out there that believes that a massive financial collapse in Europe would not dramatically affect the rest of the globe is being delusional.  The European debt crisis is one of the biggest stories that we have seen in a long, long time and the coming financial meltdown is going to permanently change the global economy.

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So far, politicians in Europe have held 19 high-level emergency meetings in an attempt to solve this crisis.

All of their efforts have failed.

Right now, this is the situation in Europe....

• Most EU governments are drowning in toxic levels of debt.
• Bond yields have risen dramatically this year and this has caused borrowing costs for most EU members to soar.
• In an attempt to get debt under control, governments all over Europe are implementing brutal austerity measures and this is causing European economies to slow down substantially.
• There is a tremendous lack of confidence in the European financial system at this point and this is causing a massive credit crunch.
• The credit crunch is causing the money supply to drop significantly in almost every nation in the EU.
• Major banks all over Europe are massively overleveraged and are on the verge of failing.

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This is all so similar to what we saw back during the early 1930s.

In fact, things have gotten so bad that prominent world leaders are now using apocalyptic language when describing the situation in Europe.

Just check out what the head of the International Monetary Fund, Christine Lagarde, recently said about Europe.  Speaking at a State Department conference in Washington D.C. this week, Lagarde made the following very shocking statements....

"The world economic outlook at the moment is not particularly rosy. It is quite gloomy"

"There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating"

"It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action."

"No country or region is immune. All must take action to boost growth. Work must start in the eurozone countries and must continue relentlessly. The risks of inaction include protectionism, isolation and other elements reminiscent of the 1930s depression."

"This is exactly the description of what happened in the 1930s, and what followed is not something we are looking forward to."

But didn't the politicians in Europe recently reach a deal which was supposed to fix all this?

Well, unfortunately the deal basically did nothing to fix the underlying financial problems that Europe is facing.

In fact, global financial markets seem entirely unimpressed by this recent deal.  A recent article by Professor Peter Morici detailed some of the problems with the deal....

Investors are rejecting the euro deal, because the agreement does not effectively meet the funding needs of Italy and other Mediterranean governments, address the weak balance sheets of European commercial banks, or fix the underlying structural flaws in the euro architecture.

The €440 billion European Financial Stability Facility is providing short-term funding—guaranteed by 17 Eurozone member states as a whole—to tide over the more troubled governments.

However, those bailouts impose huge cuts in spending and tax increases. Coupled with austerity plans also adopted by France and other healthier European states, those packages are pushing Europe into a recession that could last several years.

What is even worse is that there are signs that this recent deal is already unraveling.  Some EU nations have decided that they are not sure that they want to go along with the program.

The following comes from a recent article in the Telegraph....

Amid fresh warnings that Europe is triggering a 1930s-style global depression, the German chancellor faced open rebellion against the key plank of her Brussels accord. The leaders of Hungary and the Czech Republic told a joint conference in Budapest they were ready to reject the planned treaty changes and implied move towards a centralised tax system. Czech prime minister Petr Necas said he was “convinced that tax harmonisation would not mean anything good for us”.

In Poland, we are actually seeing people march in the streets to protest against this new agreement....

Poles marched under banners that read: “We want sovereignty, not the euro.” They were protesting against the Brussels deal that could see EU countries, including those outside the eurozone, face penalties for breaking tough centralised spending laws.

So not only does this new deal not address the fundamental problems that Europe is facing, there is also a tremendous amount of doubt about whether or not it will eventually be approved.

Meanwhile, the brutal austerity measures that are being implemented all over Europe are pushing many EU nations into recession.

The EU (led by Germany and France) and the IMF have been pushing financially troubled nations all over Europe to make incredibly deep budget cuts.  But these very deep budget cuts have had a devastating economic impact.

In a recent article, I discussed how brutal austerity measures have already pushed the economy of Greece into a full-blown depression....

Just look at what happened to Greece.  Greece was forced to raise taxes and implement brutal austerity measures.  That caused the economy to slow down and tax revenues to decline and so government debt figures did not improve as much as anticipated.  So Greece was forced to implement even more brutal austerity measures.  Well, that caused the economy to slow down even more and tax revenues declined again.  In Greece this cycle has been repeated several times and now Greece is experiencing a full-blown economic depression.  100,000 businesses have closed and a third of the population is living in poverty.  But now Germany and France intend to impose the "Greek solution" on the rest of Europe.

Right now, the flow of government money is drying up all over Europe and so is the flow of money from the banks.  European banks are shrinking their balance sheets and have dramatically cut back on lending in order to meet new capital requirements that are being imposed upon them.

All of this has created an environment where there is not much credit flowing in Europe at all.  When there is a credit crunch of this magnitude, it causes the money supply to start to shrink.  This is already happening all over Europe as a recent article in the Telegraph noted....

All key measures of the money supply in the eurozone contracted in October with drastic falls across parts of southern Europe, raising the risk of severe recession over coming months.

Right now, we are seeing the money supply in each of the "PIIGS" nations fall at a staggering rate.  The following comes from the same Telegraph article referenced above....

Simon Ward from Henderson Global Investors said "narrow" M1 money – which includes cash and overnight deposits, and signals short-term spending plans – shows an alarming split between North and South.

While real M1 deposits are still holding up in the German bloc, the rate of fall over the last six months (annualised) has been 20.7pc in Greece, 16.3pc in Portugal, 11.8pc in Ireland, and 8.1pc in Spain, and 6.7pc in Italy. The pace of decline in Italy has been accelerating, partly due to capital flight. "This rate of contraction is greater than in early 2008 and implies an even deeper recession, both for Italy and the whole periphery," said Mr Ward.

Those numbers scream "Recession, Recession, Recession".

There may be one glimmer of hope on the horizon.  The Federal Reserve has been lending huge amounts of money to the European Central Bank and the European Central Bank has been lending that money out to European banks.  In turn, the European banks have been using much of that money to buy up European government bonds.  It is a massive Ponzi scheme, but it has stabilized bond yields in Europe for now.  This scheme was described in a recent article by Simone Foxman....

That's because the European Central Bank may have already introduced roundabout measures that will solve some of Europe's big problems—it's making investing in peripheral sovereign debt a huge profit opportunity for banks.

Theoretically, financial institutions will be able coin money by borrowing ultra-cheap from the ECB and buying higher yielding sovereign debt.

Essentially, it appears the ECB might allow European banks to pledge everything but the kitchen sink in return for funds. First, the new policy allows European banks to hold far fewer assets as collateral in exchange for funding from the ECB—freeing up liquidity to the tune of €103 billion ($134 billion). More importantly, relaxing collateral restrictions could also allow European banks to use even somewhat risky sovereign assets as collateral for bond purchases.

But this Ponzi scheme cannot go on indefinitely.  A lot of European banks are already starting to run out of collateral for these loans as one Australian news source recently explained....

"If anyone thinks things are getting better, they simply don't understand how severe the problems are," a London executive at a global bank said. "A major bank could fail within weeks."

Others said many continental banks, including French, Italian and Spanish lenders, were close to running out of the acceptable forms of collateral, such as US Treasury bonds, that could be used to finance short-term loans.

Some have been forced to lend out their gold reserves to maintain access to US dollar funding.

So will the European Central Bank keep lending them money once they are out of collateral?

If they do, the ECB itself could potentially be in a great deal of danger.

The truth is that the ECB is already playing with fire.  So far, the European Central Bank has spent over 274 billion dollars buying up European government bonds in an attempt to keep bond yields down.

How many toxic assets can the ECB buy up before they get into real trouble?

That is a very interesting question.

Meanwhile, the rest of the world is becoming increasingly concerned about the financial panic that is sweeping Europe.

For example, Australian banks have been given one week to perform a stress test that evaluates their ability to survive in the event of a European financial collapse.

Why all the urgency?

Do they know something that we don't?

Just like back in 2008, we are seeing massive problems at some of the largest banks in the world.

On Thursday, Fitch Ratings downgraded a whole bunch of the world's most prominent banks....

The banks included Bank of America, Morgan Stanley and Goldman Sachs, as well as Europe's Barclays, Societe Generale and BNP Paribas.

Germany's Deutsche Bank and Switerzland's Credit Suisse were also downgraded.

The global banking system is a giant house of cards.  There is simply way too much debt, way too much leverage and way too much risk.

On average, major banks across Europe are leveraged 26 to 1.

If the value of the assets held by those banks declines by just 4 percent, they will be wiped out.

Yes, that is how serious things are.

And already we are starting to see major banks fail in Europe.

