Mish's Global Economic Trend Analysis

How Ben Bernanke "F*d" the Banks and Fixed Income Savers at the Same Time
It's Fashion Week in Paris (and I have Pictures to Prove it)
"Does Anyone Really Know What is Going on with Foreclosures?"
Open Letter to Merkel, Trichet, Sarkozy, Papandreou, Berlusconi: Extend-and-Pretend Session is Finished, It's Do or Die
Reader Question Regarding the Role of Credit in Inflation/Deflation; US vs. Europe
Restructuring Plans Underway for Another 21 Banks Says Vice President of the European Commission; What's the Real Number?

How Ben Bernanke "F*d" the Banks and Fixed Income Savers at the Same Time

Posted: 05 Oct 2011 10:41 PM PDT

Hello Ben. It seems your ploy to hold interest rates at preposterously low levels has backfired into a run on Bank of America assets.

Citizens are up in arms. Amazingly, customers in St. Louis cannot even enter banks to withdraw money.

Please ignore the first few sentences in the video below about payday loans and instead listen to the rest of the message.

URL if video does not play: SWAT Teams in St. Louis Protecting Bank of America; Refusing Customer Withdrawals

Bank of America Customer Frustration Grows

Inquiring minds are reading Bank of America Customer Frustration Grows

Bank of America's plan to add a five dollar a month debit fee has angered customers.

Bank of America customer Molly Katchpole is one of those customers, "I'm 22 years old, I'm working two-part-time jobs, I don't have an extra 60 dollars a year to give to Bank of America," says Katchpole. "

She started an online petition calling on Bank of America to repeal the fee.

Four days later, she got 125-thousand strangers lending their support.

Meanwhile smaller, local banks are reaping the benefits from big bank customer anger, says John Heaps, President and CEO of Florence Savings Bank,"We call Bank of America and the big banks the gift that keeps on giving, because over the weekend we opened more accounts from Bank of America on line than any other time in the history of the bank," says Heaps.

Fee Parade

Things are now so "F*d" up that banks cannot make money on deposits and consumers cannot even get access to their money.

It's not just at Bank of America. Wells Fargo and Citigroup have joined the fee parade.

Please consider Citibank is next with a new banking fee

Another day, another new bank fee.

As the uproar swelled over Bank of America Corp.'s planned $5 monthly charge for debit card use, megabank rival Citigroup Inc. was notifying many Citibank customers that they soon would have to start paying for their checking accounts unless they maintained significantly higher balances.

Letters are going out across the country alerting Citi customers of account changes, said the bank's retail banking chief, Stephen Troutner. In many cases, that means customers will have to maintain fatter balances to avoid fees, although Troutner said a basic account option makes dodging charges easier.

Higher fees are the new reality in retail banking, where regulations adopted in the aftermath of the bank bailouts have reduced revenue from several controversial fees by billions of dollars. At the same time, banks have seen their lending income decline due to the sluggish economy and low interest rates.

That has caused major banks to impose a variety of new customer fees, although the exact formula varies. Citibank, for example, decided not to impose "usage" fees such as the $5 a month that Bank of America, starting next year, will charge most customers who use their debit cards to purchase goods and services.

"We conducted extensive surveys with our customers, and no one wanted to pay to use debit cards," Troutner said.

One day after announcing the new debit card fee, Bank of America was inundated with visits, calls and emails from customers.

"We are doing our best to explain the impacts, the value and convenience the debit card offers and how to avoid the fee if necessary," spokeswoman Anne Pace said.

By the way, this brings up another point. I worked for two decades at banks on the programming side. Evey bank wanted accounts no matter how small for economies of scale.

The reasons for that policy are that it costs next to nothing to process incremental accounts, and costs can be spread out over all of those accounts.

I fail to see how the same cannot be true today. After all, if savings and loans and small banks with no economies of scale can handle these smaller accounts and at least break even, then why can't Citigroup and Bank of America?

Two Answers

Organizations of large banks are so bloated with multiple layers of fat, they need increasing numbers of fees to make a profit.

