US mortgage giant Freddie Mac saw a loss of $8bn (£5.3bn) in the first three months of 2010 and said it would ask for a further $10.6bn in state aid.
The firm has made a number of federal cash requests since it was taken over by regulators in September 2008.
And it said it would continue to need government funds with the US housing market not yet fully recovered.
The new request brings the total cost for rescuing Freddie Mac to $61.3bn.
We often say that investors can be bullish, bearish, or not enough of either. “Our debt is clean, we will not have to ask for help,” said Elena Salgado, Spain’s finance minister, on April 30th, appealing to the bulls. That is, if there are any bulls left in sovereign debt.
Currently, there is no shortage of bearish sentiment regarding global sovereign debt issues. In recent weeks, Greece, Portugal, and Spain have all had their credit ratings downgraded, with Greece taking on junk status. Yet despite this flurry of negative news, I would submit that investors are still not bearish enough, particularly on Spain.
Greece announced Sunday that it had reached an agreement on a long-delayed rescue package that will require years of painful fiscal belt-tightening, but the deal probably will not defuse the potential threats to other European countries also suffering from mounting debts and troubled economies.
“I have done and will do everything not to let the country go bankrupt,” Prime Minister George Papandreou said in a televised address that urged Greeks to accept “great sacrifices” to avoid “catastrophe.”
The bailout, which was worked out over weeks of negotiations with the International Monetary Fund and Greece’s European partners, calls for as much as €110 billion, or $145 billion, in loans intended to stave off an immediate debt default and stop the spread of economic contagion to other parts of the region.
But analysts warned that Greece itself has not yet solved its fundamental problems and that other sovereign debt crises could arise as lenders and market speculators turn their attention to a handful of similarly vulnerable nations.
Greece outlined deep spending cuts and tax increases Sunday to free up a multi-billion-euro rescue by the International Monetary Fund and European Union, the first bailout for one of the 16 countries using the euro.
The measures, which include tax increases and salary and pension cuts for civil servants, aim to reduce the budget deficit to below 3 per cent of gross domestic product by 2014, from the current 13.6 per cent of GDP, Finance Minister George Papaconstantinou said.
“We are called on today to make a basic choice. The choice is between collapse or salvation,” he said.
The full amount of the three-year IMF/euro-zone package will be announced in Brussels after an emergency euro-zone finance ministers’ meeting, where Mr. Papaconstantinou was heading after his Athens news conference. He said the amount would be “close to” widely reported figures. French and other officials have said it would be 120 billion euros.
The Greek debt crisis is now morphing into something much broader. No wonder the European Union and the International Monetary Fund are scrambling to regain control of the rapidly deteriorating situation. There is talk of a bigger bail-out package for Greece. The heads of the European Central Bank and IMF have made the trip to Germany that is reminiscent of the Ben Bernanke-Hank Paulson trip to Congress in the midst of the US financial crisis.
Markets are now catching up to the reality of over-burdened public finances in the aftermath of the global financial crisis. These developments are of particular concern to countries with elevated debt levels and challenging maturity profiles for this debt. Indeed, absent some dramatic change in sentiment, they will need to worry not only about their ability to mobilise new funding from the private sector at reasonable cost, but also about keeping their existing creditors on board. As a result, credit downgrades will multiply. And once a package is approved for Greece, there will be questions as to whether similar packages can be secured for other vulnerable countries in the European Union….
The bottom line is simple yet consequential: the Greek debt crisis has morphed into something that is potentially more sinister for Europe and the global economy. What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full-blown crisis for Europe.
With Greece inching closer to the brink of financial collapse, fear that the debt crisis will spread rattled markets for a second day Wednesday, while an extraordinary collection of global financial leaders gathered in Berlin to seek a solution.
Shares fell 2 percent or more across Europe and parts of Asia as investors increasingly wonder if Portugal, Spain and even Ireland may not be able to borrow the billions of dollars they need to finance their government spending.