This week it was revealed that Germany's second largest bank is going to need a bailout.  The following comes from a Sky News report....

Germany's second largest bank, Commerzbank, is reportedly in discussions with the German government about a bailout after regulators said it needed to raise more money to cope with a potential default on its loans to governments.

"Intense talks" have been going on for several days, according to sources who spoke to the news agency Reuters.

So if Germany's second largest bank is failing, are any banks in Europe safe?

Just like we saw back during the 1930s, we are starting to see a run on banks all over Europe.

In fact, according to a recent Der Spiegel article, a run on Greek banks has been going on for a while now and is rapidly accelerating....

He means that the outflow of funds from Greek bank accounts has been accelerating rapidly. At the start of 2010, savings and time deposits held by private households in Greece totalled €237.7 billion -- by the end of 2011, they had fallen by €49 billion. Since then, the decline has been gaining momentum. Savings fell by a further €5.4 billion in September and by an estimated €8.5 billion in October -- the biggest monthly outflow of funds since the start of the debt crisis in late 2009.

If you can believe it, approximately 20 percent of all bank deposits in Greece have been withdrawn since the start of 2011.

Europe is in a massive amount of trouble.  The euro is dropping like a rock and the European financial system is paralyzed by panic and fear.

It is going to take a miracle to prevent a massive financial collapse from happening in Europe in 2012.

Unfortunately, there do not appear to be any miracles for Europe on the horizon.

COMMENTARY:    This does not look good.  Right now total combined European Union government debt as about the same as the U.S.  ($14.7 trillion as of September 30, 2011) and soon to go up another

This is scary shit. The countries with the most problems of defaulting on their debt include Greece, Italy, Portugal, Ireland and Belgium.  Many European, U.S. and other international banks are holders of that debt.   Greece alone owes $236 billion to various banks in Europe and U.S.  I thought the U.S. debt situation was bad, but at least we can print money to keep things afloat.

Courtesy of an article dated December 16, 2011 appearing in Before Its News

 

 

 

INFOGRAPHIC: IS "THE 1%" INEVITABLE, GIVEN HOW NETWORKS WORK?

Occupy Wall Street's bête noire may be mathematically inevitable, according to a data visualization created by Swiss scientists.

The viral protest meme known as "Occupy Wall Street" is still going strong, and according to some provocative research to be published in PLoS One, it may never have reason to run out of steam. Why? Because "the 1%"--#OWS-speak for the tiny subgroup of wealthy interests that exerts outsize influence over "the 99%" comprising the rest of us--may be a mathematically inevitable consequence of the way networks self-organize.

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The paper, entitled "The network of global corporate control", is an attempt by complex systems theorists at the Swiss Federal Institute of Technology in Zurich to "go beyond ideology to empirically identify such a network of power," according to New Scientist.  

The researchers' method: analyzing the ownership connections between 43,000 transnational corporations and seeing where the bulk of network control coalesces. The results, visualized in an infographic, appear to show that a "core" of 1,318 companies representing 20% of the global economy collectively own (through stock shares) an additional 60% of global revenues.

If that doesn't freak you out, within that core is a still smaller "super-entity" of 147 companies--mostly financial institutions, depicted as red dots--that appear to control 40% of the total revenue in the network.

The study and infographic have generated lots of press and intense debate about the researchers' methodology and assumptions (for example, that stock ownership is a proxy for direct influence/control). But the most provocative interpretation, validated by other systems theorists contacted by New Scientist, is that this sinister-looking concentration of influence is basically unavoidable in any network, capitalist or otherwise. One researcher says that similar clustering is common in similar networks found in nature; while Dan Braha of the New England Complex Systems Institute minces even fewer words:

"The Occupy Wall Street claim that 1 per cent of people have most of the wealth reflects a logical phase of the self-organising economy."

COMMENTARY:    From Orbis 2007, a database listing 37 million companies and investors worldwide, they pulled out all 43,060 transnational corporations or TNCs and the share ownerships linking them. Then they constructed a model of which companies controlled others through shareholding networks, coupled with each company's operating revenues, to map the structure of economic power.

When the team further untangled the web of ownership, it found much of it tracked back to a "super-entity" of 147 even more tightly knit companies - all of their ownership was held by other members of the super-entity - that controlled 40 per cent of the total wealth in the network. "In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network," says Glattfelder. Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.

The top 50 of the 147 superconnected companies

1. Barclays plc
2. Capital Group Companies Inc
3. FMR Corporation
4. AXA
5. State Street Corporation
6. JP Morgan Chase & Co 
7. Legal & General Group plc 
8. Vanguard Group Inc
9. UBS AG
10. Merrill Lynch & Co Inc 
11. Wellington Management Co LLP
12. Deutsche Bank AG
13. Franklin Resources Inc
14. Credit Suisse Group
15. Walton Enterprises LLC
16. Bank of New York Mellon Corp
17. Natixis
18. Goldman Sachs Group Inc
19. T Rowe Price Group Inc
20. Legg Mason Inc
21. Morgan Stanley
22. Mitsubishi UFJ Financial Group Inc
23. Northern Trust Corporation
24. Société Générale
25. Bank of America Corporation
26. Lloyds TSB Group plc 
27. Invesco plc
28. Allianz SE 29. TIAA 
30. Old Mutual Public Limited Company
31. Aviva plc 
32. Schroders plc
33. Dodge & Cox
34. Lehman Brothers Holdings Inc*
35. Sun Life Financial Inc
36. Standard Life plc
37. CNCE
38. Nomura Holdings Inc
39. The Depository Trust Company 
40. Massachusetts Mutual Life Insurance 
41. ING Groep NV 
42. Brandes Investment Partners LP 
43. Unicredito Italiano SPA 
44. Deposit Insurance Corporation of Japan 
45. Vereniging Aegon 
46. BNP Paribas 
47. Affiliated Managers Group Inc 
48. Resona Holdings Inc 
49. Capital Group International Inc 
50. China Petrochemical Group Company

* Lehman still existed in the 2007 dataset used

The work, published in PLoS One, revealed a core of 1318 companies with interlocking ownerships (see image). Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What's more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world's large blue chip and manufacturing firms - the "real" economy - representing a further 60 per cent of global revenues.

Courtesy of an article dated November 10, 2011 appearing in Fast Company Design 

THE DOE LOAN TO SOLYNDRA PALES WHEN COMPARED TO CHINA'S BILLIONS IN LOANS TO CHINESE SOLAR COMPANIES

Dan Reicher of Stanford University in an interview we will publish later this week said.

"Capital flows for cleantech in China are not well understood."

But is that really true?

A few weeks ago, I published a chart that sought to put the magnitude of the Solyndra loan money into perspective. Based on that chart, it would appear that China is providing tens of billions of dollars in low-cost loans to Chinese solar companies. The table that follows (from Mercom Capital) would seem to confirm this.

Chart by Ryan Cunningham using Reuters and Bloomberg sources

Mercom Capital asserts that the loans to solar companies total over $40 billion over the last two years.

Reuters, Bloomberg, and Mercom would seem like reliable outlets.

But according to Suntech and other sources in the know -- they are flat-out wrong.

And those sources might want to read PVNews for a little more accuracy in their solar news. Here's the PVNews take on Chinese bank debt:

According to a spokesperson from Suntech, of the total $7 billion China Development Bank credit facility received by Suntech, less than 10 percent was actually drawn down. According to Suntech,

"In addition, last year, Suntech paid an average of 4 percent to 5 percent interest on our loans, much higher than the 1 percent given to U.S. companies under the DOE loan guarantee program. As most of our loans are at variable rates, this year we are paying closer to 6 percent as China has raised interest rates to combat inflation. The China Development Bank made higher profits last year than Morgan Stanley and you don’t do that by giving away free money."

Here is an image from Suntech's form 20F (annual and transition report of foreign private issuers) that cites the interest rates of the loans from the Bank of China at between 4.8 and 5.4 percent.

A U.S.-based senior executive at a global solar company with operations in China told Greentech Media that  "any chart suggesting that Chinese banks have actually lent “tens of billions” is not accurate. They have offered to lend, but much, much less of this money has actually been lent since the companies first have to go through a rigorous lending approval cycle. Just look at their balance sheets to see how much is really being lent."

Perhaps capital flows for cleantech in China can be understood.

COMMENTARY:   If the numbers being reported concerning the billions of dollars being poured into Chinese solar companies by Chinese banks are correct, then the U.S. definitely has a lot of catching up to do.   