Major banks are so capital impaired they desperately need new feed to cover losses elsewhere.

Ultimate Irony of Fed Policies

Here is the ultimate irony in the asinine policies of Ben Bernanke and the Fed:

As a result of "too big to fail" policies of the Fed, the big got so big they are not even profitable at the low interest rates Bernanke has set for the alleged benefit of the banks and the economy.

Not only did Bernanke "F" those on fixed income, he "F*d" all the banks that cannot make a profit on small accounts.

Congratulations Ben. It is not easy to be that big a failure.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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It's Fashion Week in Paris (and I have Pictures to Prove it)

Posted: 05 Oct 2011 05:48 PM PDT

In the lighter side of the news of those who comment on the news, I am pleased to report that Max Keiser won an Honorary Life Membership from University of Limerick for His Work as a Journalist Exposing Financial Terrorists

Moreover, I am also pleased to report that Charlotte Kemp Muhl, an American model and actress from suburban Atlanta, Georgia, and the youngest model to appear on the cover of Britain's Harper's and Queen magazine, just happens to be a big fan of the Max Keiser Report.

Given that it's fashion week in Paris, it is only fitting that Muhl would seek out the ever-stylish Max Keiser for a photo-op.

Given that it's extremely difficult to judge who in that picture is more stylish, I defer to my readers to decide for themselves.

In God I love fashion week in Paris!!! Max Comments: "This photo was taken by Charlotte's boyfriend and band mate Sean Ono Lennon in the lobby of their hotel earlier this evening. Turns out Sean and Charlotte are big Keiser Report fans…. but I noticed they seemed to ask Stacy all the serious questions. Maybe I should go back to go-go dancing in the West Village."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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"Does Anyone Really Know What is Going on with Foreclosures?"

Posted: 05 Oct 2011 11:28 AM PDT

Patrick Pulatie at LFI Analytics has noticed a huge discrepancy in the number of reported foreclosures by varying organizations. Via Email Pulatie writes ...

Much of my off time is spent in reviewing the reports of other entities regarding the foreclosure crisis, correlating data and trying to forecast what to expect in the future.

Frankly, I am at the point where I am wondering whether anyone has a true reading on what is happening.

Office of the Comptroller of the Currency

At the end of the 2nd Quarter, the OCC reports:

It Monitored 32.7 million first mortgages out of 53 million total, representing 62% of all first mortgages.
4.9% or 1.57 million were more than 60 days late, or at least 1 month late while in Bankruptcy.
5.5 million are late by over 30 days, or in the foreclosure process.
1.3 million in some stage of foreclosure.
88% of mortgages were current. (This would mean that 3.944 million were not current of the 32.7 million being monitored.)
800,000 REO's
If 1.57 million loans are more than 60 days late and 5.5 million are late by over 30 days, then 3.8 million must be between 30 days and 60 days late.

Even worse, this only represents 62% of all first mortgages.

Amherst

Amherst's Laurie Goodman comes up with different numbers.

Of 55 million mortgages, 4.5 million are non-performing or delinquent. (Non-performing would be those that are 30 days late or more.)
10.6 million "at risk" of foreclosure.
400,000 REO's (compare to OCC 800,000)

Corelogic

Corelogic does not match any numbers except REOs of OCC but not Amherst

Current Residential Shadow Inventory is 1.6 million homes.
Of the 1.6 million shadow inventory, 770,000 loans are "seriously delinquent".
430,000 are in some stage of foreclosure. (Compare to the OCC saying 1.3 million are in foreclosure.
800,000 REOs

Rick Sharga – formerly of RealtyTrac/Moodys

Sharga says:
800,000 are in foreclosure.
1.5 million are delinquent. (Does this include the foreclosure loans?)

LPS

This is what LPS says:

8.13% total loan delinquency rate.
4.11% of loans in the foreclosure process.
12.44% total delinquent or in foreclosure.
2.38 million loans less than 90 days delinquent
1.87 million loans 90+ days delinquent.
2.15 million loans in foreclosure process.
Total of 6.40 million loans delinquent or in foreclosure in August.