“It’s like Lehman Brothers and Bear Stearns,” said Philip Lane, a professor of international economics at Trinity College in Ireland, referring to the Wall Street failures that propelled the financial crisis of 2008. “It is not so much the fundamentals as it is the unwillingness of the market to fund you.”
Standard & Poor’s cut Greece’s debt to junk level on Tuesday, warning that bondholders could face losses of up to half of their holdings in a restructuring. The agency also downgraded Portugal’s debt by two notches.
…a good number of economists and banking experts are worried. They think the odds of a future bankruptcy-or-bailout dilemma will remain uncomfortably high even if reregulation passes.
For starters, there are the cross-border problems; in the midst of a crisis, governments may have trouble cooperating. Then there is the fact that the regulators have never before tried to shut down anything as complex as a multibillion-dollar financial firm. “It’s really hard ”” really hard,” says Robert Steel, who worked on the financial crisis in the Bush Treasury Department and later was chief executive of Wachovia. “Anyone who says they know exactly what we should do is overconfident.”
Another former top government official adds, bluntly, “Don’t kid yourself into thinking that if J. P. Morgan were on the rocks, it would disappear.”
Above all, no one knows what the next crisis will look like. So no one can be sure exactly how to prevent it. In all likelihood, Wall Street will eventually figure out ways around technocratic rules ”” and technocrats ”” and create trouble that today’s proposals don’t anticipate.
The beauty of a bank tax is that it acknowledges as much.
With that as the backdrop, it would amount to progress if both parties, via the debt commission, agreed that two big steps can’t be avoided:
”¢ The tax system has to be changed. The U.S. doesn’t have a system that can fund the government the country wants. The Tax Foundation says the levies paid by the top 1% of taxpayers now exceed those paid by all of those in the bottom 95%. And the Tax Policy Institute says almost half of all filers will pay no 2009 income taxes at all, because of various exclusions and credits””up, by some estimates, from a quarter in 1990.
This may be great for those who like soak-the-rich rhetoric, but it’s no way to finance a country. More than that, it’s a bit of a hoax on middle- and lower-middle-class Americans. They certainly pay payroll taxes, and the more they are excused from the income tax-system, the more likely it is that they will be hit with sneakier and less-progressive taxes. Tax reform””a flatter tax system, a value-added tax, something””is needed.
”¢ Americans have to change how they think about retirement. When the economy recovers and costs for recession-related bailouts, stimulus spending and unemployment benefits are resolved, we’ll still be left unable to really afford our Social Security, Medicare and long-term-care commitments. When the easier stuff is done, this is the hard reality, requiring a new and nonpoliticized national discussion.
The one thing we know about the financial “reform” now moving toward what looks like eventual congressional approval is that it will be oversold, says economist Robert Litan of the Kauffman Foundation. We will be told that it will forever prevent a repetition of the recent financial crisis; that it will root out corruption on Wall Street; that it will eliminate “bailouts”; that it will protect consumers against greedy lenders. In the present anti-Wall Street mood, no one wants to be accused of coddling America’s money merchants.
What can we really expect?
History counsels caution. Every financial reform, even if mostly successful, ultimately gives way to another because there are unintended consequences or unforeseen problems. Sheila Bair, the head of the Federal Deposit Insurance Corp., has noted that the reforms of the early 1990s, which curbed risk-taking within the banking system, perversely shifted lending to the largely unregulated “shadow banking system” — mortgage brokers, specialized lenders and “securitization.” The central aim of today’s reform is to avert another financial panic. A panic is not a bubble or just big losses. These are inevitable and, in part, desirable: Without losses, investors would become reckless. A panic is a stampede of selling and hoarding, driven by fear, that threatens the financial system and, through it, production and jobs. A panic occurred in September 2008 when Lehman Brothers failed. Distrusting most financial institutions, investors and money managers fled to safety (a.k.a. Treasury bills).