According to Bloomberg, the U.S. knew Solyndra was violating its loan terms with the DOE before guarantees.  Here's what Bloomberg says.

"The Energy Department knew Solyndra LLC was violating terms of its U.S. loan by December and agreed to keep providing taxpayer support for the solar-panel maker that filed for court protection nine months later.

Damien LaVera, a spokesman for the Department of Energy, said officials were aware that Solyndra had failed to set aside $5 million, due in December, as the first of six payments under the loan-guarantee agreement.

In the fall of 2010, Solyndra informed DoE that it was having major cash flow problems and would face bankruptcy in early 2011 if new capital could not be raised, LaVera said in an e-mail today.

Solyndra executives and the Energy Department negotiated new terms for the $535 million loan guarantee in January, more than a year after the U.S awarded the company the first loan package funded with economic stimulus money. The revised agreement didn't require the $5 million payments, LaVera said.

'Based on the information we had available to us at the time, we concluded that this restructuring gave us the best chance to protect the government's investment by putting the company in a better position to repay the loan', LaVera said.

Documents released this month showed the company was a month away from running out of cash in December 2010, before the loan agreement was restructured.

The new terms placed government debt in a subordinate position to $75 million from investors in the event of a default. Solyndra filed forbankruptcy protection on Sept. 6. Two days later, its offices were raided by FBI agents.

A House subcommittee is investigating the restructuring as part of a broader investigation into the guarantee. An official at the White House Office of Management and Budget wrote in a Jan. 31 e-mail that while the company “may avoid default with a restructuring, there is also a good chance it will not.” The e- mail was released by the subcommittee.

'The restructuring gave the company a fighting chance to survive', Jonathan Silver, executive director of the Energy Department's loan programs office, said at a House Energy and Commerce Committee hearing this month.

Solyndra had received $460 million in government loans by the time of the restructuring. It would get another $67 million before closing on Aug. 31, according to the Energy Department.

The details were reported earlier today by the Washington Post."

It was a huge mistake by the DOE to approve the guaranteed loan to Solyndra loan back in 2010, renegotiate the terms of the loan in in January 2011, then advance the remaining $67 million.  What a massive screwup.  For Solyndra's founders to claim that the reason the company failed was because of those Chinese loans is total bullshit.  Solyndra's tubular solar panels were too costly to produce and made it impossible for it to compete against flat PV solar panels.  It was losing a $1.00 on every two dollar of sales.

Courtesy of an article dated September 29, 2011 appearing in GreenTechSolar

HOUSING FORECAST CALLS FOR MORE PAIN THROUGH 2015 SAY EXPERTS, A SECOND REAL ESTATE BUBBLE MORE LIKELY

Prices to Stumble Through 2015, Economists Say, Weighing Down Recovery

Economists, builders and mortgage analysts are predicting the weakened U.S. economy will depress housing prices for years, restraining consumer spending, pushing more homeowners into foreclosure and clouding prospects for a sustained recovery.

Home prices are expected to drop 2.5% this year and rise just 1.1% annually through 2015, according to a recent survey of more than 100 economists to be released Wednesday. Prices have already fallen 31.6% from their 2005 peak, as measured by the Standard & Poor's Case-Shiller 20-city index.

 

WSJ's Nick Timiraos reports on a new survey of economists stating that the housing market is likely is likely to remain under pressure through 2015. Photo by Scott Olson/Getty Images

If the economists' forecast is accurate, it means housing faces a lost decade in which home prices recover just a fraction of what was lost between 2005 and 2015, leaving millions of homeowners with little, if any, equity in their homes. The survey was conducted for MacroMarkets LLC, a financial technology company co-founded by Yale University economist Robert Shiller.

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The housing bust has chilled consumer spending—the largest single driver of the U.S. economy—with eroding home equity contributing to the so-called reverse wealth effect that prompts people to spend cautiously because they feel poorer.

One in five Americans with a mortgage owes more than their home is worth, and $7 trillion of homeowners' equity has been lost in the bust. Homeowners' equity as a share of home values has fallen to 38.6% from 59.7% in 2005.

"With all of the economic turmoil, both domestic and international, there's not much that points to an improving housing market at any point in the near future," said Ara Hovnanian, chief executive of Hovnanian Enterprises Inc., the U.S.'s seventh-largest builder by deliveries.

While home prices aren't falling at anywhere near the pace of 2008, one worry is that even modest declines become self-reinforcing, pushing more homeowners underwater and exacerbating the downdraft caused by more foreclosures.

That, in turn, could prompt more credit tightening by lenders, further shrinking the pool of home buyers when more are needed to purchase bank-owned foreclosures.

The housing bust is weighing on the economy in part because bank-owned foreclosures have sidelined new construction, a traditional employment engine following a downturn.

The Commerce Department said Tuesday that single-family housing starts fell by 1.4% in August from July to a seasonally adjusted annual rate of 417,000.

Over the past 35 years, housing has contributed just 0.03 percentage point to annual growth in gross domestic product, according to research from the Federal Reserve Bank of St. Louis. But in the two years following most recessions, housing adds around 0.5 percentage point.

Recently, that contribution has been negative. The housing market needs the economy to add jobs, but the economy isn't able to rely on the job boost housing normally provides in a recovery. "We're in uncharted territory," said David Rosenberg, chief economist at Gluskin Sheff.

The fallout from the housing bust hasn't been easy on Greg Rubin, owner of California's Own Native Landscape Design, a landscape contractor in Escondido, Calif.

With sales down by half from 2007, Mr. Rubin has reduced his work force to nine people from 21. He now does jobs for as little as $4,000 versus no less than $10,000 in the past.

With home values no longer increasing, the few people who are hiring Mr. Rubin are paying with cash savings instead of home-equity loans, substantially decreasing their purchasing power.

Also, Mr. Rubin said, home prices have been battered for so long that many people have stopped believing home improvements will increase the value of their property.

"There's this psychology that home prices are dropping independent of whatever improvements they make, so it's a lost cause to do them now," he said.

Rising home prices traditionally lead homeowners to spend more money, even during periods of economic sluggishness, creating jobs.

But "that cycle can cut the other way," said James Parrott, a top White House housing adviser. "As the value of a family's home drops, that can really go from a lever of savings to a drain on that savings."

Those concerns prompted the White House earlier this year to begin canvassing experts on how to attack the excess inventory of distressed properties and troubled mortgages.

Officials are studying ways to encourage banks to write down loan balances for borrowers that are seriously underwater and to allow more underwater borrowers with government-backed loans to take advantage of low mortgage rates by refinancing. They are also working with federal regulators to study ways to rent out or clear the inventory of foreclosed homes.

Earlier initiatives encouraging banks to voluntarily modify mortgages haven't reached as many borrowers as hoped, hindered in part by stubbornly high unemployment.

Banks hold nearly 500,000 homes on their books, but more than four million additional loans are in some stage of foreclosure or are considered "seriously delinquent" because they have missed three or more payments.

That bad debt is "dragging the nation's economy underwater," said Lewis Ranieri, the pioneer of the mortgage-bond market, in a speech warning of the growing risks of policy inaction at a conference Monday. "In truth, we seem very paralyzed and slow to act," he said, chiding policy makers and industry executives for "wasting time engaging in self-interested bickering" while the housing market rots.

While mortgage rates have fallen to their lowest levels in decades, applications for home-purchase mortgages are mired near 15-year lows, according to the Mortgage Bankers Association. Applicants today face "a mountain of paperwork and never-ending reverifications," said Stuart Miller, chief executive of home builder Lennar Corp., in an earnings call Monday. Financing remains available to only "the most credit-worthy purchasers," he said.

Mortgage-finance giants Fannie Mae and Freddie Mac sharply tightened their standards three years ago, and many banks continue to do so because of concerns they will be forced to buy back defaulted mortgages.

The bust has hit some markets harder than others. In Nevada, Arizona and Florida, many homeowners can't move to take new jobs because they owe far more than their homes are worth. But even some markets that have shown resilience over the past year, such as Washington, D.C., could be at risk if job growth peters out.

Housing markets are also in bad shape because would-be first-time homeowners have retreated amid grim economic news. Many current homeowners, meanwhile, don't have enough equity to move, chilling the crucial "trade-up" market. That has left housing heavily dependent on investors buying homes at discounts with cash.