Why does the OCC, which looks at 62% of the loans tend to have numbers that if extrapolated over the total amount of loans, would suggest much higher numbers than all other entities?

I have to ask: "Does anyone really know what is going on with foreclosures?"

Data Sources for Figures Cited Above

Addendum:

As a comment to this post, Pulatie added ...

OCC is likely getting their information from the GSE's, since that would be easy to track. I "assume" this because they only follow 62% of the loans, which is about the size of the market that the GSE's held during the peak of the boom.

Either LPS or Corelogic gets their foreclosure numbers from 2200 counties in the US. However, there are 3143 counties in the US. Likely, they use electronic reports, but if almost 1000 counties are missed, then what good is the reporting?

RealtyTrac uses county data. But, RealtyTrac is actually Moody's. And with Mark Zandi, who knows what the hell that they doing and coming up with.

Amherst Holdings appears to be fairly accurate, based upon what information that they actually reveal. The do consider some outside influences that the other companies do not consider. Laurie Goodman appears quite knowledgeable when she reports to Congress in her testimony..

Amherst actually provides a "best case" scenario, and a "reasonable" scenario, at least in regards to their projections. However, "reasonable" appears to be at least 20% below what "worst case" would suggest at the moment. At this time, I think that "worst case" is more important than all others.

A potential source for delinquencies may be the Credit Reporting Agencies. Each lender would detail in their monthly tapes who was delinquent, and by how many months. Then, it would be a matter of actually determining what one considers seriously delinquent. (This is especially important to know, but in my view, since once a loan goes 30 days late, it is a 90% likelihood of default and foreclosure occurring.)

How they are determining "underwater" loans, I haven't got a clue. Perhaps they are trying to incorporate Automated Appraisal Date sources. Or they take the original loan to value as reported in monthly reports on lending, and then apply general decreases in value in geographic areas to arrive at "underwater" numbers.

I believe that there is a tendency for the different companies to want to under report what is happening. This would be in part to try and stabilize housing to some degree. If the public thought things were much worse, then it would only worsen the public perception.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Open Letter to Merkel, Trichet, Sarkozy, Papandreou, Berlusconi: Extend-and-Pretend Session is Finished, It's Do or Die

Posted: 05 Oct 2011 10:56 AM PDT

Dear Chancellor Merkel, President Sarkozy

The market has indicated the extend-and-pretend session that you have come to love, is over. It's now time to do or die.

Hoping-against-hope the problems will go away will no longer work, and in fact never worked ever (it just eventually made the problems worse).

So, either you put together a credible plan for a fiscal union or you put together a credible plan for a breakup of the Eurozone. Since the former is impossible because of German supreme court rulings, common sense would dictate you start working on the latter.

In the meantime, if you come up with a credible plan to recapitalize insolvent banks, a plan that sticks it to bondholders and not taxpayers, a plan that lets Greece default, perhaps you can appease the market and buy additional time while working on a vitally needed plan B (a breakup of the Eurozone).

I am not sure how long the market will give you on the these plans. It could be as little as two days or as long as five weeks, but action in the banking sector and stocks in general says not long.

cc

ECB President Jean-Claude Trichet, Prime Minister Papandreou, Prime Minister Berlusconi, Eurogroup Chairman Jean-Claude Juncker

Mish

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Reader Question Regarding the Role of Credit in Inflation/Deflation; US vs. Europe

Posted: 05 Oct 2011 08:56 AM PDT

A reader from Germany has questions regarding the role of credit in my deflation thesis. Josef writes:

Hello Mish

I am trying to understand your reasoning in the discussion about inflation vs. deflation.

One of the things I don't understand is the role of "credit". You write that "the market value of credit is collapsing at an amazing rate".

But isn't "credit" the same as "debt"?

When the market value of debt falls, then I wouldn't I need less "real estate" to get rid of my debt? Please, can you spend a minute to clarify this contradiction.