By its nature, a panic is unanticipated. Reform may resemble generals fighting the last war….
Seventy-nine percent of investors say it’s likely Goldman Sachs committed fraud – but only 39% of Americans believe the government’s investigation of Goldman is based on a legitimate concern about fraud.
CHARLIE ROSE: Goldman also says it’s wrong in law and in fact. Where’s it wrong in law?
DAVID BOIES: Well, I think what they mean — I think what they mean is based on the facts that are in there, it’s not an illegal conduct.
The issue is whether there are more facts that would bring it under conventional law. As Michael says, this is an unusual case. This is the first time you’ve seen a case like this. I happen to think it’s no coincidence it comes out just at the time that the administration is going after the financial regulatory reform in Congress.
CHARLIE ROSE: Wait. You think the administration had some influence with the SEC in terms of bringing this complaint now?
DAVID BOIES: I think that there’s a climate in Washington that is — wants to show aggression in terms of regulation. I think that — that’s not necessarily a bad thing.
But I think you’ve got to be careful that when you bring an SEC complaint as opposed to bring a bill to change procedures or to add new regulations that you’ve got something that is improper under existing law.
And looking at the complaint, I don’t see where that is right now.
Washington is gearing up for a big debate: What to do about the exploding national debt, the unsustainable annual budget deficits and what to do about the Bush tax cuts that expire at the end of the year.
Alarm bells are ringing over the size of the national debt, now equal to 84 percent of the country’s gross national product — the highest level since after World War II. The credit-rating agency Moody’s is hinting that the federal treasury’s Triple A bond rating is in jeopardy and Fed Chairman Ben Bernanke is warning that China, the United States’ largest foreign creditor, may start charging higher interest rates.
“The arithmetic is, unfortunately, quite clear,” Bernanke said. “To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above.
“These choices are difficult, and it always seems easier to put them off — until the day they cannot be put off any more.”
The clinical trials for EndoStim are being conducted in India and Chile. “What they have in common,” said Hogg, “is superb surgeons with high levels of skill, enthusiasm for the project, an interest in research and reasonable costs.” This is also part of the new model, said Hogg: Invented and financed in the West, further developed and tested in the East and rolled out in both markets.
What’s in it for America? As long as the venture money, core innovation and the key management comes from here ”” a lot. If EndoStim works out, its tiny headquarters in St. Louis will grow much larger. St. Louis is where the best jobs ”” top management, marketing, design ”” and shareholders will be, said Hogg. Where innovation is sparked and capital is raised still matters.
You don’t hear much about companies like this. Our national debate today is dominated by the ignorant ramblings of Sarah Palin, talk-show lunatics, tea parties and politics as sports ”” not ESPN but PSPN. Fortunately, though, we still have risk-takers who are not paying attention to any of this nonsense, who know what world they’re living in ”” and are just doing it. Thank goodness!
Gordon Brown has called for a “special investigation” into Goldman Sachs after reports that the bank is to pay £3.5bn in bonuses.
Speaking on the BBC’s Andrew Marr Show the Prime Minister described the situation as one of “moral bankruptcy”.
His criticism follows allegations by the Securities and Exchange Commission in US that Goldman defrauded investors during the sub-prime housing crisis.
Goldman strongly rejected the claims as wrong “in fact and law”.
For Goldman Sachs, it was a relatively small transaction. But for the bank ”” and the rest of Wall Street ”” the stakes couldn’t be higher.
Accusations that Goldman defrauded customers who bought investments tied to risky subprime mortgages have only just begun to reverberate through the financial world.
The civil lawsuit that the Securities and Exchange Commission filed against Goldman on Friday seemed to confirm many Americans’ worst suspicions about Wall Street: that the game is rigged, the odds stacked in the banks’ favor. It is the first big case ”” but probably not the last, legal experts said ”” to delve into a Wall Street firm’s role in the mortgage fiasco.