COMMENTARY:    

The Real Estate Bubble of 2011

I first predicted a a second real estate bubble to occur in mid-2010, but an $8,000 credit for first-time home buyers increased demand just enough to keep the bubble from occurring. Towards the end of 2010, the banks got into trouble with the regulators because they "robosigned" foreclosure documents and could not prove that they actually owned the deed on the foreclosed property. This situation happened because at the height of the housing boom, the banks packaged loans into mortgaged-backed securities and them sold them to other financial institutions.  In some cases those securities were resold a second or third time.  As a consequence banks slowed down foreclosures until they could get their paper trail straight.  In other cases, banks worked out loan modifications with homeowners in order to avoid foreclosure.  A lot of those loans are now past due again, and this will result in a second series of foreclosures.  From what I have been reading, foreclosures are now in full swing again and many housing experts are predicting another huge increase in foreclosures during 2011.  

The Root Causes of High Unemployment

In a blog post dated July 10, 2011, one of my most detailed and comprehensive analysis of the root causes behind today's high unemployment rate, I came to the inescapable conclusion (as have many economists) that high unemployment will continue to plague the nation for several years, and that as a result, overall economic conditions are not likely to improve sufficiently to spur a resurgence of new housing starts and resales of existing housing units simply are not there. In the past, when we had previous recessions, the unemployment rate increased, but within six to nine months, employment rebounded.  This is no longer the case.  There are three job destruction forces that will continue to keep unemployment rates high.  

• Computerization - Resulting from faster computers, the internet, software productivity tools and applications.  In many cases, one worker can do the work of two.
• Globalization - This the result of a collapse of the manufacturing sector (over 57,000 factories have closed since 1998) during the Great Recession, destruction of the manufacturing sector due to outsourcing jobs overseas in order to lower production costs and remain competititve in the marketplace, creation of new  businesses dedicated solely to outsourcing jobs, and corporations are now highy motivated to improve earnings by not hiring full-time workers, but relying on temporary or part-time workers.  Corporations are also employing selective discrimination, a practice where they won't hire people of a certain age or those who have been unemployed for a long time. 
• Industry Consolidation - Big companies began merging in earnest during the Reagan administration, and by the early 2000's it was common for three or four firms to control upwards of half or more of entire sectors.  It happened in banking, retail, transportation, pharmaceuticals, medical and health, broadcasting and automobile industries, accounting, and advertising, just to name a few.

In the interim, home buyers are standing on the sidelines, waiting for a "bottom" to occur in the housing market, preferring to paydown their debt, and are not willing to take on any new debt. 

The Shadow Inventory

In a blog post dated December 28, 2010, I predicted a second real estate bubble to occur in 2011, and this now appars to be happening.  The key reason:  The inventory of available housing units needs to be reduced substantially before a full recovery can begin.  

According to CoreLogic, the visible supply of unsold inventory was 4.2 million units in August 2010, the same as the previous year. The visible inventory measures the unsold inventory of new and existing homes that were on the market. The visible months’ supply increased to 15 months in August, up from 11 months a year earlier due to the decline in sales during the last few months.

On November 22, 2010, CoreLogic, a leading provider of consumer, financial and property information and business services, reported that the shadow inventory of residential property as of August 2010, reached 2.1 million units, or eight months worth of supply, up from 1.9 million, or a five-months’ supply, from one year earlier. 

The total visible and shadow inventory was 6.3 million units in August, up from 6.1 million a year ago. The total months’ supply of unsold homes was 23 months in August, up from 17 months a year ago.

Banks Tighten Lending Requirements

Banks are also making it a lot more difficult for home buyers by tightening credit requirements, including higher loan-to-value requirements, and restricting financing to owner-occupied housing units.  The days of flipping real estate properties to make a quick profit, are long gone.  I know a few of you will argue this point with me, but I will call you out on it.  Show me you have bought, fixed up and sold at least four houses in 2011.  You can't can you? 

Political Gridlock

Continue gridlock in Congress is something we do not need during times like this. Political parties are content to fight among themselves instead of doing what is right for the people This creates nothing but uncertainty in the financial markets.  Banks are not going to lend when this situation continues. 

Courtesy of an article dated September 21, 2011 appearing in The Wall Street Journal Economy

STUDENT LOAN DEFAULTS ARE ON THE INCREASE, AS STUDENT EMPLOYMENT HOPES DIM

Student loan defaults are rising fast, according to figures released this week by the U.S. Department of Education. While much of the press coverage focused on defaults by students attending for-profit schools, defaults at state colleges and universities went up, too. The bad job market is a big factor: Unemployment in 2010 was 10.1 percent for people between the age of 25 to 34, and those numbers are even higher when you remove people above the age of 30. At the same time, state budget cuts to higher education have led to big tuition hikes at many public colleges. California students graduated from public colleges with the least debt in the country in 2009, but tuition jumped 18 percent last year for in-state students in California and double-digit increases are projected for the next several years, as well.

COMMENTARY:   I originally researched the Student Loan Bubble in a blog post dated December 22, 2010, and was appalled at the amount of college loan debt many college graduates had accumulated upon graduation.   Many colleges and universities, both public and private, have increased tuition rates in order to avoid drastic budget cuts as a result of the Great Recession.  So long as the unemployment rate continues to remain high, and college graduates are unable to find good paying jobs, student loan defaults will increase. 

FinAid prepared this perpetual Student Loan Debt Clock.  This clock reports an estimate of current student loan debt outstanding, including both federal and private student loans.

This student loan debt clock is intended for entertainment purposes only. The actual total debt outstanding demonstrates more volatility at the beginning of each semester, when most student loans are disbursed. (Most colleges are required to disburse federal education loans in two installments per period of enrollment.) 

 

Courtesy of an article dated September 16, 2011 appearing in Stateline

HOW THE WORLD'S TOP 16 MAJOR BANKS ARE DOING SINCE THE 2008 GLOBAL FINANCIAL CRISIS

The financial crisis of 2008 had a unprecedented effect on the global banking industry. This interactive graphic charts the changing fortunes of 16 of the world’s leading banks since 2007.

[Click Image To View Interactive Chart]

COMMENTARY:   How exactly did the Global Financial Crisis of September 2008 occur?  It was a Domino Effect of a series of economic crashes and bubbles one after another.  Banks in the U.S. and overseas felt the full brunt, as their liquidity virtually vanished overnight.  In the U.S., the U.S. Treasury Department and Federal Reserve came in and bailed out over 200 major banks.  The central banks of foreign countries did the same thing.  

Today the construction and housing industries still remain anemic, with deliquincy and foreclosure rates the highest since the Great Depression.  Employers are not hiring full-time workers, relying mostly on part-timers and temporary workers.  So long as these industries remained mired in a quagmire and the unemployment rate remains high, most major U.S. banks are very hesitant to lend, or do so only with their most creditworthy borrowers.  As a consequence, they have accumulated well over $2 trillion in cash in excess of their federal reserve banking reserve requirements.

The following chart pretty much puts things into perspective:

[Click Image To Enlarge]

ThinkRealibility produced a highly detailed "2008-2009 Financial Mess Cause Map" which showed the cause and effect of the events resulting in the U.S. Financial Meltdown of 2008 in greater detail. You can view it HERE.

The U.S. financial system nearly collapsed when a record $140 billion was withdrawn from money market accounts by depositors.  To prevent a total meltdown of the U.S. financial system, President Bush signed into law the Emergency Economic Stabilization Act or EESA in October 2008 which created a $700 billion fund to help bailout nearly 555 financial institutions.  

The U.S.Treasury Department used $115 billion of EESA funds to buy preferred stock in eight banks: Bank of New York Mellon, Goldman Sachs, J.P. Morgan, Morgan Stanley, Bank of America/Merrill Lynch, Citigroup, Wells Fargo, and State Street.  The remaining $585 billion was to be used purchase the troubled assets (primarily worthless or near-worthless mortgage backed securities) of nearly 555 banks including emergency funds for the troubled U.S. auto industry. The latter became known as the Troubled Assets Relief Program or TARP.  You will find a comprehensive list of the banks the federal government bailed out HERE.

 

Congress only authorized $350 billion of the $700 billion to be lent out in 2008.  The other $350 billion was saved for President Obama when he took office in 2009.  Obama never used the TARP funds. Instead, he launched the $787 billion Economic Stimulus package. Second, the government bought bank stocks when the prices were depressed and sold later, when prices were higher. By 2010, banks had paid back $194 billion into the TARP fund, more than the $190 billion that was still outstanding. Third, the bill required the President to develop a plan to recoup losses from the financial industry if needed.