No Contradiction

Hello Josef

An accepted offer for credit is a loan, resulting in debt for the borrower, and an asset (the loan) on the balance sheet of the lender (typically a bank or finance company). So yes debt = credit extended (plus agreed upon interest).

When the value of assets (loans) drop significantly, banks become capital impaired and cannot lend. This is happening now even though banks are hiding losses by not marking assets to market prices.

We have heard absurd statements from the Central bank of France that there are no toxic assets on French bank balance sheets. The market price of Greek debt says otherwise.

Plunge in Mark-to-Market Prices of Bank Assets

We can infer marked-to market plunges in value of bank assets by the enormous drops in financial stocks this year. We know the value of debt on the balance sheets of banks has collapsed, even if banks deny it.

Inability to pay back debt also shows up in credit default swaps, sovereign debt ratings, and soaring bond yields of Greece, Portugal, Spain, and Italy vs. Germany.

These credit actions show a demand for safe hiding places such as US and German government bonds and cash. We can see that in record low US treasury yields and German government bond yields.

Debt Not Marked-to-Market

The second question is where your error is "wouldn't I need less real estate to get rid of my debt?"

The debt remains until it is written off. In the US, people still owe more on their houses than they can pay back. The money is owed but will not be paid back. The same applied to may types of loans including auto loans, credit card debt, home equity lines, etc.

Enormous Foreclosure Backlog

US Banks have the value of their assets (mortgage loans, commercial real estate loans, consumer credit loans), at prices that do not reflect likelihood of default and thus that debt is not marked-to-market.

Writedowns are deflation in action, and they are coming.

In many instances, people walk away from mortgage debt. In those cases banks eventually foreclose. The key word is "eventually" as the list of pending foreclosures is measured in decades at the current rate.

Please see First Time Foreclosure Starts Near 3-Year Lows, However Bad News Overwhelms; Foreclosure Pipeline in NY is 693 months and 621 Months in NJ for details.

US Writedowns Coming on REOs

When homeowners walk away or go bankrupt, generally they are relieved of debt. However the problem for banks does not go away.

After foreclosure, banks have a different asset on the books. It is no longer a loan, but rather REO (Real Estate Owned).

What do you think those houses on the balance sheets of banks are worth vs. the value banks hypothesize they are worth?

Once again, this capital impairment shows up in banks inability and unwillingness to lend. When banks don't lend, businesses don't expand, and when businesses don't expand unemployment stays high.

This deflationary cycle feeds on itself until home prices fall to the point where there is genuine demand for them and banks are recapitalized.

European Writedowns

The biggest debt problem in Europe is in regards to loans made by French and German banks to Greece, Spain, Portugal, and Italy.

The ECB, EU, and IMF compounded the problem by throwing more money at Greece, on terms and timelines Greece cannot possibly pay back.

Europe has other huge structural issues regarding productivity in Spain and Greece vs. Germany, and in currency union that cannot possibly work given the lack of a fiscal union.

Poor Policies by IMF, EU, ECB, Fed

EU, IMF, ECB, and Fed policies in the US and Europe were designed to hide losses on real estate loans, to hide losses on sovereign debt loans to Greece, Spain, Portugal etc, and to prevent losses to banks and bondholders.

Barry Ritholtz had an excellent column on that yesterday called Banking's Self Inflicted Wounds.

Policies of governments and central banks that bail out private banks are wrong because they place more burden on already over-extended and deep in debt taxpayers who are not equipped to take on more debt.

The deflationary backdrop will persist until debt is written off, consumer deleveraging peaks, home prices fall to affordable values, and global structural imbalances fixed. The situation is not encouraging because of five critical problems.