Courtesy of an article dated September 8, 2011 appearing in Financial Times

FHFA SUES 17 BANKS FOR LOSSES ON $196 BILLION IN RISKY HOME LOANS SOLD TO FANNIE MAE AND FREDDIE MAC

The top federal housing regulator filed lawsuits on Friday against 17 of the world's biggest financial institutions, saying they sold $196 billion of risky home loans over four years to Fannie Mae and Freddie Mac without adequately disclosing the risks.

FHFA Filings in PLS Cases, September 2, 2011:

1. Ally Financial Inc. f/k/a GMAC, LLC
2. Bank of America Corporation
3. Barclays Bank PLC 
4. Citigroup, Inc.
5. Countrywide Financial Corporation 
6. Credit Suisse Holdings (USA), Inc.
7. Deutsche Bank AG 
8. First Horizon National Corporation
9. General Electric Company 
10. Goldman Sachs & Co.
11. HSBC North America Holdings, Inc.
12. JPMorgan Chase & Co. 
13. Merrill Lynch & Co. / First Franklin Financial Corp.
14. Morgan Stanley 
15. Nomura Holding America Inc.
16. The Royal Bank of Scotland Group PLC 
17. Société Générale

The suits, filed by the Federal Housing Finance Agency (FHFA), represent the most sweeping action to date from a federal regulator stemming from the mortgage meltdown, which brought the financial system to its knees in the fall of 2008 and helped push the economy into a deep recession

The banks have spent the last three years rebuilding their balance sheets. Now, the legal fallout from the mortgage crisis is creating a new wave of liabilities for them and uncertainty for the financial system. News that the economy added no jobs in August and that the lawsuits were pending slammed the stock market Friday and sent bank stocks tumbling.

The suits come as worries about the health of the banking system and the broader economy are on the rise. Banks depend on economic growth to fuel lending activity; at the same time, the financial condition of the nation's banks is considered to be a key gauge of the economy's overall health.

Friday's lawsuits come amid a wider debate over whether the taxpayer-backed mortgage giants should be doing more to help accelerate a housing recovery. The Obama administration is seeking to enlist the firms to take additional steps that might help a housing recovery, including relaxing tough lending standards that have inhibited mortgage refinancing.

The lawsuits highlight the competing pressures complicating the government's approach to the financial crisis. On one hand, it has slashed interest rates and rescued beleaguered financial institutions to prevent a wider financial disaster. But it has also faced criticism for not taking more aggressive steps, until Friday's action by the FHFA, to recoup losses that have hit taxpayers as a result of the bust.

Rep. Brad Miller (D., N.C.) in a statement on Friday said. 

"Not pursuing those claims would be an indirect subsidy for an industry that has gotten too many subsidies already.  The American people should expect their government not to give the biggest banks a backdoor bailout."

The 17 complaints filed Friday included the following seven major defendants:

• Bank of America Corp. ($6 billion) including Merrill Lynch ($24.853 billion) and Countrywide Financial ($26.6 billion) face combined lawsuits on $57.4 billion in bond deals. 
• J.P. Morgan Chase & Co., where $33 billion in bond deals are at stake. 
• RBS Securities Inc., with $30.4 billion in securities sold to Fannie and Freddie. 
• Goldman Sachs Group Inc. with $11.1 billion securities sold to Fannie and Freddie 
• Deutsche Bank AG with $14.2 billion securities sold to Fannie and Freddie
• Credit Suisse AG with $14.1 billion securities sold to Fannie and Freddie
• Morgan Stanley with $10.58 billion securities sold to Fannie and Freddie

In a statement, FHFA said that it is involved in constructive discussions to settle claims with several of the firms that received complaints.

Bank of America and Deutsche Bank each issued statements Friday denying they had done anything improper.

The FHFA, an independent agency charged with conserving the assets of Fannie Mae and Freddie Mac while they are on government life support, filed the lawsuits on Friday in federal and state court in three jurisdictions.

The FHFA placed Fannie and Freddie into conservatorship three years ago after plunging house prices led to surging loan defaults and wiped out their capital. The U.S. Treasury has spent $141 billion to keep the firms solvent.

Fannie and Freddie don't lend money, instead buying mortgages from banks and bundling them into securities while guaranteeing repayment to investors. The companies have provided financing for the lion's share of U.S. home loans since the housing bubble collapsed.

In a statement, the agency said the complaints "reflect FHFA's conclusion that some portion of the losses that Fannie Mae and Freddie Mac incurred" stem from mortgage investments that had riskier characteristics than "the descriptions contained in the marketing and sales materials."

The lawsuits are bound to be controversial.

Consumer groups will applaud them. There has been widespread discontent among some taxpayers that banks and other financial institutions haven't been sufficiently reprimanded for their roles in the housing and mortgage crisis that has led to millions of Americans ending up in foreclosure, as well as a myriad of other financial and economic problems.

But critics said Friday that the lawsuits represent a "piling on" by federal and state regulators that threaten to crimp credit and undermine a housing recovery.

Andrew Sandler, co-chairman of BuckleySandler LLP, a law firm representing banks in litigation and regulatory enforcement actions. 

"The government is coming at the banks from every direction—the FHFA lawsuits being the most recent example—at the same time the government is putting enormous pressure on the banks to extend credit to help alleviate the housing crisis.  It constitutes a completely incoherent government approach to the housing crisis."

Some banks said Fannie and Freddie were sophisticated investors who understood the risks of subprime securities. As a result, the banks said, they shouldn't be held responsible for the losses that were caused by an unprecedented collapse in housing prices.

"We will vigorously defend against this action," Deutsche Bank AG said in a statement. The German bank said the two agencies had issued and bought trillions of dollars of mortgaged-backed securities "often after hand-picking the loans they now claim should not have been included in the offerings."

Bank of America issued a similar statement, noting that Fannie and Freddie "continued to invest heavily in those securities even after their regulator told them they did not have the risk management capabilities to do so."

Representatives of Barclays, Citigroup, Credit Suisse, Goldman, J.P. Morgan, Nomura and RBS declined to comment. Other bank representatives couldn't immediately be reached for comment.

In putting together the bond deals, banks "routinely" packaged loans into securities even though they had been flagged by third-party due diligence firms as not meeting underwriting guidelines, according to the lawsuits.

Countrywide Financial Corp., for instance, included in securitizations 12% of the mortgages that were deemed defective by Clayton Holdings, a firm that reviewed loans to see if they conformed to underwriting guidelines, according to a report from the fourth quarter of 2006 to the first quarter of 2007, the suit said.

Bank of America included 27% of defective loans, according to the lawsuits, while RBS included 53% of the faulty loans and Citigroup Inc. nearly one-third.

The FHFA's action is just one of a growing number of legal challenges facing banks because of their conduct before and after the mortgage meltdown.

Investors and government regulators, including the National Credit Union Administration, several Federal Home Loan Banks and government-backed American International Group Inc., have filed lawsuits alleging that some big banks violated securities laws in packaging loans into securities.

The banks have also faced increased demands from investors seeking to make banks buy back faulty loans and face lawsuits from insurers who provided financial guarantees when mortgages were packaged into securities.

Meanwhile, state attorneys general and the federal government are currently in negotiations with some of the nation's largest banks over questionable foreclosure practices.

COMMENTARY:  I had a cursory look at the average loan-to-value or LTV (the LTV is the ratio of the balance of the mortgage loan to the value of the mortgaged property when the loan is made) of the various securitizations named in the 17 lawsuits, and was horrified that the average values of the properties were drastically below the loan amounts, in other words, many of those loans were already "underwater" when they were sold to Fannie Mae and Freddie Mac.  

In each lawsuit, the FHFA emphasized the importance of the LTV ratio in measuring the risk of a mortgage loan and said.

"The LTV ratio is among the most important measures of the risk of a mortgage loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owner’s equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV, the greater the “equity cushion,” so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan."

"Thus, the LTV ratio is a material consideration to a reasonable investor indeciding whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificate holders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate."

In the 17 lawsuits, the FHFA claimed that the 17 defendant banks overstated the LTV for the loan securitizations.  The FHFA  said.

"The Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent,and materially understated the percentage of loans in the Supporting Loan Groups with an LTVratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates."

The FHFA consistently accused the 17 defendant banks of making "false statements of material facts and omissions of material facts".  The FHFA said. 

"The false statements of material facts and omissions of material facts in the Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer billions of dollars in damages, including without limitation depreciation in the value of the securities. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements.

"Fannie Mae’s and Freddie Mac’s losses have been much greater than they would have been if the mortgage loans had the credit quality represented in the Registration Statements."

The FHFA also discovered that the 17 defendant banks consistently under-reported the percentage non-owner occupied loans in each loan securitization.  The FHFA discovered that the actual percentage of non-owner occupied loans was two to three times higher.  The FHFA said.

"The percentage of owner-occupied properties is a material risk factor to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements." 

The FHFA is also alledging that the 17 defendant banks committed fraud which is a felony punishable by fines and imprisonment.  Here's the legal definition of fraud:

"A false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury."

"Fraud is commonly understood as dishonesty calculated for advantage. A person who is dishonest may be called a fraud. In the U.S. legal system, fraud is a specific offense with certain features."

"Fraud is most common in the buying or selling of property, including real estate, Personal Property, and intangible property, such as stocks, bonds, and copyrights. State and federal statutes criminalize fraud, but not all cases rise to the level of criminality. Prosecutors have discretion in determining which cases to pursue. Victims may also seek redress in civil court."

"Fraud must be proved by showing that the defendant's actions involved five separate elements: (1) a false statement of a material fact,(2) knowledge on the part of the defendant that the statement is untrue, (3) intent on the part of the defendant to deceive the alleged victim, (4) justifiable reliance by the alleged victim on the statement, and (5) injury to the alleged victim as a result."

I am certainly not an attorney, but if you read the above definition of fraud, it certainly has the appearance of fraud or at least borderline fraud.  Let's put some of these punkasses in prison too. These 17 defendant banks were accomplices in the collapase of the U.S. financial system.  If it were not for the Treasury Department's $700 billion bailout of these banks, the Great Recession would've become The Greatest Recession. 

Reuter's Felix Salmon, with the help of Nick Rizzo, did some basic number crunching on the FHFA lawsuits.  They used three different metrics to see how aggressive any given lawsuit was:

• The number of individual named defendants; 
• The total number of pages in the suit; 
• Whether it asked for punitive damages. 

Here’s the league table conceived by Salmon and Rizzo.  They calculated a total score by taking the number of pages in the lawsuit, adding the number of individual defendants multiplied by 10, and then adding an extra 100 points if the FHFA was asking for punitive damages:

Salmon said:

"JP Morgan, here, is the clear winner — until you realize that Bank of America is split into three different parts. If you take Countrywide, Bank of America, and Merrill Lynch and add their scores together, then the total for BofA reaches 884 points, and no I’m not going to worry about double counting."

"All silliness aside, the total number of named defendants here, including various different individuals and corporate entities, is a whopping 268, including a small amount of double-counting. This is a full-employment act for lawyers, and I’m pretty sure they’re going to be fighting this one out for a long time; I can’t imagine, having put all of this work into these suits, that the government is going to be remotely willing to simply give all of these banks blanket immunity as part of a global settlement with the 50 state attorneys general."

"I’ll have more on the substance of the suits later; suffice to say that they’re strong, and aggressive, and exactly what I’ve been looking for for a while. These banks lied to investors when they put together mortgage securitizations. And one way or another, they’re about to start paying for that. About time too."

What a mess these banks created.  By packaging their mortgages and selling them to Fannie Mae and Freddie Mac, they were able to shrewdly and systemically pass on the potential losses on those loans to the investors of Fannie Mae and Freddie Mac and the federal government.   

I am not an attorney, but if the FHFA's complaints are correct, these 17 defendant banks are going to be reimbursing Fannie Mae and Freddie Mac a hefty sum of money. How much remains to be determined. You can expect an out-of-court settlement that will be in the billions.

Courtesy of an article dated September 3, 2011 appearing in The Wall Street Journal

VENEZUELA MOVES ITS GOLD FROM THE EU & UK TO RUSSIAN, CHINESE AND BRAZILIAN BANKS, CHAVEZ MOTIVES REMAIN UNKNOWN

 

CARACAS—Venezuela plans to transfer billions of dollars in cash reserves from abroad to banks in Russia, China and Brazil and tons of gold from European banks to its central bank vaults, according to documents reviewed Tuesday by The Wall Street Journal.

The planned moves would include transferring $6.3 billion in cash reserves, most of which Venezuela now keeps in banks such as the Bank for International Settlements in Basel, Switzerland, and Barclays Bank in London to unnamed Russian, Chinese and Brazilian banks, one document said.

Venezuela also plans to move 211 tons of gold it keeps abroad and values at $11 billion to the vaults of the Venezuelan Central Bank in Caracas where the government keeps its remaining 154 tons of bullion, the document says.

Venezuelan officials were tight-lipped. Representatives of the ministry of finance and the central bank said there was no official comment, and no one was authorized to address the issue.

Lately, senior Venezuelan officials have criticized Venezuela's dependence on the dollar. Last Saturday, Venezuelan Foreign Minister Nicolas Maduro said the world's financial system, based on the dollar, "had entered into a crisis of uncertainty and we are planning to construct a new international monetary system, and especially in South America, protect ourselves from this situation," he said.

The Bank of England recently received a request from the Venezuelan government about transferring the 99 tons of gold Venezuela holds in the bank back to Venezuela, said a person familiar with the matter. A spokesman from the Bank of England declined to comment whether Venezuela had any gold on deposit at the bank.

A spokesman for the Bank for International Settlements where Venezuela keeps $3.7 billion of its cash reserves, and 11.2 tons of gold, Venezuela values at $544 million, according to the document, also declined to comment.

Analysts said the planned move made little economic or financial sense, since Venezuela would be taking its money out of secure banks in safe countries and putting it in countries that are not as safe and perhaps in currencies such as the Chinese yuan or the Russian ruble, which are not reserve currencies. "It's a big risk," said José Guerra, a former official at Venezuela's central bank. Mr. Guerra said he also had heard about the documents whose authenticity was confirmed to him by Central Bank officials.

Mr. Guerra said one possible reason for the planned moves could be that Venezuela is afraid it could be compelled to pay billions of dollars in compensations to foreign companies that have gone to court to recover damages for companies Venezuelan President Hugo Chávez has nationalized. Another reason could be that China may have asked for collateral for billions of dollars it has loaned Venezuela, Mr. Guerra said.

Venezuela faces a sizable bill from arbitration but it's difficult to pin down a reliable estimate.

Tamara Herrera, chief economist of Síntesis Financiera, an economic consulting firm based in Caracas says about Venezuela's nationalization problems. 

"It's a wide range from $10 billion to $40 billion and beyond.  There are many ongoing negotiations; the major ones of course are with oil companies."

One of the documents outlining the moves appears to have been drafted by Jorge Giordani, Venezuela's planning and finance minister, in conjunction with Nelson Merentes, the central bank president, for Mr. Chávez's approval. It calls for the transfer of the cash and gold reserves as of Aug. 8 in a maximum of two months.

Another document prepared by Foreign Minister Nicolas Maduro for Mr. Chávez's approval calls for Messrs. Giordani and Merentes to prepare a plan to safeguard Venezuela's international reserves given "the recent U.S. debt crisis and its impact on the dollar as a world reserve currency."

The crisis, the document says, "has lit all the alarm signals as to whether it's convenient to maintain our reserves in that currency [U.S.dollar]."

The document also notes that "the powers of the North" have "pillaged" Libya's international reserves as a result of the sanctions applied to Libya.

"That makes us reflect on the need to elaborate a plan to monitor and secure the funds that the Republic maintains in international banks to meet its commitments abroad."

For some analysts, the reference to Libya signaled a possible political motive. The charismatic Mr. Chávez, who has said he will run again for president next year's elections, is being treated with chemotherapy for cancer in Cuba.  Neither Mr. Chávez's type of cancer nor Mr. Chávez's prognosis has been made public. Moving the reserves may signal that Mr. Chávez and his associates could be preparing some drastic political moves—such as canceling elections—that could incur international condemnation and perhaps trigger sanctions.

Roger Noriega, a former high-ranking state department official during the Bush administration.

"It doesn't augur well for Venezuela." 

Opposition congressman Julio Montoya said he received leaked "secretive" copies of the proposal to relocate Venezuela's gold reserves deposited in the UK and Swiss banks to nations friendly with Venezuela from concerned officials of the finance ministry says.

"We don't know if (Chávez) has signed it." 

Mr. Montoya said that the proposal raised the question if Venezuela was being pressured into transferring its gold reserves because of its growing ties with China and Russia.