Five Critical Problems

Keynesian clowns everywhere refuse to accept the fact that debt is the problem and one cannot possibly spend one's way out of debt crisis.
Europe has structural problems related to the currency union, productivity, union work rules, pensions, retirement, and country-specific fiscal problems.
The US has structural problems related to prevailing wages, collective bargaining of public unions, corporate tax policies, etc.
Stimulus and bailouts are bad enough in and of themselves, but stimulus and bailouts without fixing structural problems is insanity.
Politicians on both continents refuse to address structural issues

Process is Important, Not the Term

It's important to not get hung up on the term "deflation" but rather to understand the process I am describing, the implications of that process, and why the policy actions taken have not worked (and cannot possibly work), all called well in advance.

For more on the process of deflation (regardless of what one wants to call it), please see Bizarro World Inflation; About that 2011 Hyperinflation Call ...

Yes Virginia, U.S. Back in Deflation; Inflation Scare Ends; Hyperinflationists Wrong Twice Over

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Restructuring Plans Underway for Another 21 Banks Says Vice President of the European Commission; What's the Real Number?

Posted: 05 Oct 2011 12:19 AM PDT

Inquiring minds are reading details of a Speech by Joaquín Almunia Vice President of the European Commission responsible for Competition Policy on October 4, 2011.

Since 2008, people throughout the EU have been asked to accept the huge government bailout of the financial sector and to endure the austerity measures required to bring public finances under control.

These measures touch directly the lives of citizens; this is why I believe that we need to be as transparent as possible with them. And – of course – we need to do our utmost to make the most efficient use of public money.

It is crucial that we explain to our citizens why this aid was necessary to avert the collapse of the financial system. ...

We are all aware of the seriousness of the situation and of what is at stake.

Of course, the control of the State aid given to the banks under restructuring is not the only task to overcome the consequences of the financial crisis.

The financial sector must be oriented – first and foremost – towards its core function of meeting the financing needs of firms and households.

To this end, the Commission is in the process of changing the regulatory landscape for the financial industry.

Recent steps include, among others, the proposals on capital requirements – the so-called CRD IV – and the European Market Infrastructure Regulation, or EMIR.

President Barroso also announced a proposal for a tax on financial transactions in last week's State of the Union speech to the European Parliament. ...

The Commission's work has reduced the amount of taxpayers' money that has gone to financial institutions and has addressed the moral-hazard issue.

Since October 2008, under the crisis regime, we have taken restructuring decisions on 25 banks and we have seen the orderly liquidation of 11 more. The only negative decision we had to take involved a small Portuguese bank.

At present, we are working on restructuring plans for another 21 banks and we cannot exclude that this number could grow in the near future.

The emergency package to rescue and restructure banks is temporary by definition. As soon as the crisis is over, the exceptional rules will disappear – and the sooner, the better.

I have said many times that, when market conditions improved, we would replace the crisis rules with the new rescue and restructuring measures that we have been preparing for some time now.

Only a few months ago, we hoped we could make the switch at the end of this year; we were ready for it. Unfortunately, the conditions on the markets have deteriorated again and it would no longer be safe to press ahead with that plan.

I will therefore propose to the College to extend into 2012 the crisis State aid rules for banks. Let's hope that in the next year we will be able to come back to a normal regime of State Aid in this domain.

And in the meantime, let's hope that markets will calm down; that banks will resume lending to the real economy; that growth will take again a sustainable path; that new jobs will be created again; and that the taxpayers will recover the resources they have been obliged to put on the table to prevent an even worse crisis.

Thank you.

The EC ...

Suspended plans to end crisis rules
Promised to explain why taxpayer money was needed then did not explain
Intends to proceed with a catastrophic tax on financial transactions (For details, please see Europe Plans to Tax Stock and Bond Transactions .1%, Derivatives .01% Despite US Objections; Expect More Crashes Should it Pass)
Is operating on a policy of "hoping markets calm down"
Admits 21 banks need restructuring (Which of course means the true number is well above that. I won't even bother to guess.)
Hopes taxpayers will recover losses when it is 100% guaranteed they won't

The most galling of all is this blatant lie "The Commission's work has reduced the amount of taxpayers' money that has gone to financial institutions and has addressed the moral-hazard issue."

If that is not enough to make you puke, nothing is.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mish's Global Economic Trend Analysis

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