• China - To fund the country's large-scale social programs, Mr. Chávez has turned to resource-hungry China, Venezuela's largest creditori recent years, for assistance on everything from financing to housing and machinery. Last year, Venezuela received a $20 billion credit line from the China Development Bank for housing, which it is paying back with oil shipments.
• Russia - Rusia has been a major arms supplier to the South American nation, supplying it with small arms, ammunition, tanks, armored personnel vehicles and combat jet aircraft

Most recently, Venezuela announced it was finalizing agreements for two additional credit lines of $4 billion each with Russia and China, with a portion of the Russian funds earmarked for the Venezuelan military. Venezuelan officials have also said they have recently reached an agreement with Brazil for a $4 billion line of credit.

COMMENTARY:    It's a well known fact that China, Russia, Iran and Venezuela, nations that are not considered very friendly towards the U.S. or The West for that matter, have pressed their case before the World Bank and International Monetary Fund to replace the U.S. dollar as the world's reserve currency. Developing countries like China, Brazil and India in particular view themselves as future economic powers.

The World Bank, in a report titled, "Gobal Development Horizons 2011--Multipolarity: The New Global Economy", projects that by 2025, six major emerging economies—Brazil, China, India, Indonesia, South Korea, and Russia—will account for more than half of all global growth, and the international monetary system will likely no longer be dominated by a single currency (U.S. dollar). As economic power shifts, these successful economies will help drive growth in lower income countries through cross-border commercial and financial transactions.

[Click Image To Enlarge]

[Click Image To Enlarge]

The report projects that as a group, emerging economies will grow on average by 4.7 percent a year between 2011 and 2025.  Advanced economies, meanwhile, are forecast to grow by 2.3 percent over the same period, yet will remain prominent in the global economy, with the euro area, Japan, the United Kingdom, and the United States all playing a core role in fueling global growth.

[Click Image To Enlarge]

[Click Images To Enlarge]

PricewaterhouseCoopers prepared a ranking of developed and developing nations by GDP between 2009 and 2050, and the U.S. drops from #1 in 2009 to #3 in 2050.  During this period China and India rise from#2 and #4 respectively in 2009 to #1 and #2 respectively in 2050. 

 [Click Image To Enlarge]

In April 2011, the International Monetary Fund boldly predicted that China will overtake the U.S. in GDP (Purchasing Power Parity) by 2016.  

  

The IMF is using what's known as "purchasing power parities," comparing what residents of both countries earn and spend domestically.   Based on that comparison, China's economy will rise from $11.2 trillion in 2011 to $19 trillion in 2016. The U.S. economy will rise at a slower pace, from $15.2 trillion to $18.8 trillion in that period. According to MarketWatch, China's share of the global economy will hit 18 percent, while the United States' share will lag behind at 17.7 percent.

The World Bank and IMF have both been at loggerheads with the U.S. for sometime, and highly critical of the U.S.'s reckless financial investment practices that nearly brought the nation to the verge of financial collapse and triggering a worldwide recession, rising U.S. federal debt levels, loose central bank monetary policies (FRB'squantitative easing) and the effect on global interest rates because of the US's heavy borrowing to keep afloat.  The threat of a debt rating reduction by S&P (S&) finally reduced U.S. credit from AAA to AA+ in August) and Moody's did not help matters any.  

In February 10, 2011, the IMF announced a plan to replace the U.S. Dollar as the world reserve currency with Special Drawing Rights (SDRs).  SDRs represent potential claims on the currencies of IMF members. They were created by the IMF in 1969 and can be converted into whatever currency a borrower requires at exchange rates based on a weighted basket of international currencies. The IMF typically lends countries funds denominated in SDRs    

Emerging nations like China, Brazil, Russia and India, and oil rich nations in the Middle East and Iran see the eminse sovereign debt problems of the U.S., The EU, the UK and Japan, and are running scared and slowly hedging against the U.S. dollar and banding together to eventually replace the U.S. dollar as the world reserve currency.  

Two years ago, China pushed the IMF to create a "super-sovereign reserve currency" which would turn the IMF into a world central bank.  Does this mean that the SDR could become the new world reserve currency?  BTW, the IMF has the world's third largest reserves of gold--3,101 tons worth $158.77 billion.   All foreign currencies would be pegged against the SDR.   Gold and the value of claims between nations, is what is going to back those IMF's super-sovereign reserve currency.  The question is how much more gold will its 185-member nations be asked to pony up to establish that new world reserve currency.  I am glad I am not an economist.  Remarkably, U.S. Treasury Secretary Timothy Geitner is for a new world foreign currency.   

My guess is that Hugo Chavez is protecting his gold reserves against sanctions, either legal or political, but it is also a hedge against the eventual replacement of the U.S. dollar as the world reserve currency.           

Courtesy of an article dated August 17, 2011 appearing in The Wall Street Journal

SWISS BANKS ARE A HAVEN FOR TAX CHEATS: UBS GOT CAUGHT, HSBC FEELS THE HEAT, AND CREDIT SUISSE IS NOW UNDER INVESTIGATION

HSBC Holdings PLC is moving to mollify federal authorities investigating how the banking industry has helped U.S. clients evade taxes.

The global banking giant is cutting ties with wealthy American clients who bank offshore, as U.S. prosecutors turn up the heat on the bank to produce information about account holders who may be evading taxes, people familiar with the matter say.

A spokeswoman said the global banking giant will

"No longer offer wealth-management services to U.S. resident private clients from locations outside the U.S."

and that American clients

"Will be better served by our private banking teams in the United States."

At issue are hundreds of clients with accounts totaling as much as $100 million, said a person familiar with the situation. U.S. clients need roughly $5 million in assets to qualify for an HSBC private-client account, another person familiar with the situation said.

The extraordinary move comes as the U.S. Justice Department and Internal Revenue Service intensify crackdowns on offshore tax evasion and look beyond the world of Swiss banking for institutions that might be providing places to hide money.

HSBC is ending the practice of serving wealthy American residents from locations outside the U.S. as a way of cooperating with the U.S. and avoiding the fate of rivals that were fined or threatened with prosecution for assisting tax scofflaws, the people familiar with the matter say. The Justice Department declined to comment.

In a letter sent earlier this month to U.S. customers who have accounts with HSBC India, the bank said it is terminating "private banking services to US persons and certain trusts and non operating companies connected to US persons." Customers have 30 days to close their accounts, according to the letter.

HSBC has been under Justice Department scrutiny since earlier this year, when U.S. prosecutors alleged HSBC India had helped U.S. residents get around paying federal taxes.

HSBC's move to cut off wealthy U.S. clients represents a retreat for an institution that made a splash in the private-banking business in 1999 with the acquisition of Republic National Bank of New York. A new IRS law taking effect in 2011 requires banks with U.S. taxpayers holding offshore accounts to meet stringent and expensive new reporting requirements.

An HSBC spokeswoman said a team of advisers "will help affected clients through the transition process."

HSBC's move could put its clients in a tough spot. Brian Rowbotham, an international tax specialist in San Francisco said. 

"It presents a significant challenge for many investors and business executives, given the short notice of termination." 

The HSBC move comes amid much broader government scrutiny on tax evasion. In 2009, Swiss bank UBS AG admitted to conspiring to defraud the U.S. government of billions in taxes by helping wealthy Americans hide taxes. As part of a "deferred prosecution" agreement avoiding criminal charges, UBS turned over the names of 4,000 U.S. account holders and paid a $780 million fine for its role as part of a settlement between the U.S. and Swiss governments.

Credit Suisse Group AG said Friday that the Justice Department had notified the Swiss bank that it was a formal target of a criminal investigation into how Swiss institutions allegedly helped U.S. citizens avoid paying taxes. The bank said it was cooperating with the probe. Settlement talks between U.S. and Swiss governments aimed at resolving a wide-ranging U.S. investigation into the Swiss banking system are continuing.

In January, prosecutors indicted a New Jersey businessman on charges he conspired to evade U.S. taxes by hiding offshore accounts in India maintained by HSBC.   He pleaded guilty. And in late June, a federal grand jury indicted an HSBC client living in Wisconsin for allegedly filing false tax returns and hiding more than $8.7 million in offshore accounts. The client, a neurosurgeon and a U.S. citizen, pleaded not guilty.

The Justice Department in April asked a San Francisco federal court to let the IRS serve a "John Doe" summons on the Indian unit of HSBC seeking information about possible tax fraud "by people whose identities are unknown." The status of the summons isn't clear.

Federal authorities asked HSBC India to send letters to customers encouraging them to come forward to the IRS, and HSBC has complied with that request via a separate set of letters, said people familiar with the situation. The IRS is offering reduced but still stiff penalties for U.S. taxpayers with secret offshore accounts who voluntarily report them, but that program is to end Aug. 31. The government said it believed "many" of these clients "have hidden their accounts from the IRS."

COMMENTARY:    I love Swiss chocolates and cheese with holes it it, those beautiful Swiss Alps, the athleticism of Swiss downhill skiers, the precision of Swiss cutlery, and I thought Swiss banks represented the highest standards of ethical banking and professionalism, but I was so wrong about the latter.  It is turning out that Switzerland is a haven for tax cheats.

Foreign Bank Account Reporting (FBAR) Program 

So what's the fuss all about?  It's simply this.  The IRS is attempting to close an estimated $300 billion tax gap that has been plaguing the federal government for the past several years.  In 2009, after Barack Obama came into office, the U.S. government budgeted $20 billion to form the Foreign Bank Account Reporting (FBAR) program designed to thwart efforts by US citizens to commit income tax evasion by underreporting U.S. income and then hiding the cash related to the unreported income in undisclosed Foreign Bank Accounts.  In addition the IRS has expanded in sheer size by 40% over the last few years in response to this issue.  And boy, oh boy, the FBAR program is doing a splendid job.  

UBS

On February 18, 2009, UBS, the largest bank in Switzerloand, in a striking admission, said that from 2000 through 2007, some of its private bankers and managers had “participated in a scheme to defraud the United States” and the I.R.S. by helping American clients set up and conceal offshore accounts. 

The IRS discovered that UBS regularly sent its private bankers into the United States to solicit business from and maintain business with U.S. citizens and residents. Those UBS private bankers made thousands of client solicitations and contacts within the United States. The scheme involved falsifying or not properly obtaining or filing certain tax forms required of both the bank and its clients.  Those contacts earned UBS AG more than $100 million in fees. At the same time, that business cost the U.S. Treasury hundreds of millions of dollars in unpaid taxes. 

The bank agreed to pay the IRS $780 million to settle a sweeping federal investigation into its activities.  The U.S. Justice Department had been investigating about 19,000 UBS accounts, but the New York Times reported that the bank may only release a couple hundred names.

The IRS later asked a federal judge to demand that UBS turn over the names of around 52,000 clients. UBS "vigorously challenged" the new request.  Justice Department prosecutors suspected that from late 2002 to 2007, UBS helped American clients illegally hide $20 billion, letting them evade $300 million a year in taxes.  In July 2009,  UBS finally agreed to turn over the names of 52,000 U.S. citizens with accounts at UBS.  According to the IRS, those accounts had a cumulative value of $14.8 billion.

HSBC: How It All Came Down

In August 2010, HSBC, Europe's biggest bank,  reported that data on up to 24,000 Swiss client accounts had been stolen by a former employee and ended up in the hands of authorities in France, where the ex-worker fled.  U.S. authorities supposedly negotiated with the French through a treaty request to get the names of any U.S. HSBC clients involved.  

At that time, Linda J. Osuna, an IRS Special Agent in Charge of the Tampa Field Office, told reporters that the U.S. was building a case against an unnamed foreign bank (HSBC), which she declined to name, for "the same behavior that got UBS in trouble."  

HSBC, in an apparent attempt to avoid deeper Justice Department investigation, criminal charges and fines similar to those suffered by UBS, has given in to U.S. pressure.  However, the names of U.S. citizens whose HSBC bank accounts will be closed have not been provided to U.S. authorites. And, from appearances, HSBC gets away scott free.  

So the question remains, how many of those HSBC customers will step forward and finally comply with FBAR reporting requirements before the November 1, 2011 amnesty deadline, and put themselves at the mercy of the IRS for any wrong doing.  And, how many of those scoundrels will simply take their money and deposit it into another scruplous bank in Europe or flee to another foreign country.

Credit Suisse Now Under Investigation

I thought I was through writing about IRS investigations of these Swiss banks, but as luck would have it, noooo it's not.  I just discovered that on July 14, 2011, Credit Suisse received a letter from the IRS and is the target of an investigation in to FBAR violations.  In case you are counting, this is the third major Swiss bank under investigation by the IRS.  

A target letter is a big deal.  It probably means that a considerable level of investigation has already been done and further criminal investigation is warranted.

Credit Suisse is unlikely to be the only institution in the IRS’s sights.  It has been reported that U.S. authorities are conducting a broader industry inquiry.  Credit Suisse points out that it has obligations under Swiss law, and those are not small.  Credit Suisse says it will continue to cooperate with the U.S. authorities, subject to those rules.

IRS Penalties If Found Guilty of Violating FBAR Regulations

The IRS has given FBAR violators amnesty against criminal prosecution through November 1, 2011, in otherwords you could avoid prison time.  So what exactly happens to a U.S. citizen found to be in violation of FBAR reporting violation?   I went to a lot of trouble to find this out, and it depends if you voluntarily turn yourself in and admit to having an illegal foreign bank account or are later discovered to be a FBAR violator after the amnesty date expires.

Even with amnesty, the amounts owing are still quite painful. In a Frequently Asked Questions released by the IRS on May 6, 2009, the IRS provides the following example based on a $1 million unreported foreign account balance and $300,000 of unreported interest covering five years:

Voluntarily Disclosure Under Amnesty

If the taxpayer comes forward and has their voluntary disclosure accepted by the IRS, they …would pay $386,000 plus interest. This includes:

• Tax of $105,000 [assumes a 35% tax bracket] plus interest.
• An accuracy-related penalty of $21,000 (i.e., $105,000 x 20%). 
• An additional penalty, in lieu of the FBAR and other potential penalties that may apply, of $260,000 (i.e., $1,300,000 x 20%).

In short, the taxpayer under amnesty pays the U.S. 129% of the total income that was earned. However, this is mild when compared to what the government explains will be demanded without amnesty and $300,000 of total unreported income. In short, the amounts owing will almost two times the entire account balance and accumulated unreported income:   

Disclosure After Amnesty Period Expires

If the taxpayer didn’t come forward and the IRS discovered their offshore activities, they face up to $2,306,000 in tax, accuracy-related penalty, and FBAR penalty. The taxpayer would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution.

The civil liabilities potentially include:

• The tax and accuracy-related penalty, plus interest, as described above. 
• FBAR penalties totaling up to $2,175,000 for willful failures to file complete and correct FBARs (2003- $100,000, 2004 - $100,000, 2005 - $100,000, 2006 - $600,000, 2007 - $625,000 and 2008 - $650,000).
• The potential of having the fraud penalty (75 percent) apply.
• The potential of substantial additional information return penalties if the foreign account or assets is held through a foreign entity such as a trust or corporation and required information returns were not filed.

Note that if the foreign activity started more than six years ago, the IRS may also have the right to examine additional years.

If these monetary amounts were not enough, here is the IRS description of the criminal charges without the amnesty program:

Possible criminal charges related to tax returns include:

• Tax evasion (26 U.S.C. § 7201), 
• Filing a false return (26 U.S.C. § 7206(1)). 
• Failure to file an income tax return (26 U.S.C. § 7203) 
• The failure to file an FBAR and the filing of a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.

A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.

Ugly isn't it?!!

FBAR Violators Renouncing U.S. Citizenship

I can't believe the extent well educated, intelligent and professional U.S. citizens (okay, they are crooked U.S. citizens) will go to hide their money earned overseas in foreign bank accounts.  In fact, some of these punkasses have gone as far as to renunciate their U.S. citizenship in order to avoid filing the required Report of Foreign Bank and Financial Accounts (FBAR) report and avoid prosecution.   Now that's what I called dedication to crime.  According to the IRS, 1,534 Americans renounced their U.S. citizenship.

Keep in mind that the FBAR is just getting started. It has taken about a year to hire and train investigators, setup the organization, gather evidence and conduct investigations, and targeted banks have not exactly been very cooperative, so it is just recently that the full extent of FBAR violations are beginning to surface.  

UBS, HSBC and Credit Suisse are not small banks. According to Global Finance Magazine's "World's 50 Biggest Banks" for 2010, ranked according to assets, HSBC is #3 ($2.364 trillion), UBS is #20 ($1.301 trillion), and Credit Suisse is #27 ($1.001 trillion).  

I look forward to reporting on the developments concerning the IRS's investigation of Credit Suisse, the newest member of the Swiss tax cheat banks.  

Courtesy of an article dated July 20, 2011 appearing in The Wall Street Journal Business, an article dated February 18, 2009 appearing in The New York Times, an article dated July 20, 2011 appearing in Forbes, and an article appearing in HGExperts.com