It is a particularly sensitive time for Wall Street. Washington policy makers are hotly debating a sweeping overhaul of the nation’s financial regulations, and the news could embolden those seeking to rein in the banks. President Obama on Saturday stepped up pressure for financial reform by accusing Republicans of “cynical and deceptive” attacks on the measure.
The S.E.C.’s action could also hit Wall Street where it really hurts: the wallet. It could prompt dozens of investor claims against Goldman and other Wall Street titans that devised and sold toxic mortgage investments.
In late October 2007, as the financial markets were starting to come unglued, a Goldman Sachs trader, Jonathan M. Egol, received very good news. At 37, he was named a managing director at the firm.
Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.
Goldman’s own clients who bought them, however, were less fortunate.
Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.
Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.
The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.
The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.
In a statement, Goldman called the S.E.C. accusations “completely unfounded in law and fact” and said the firm would “vigorously contest them and defend the firm and its reputation.”
Praise the Lord. The investment arm of the country’s largest Anglican diocese has edged back into the black after a $160 million loss of faith in 2008.
But although a few extra prayers might have worked over the last 12 months, it appears the Sydney diocese’s Endowment Fund is still in financial purgatory. After all, the fund managed by the Glebe Administration Board suffered a decline in the value of its total assets over the year from $310 million to $290 million. Its total assets stood at $634 million two years ago.
But the 60,000-strong flock of the Archbishop of Sydney, Peter Jensen, will be relieved to here that parish belt-tightening and a resurgent Australian sharemarket have helped the fund to post a profit of $11 million for the year to December 31.
The danger now is red ink, not Redcoats.
In recent years, a modern-day Paul Revere has been found in David Walker, the former U.S. Comptroller General, who has been visiting every state to warn of the consequences of the nation’s fiscal course.
The majority of our representatives have, so far, closed their ears to the message.
But on Wednesday, Mr. Walker’s warnings were echoed by the chairman of the Federal Reserve Board, Ben Bernanke, who stepped out of character to alert Americans in plain language:
“To avoid large and ultimately unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above….”
Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.
That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.
The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.
“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”
The Federal Home Loan Banks are a frequently overlooked band of government-chartered cooperatives whose name screams systemic risk with every word. Federal means Uncle Sam. Homes are a declining asset. A loan is money out the door. And banks are the things that get taxpayer bailouts when they’re too big to fail and enough of their loans go bad….
Last week, the FHLBs, which is pronounced “flubs,” published their combined audited financial statements for 2009. And at first glance, it might seem like they had a profitable year. Net income was about $1.9 billion, the banks said, up 54 percent from the year before.
The most striking part about that dollar figure was what it didn’t include: About $8.8 billion of paper losses from their portfolios of mortgage-backed securities. By the banks’ own description, these losses were “other than temporary,” meaning the values of the investments aren’t expected to recover soon.
The reason those losses weren’t included in earnings? The Financial Accounting Standards Board rewrote its rules a year ago so they wouldn’t have to count, following an intense campaign by the banking industry and its friends in Congress….
As interest rates on Greek debt spiral upward again, the question facing Europe is no longer whether Athens has the political will to cut spending and raise taxes to curb its gaping budget deficit, but whether Greece will run out of money before it gets the chance to do so.
With the rate on 10-year Greek bonds reaching as high as 7.5 percent on Thursday, up from 6.5 just three days ago, the cost of insuring against a Greek default hit a record high.
The message from the market could not be clearer: artfully worded communiqués from Brussels will no longer suffice. To avoid bankruptcy, analysts said, Greece needs a bailout from Europe, and fast.
“This is no longer about liquidity ”” it’s a solvency issue,” said Stephen Jen, a former economist at the International Monetary Fund who is now a strategist at BlueGold Capital Management in London.
The U.S. must start to prepare for challenges posed by an aging population with a credible plan to gradually reduce a soaring public debt, Federal Reserve Chairman Ben Bernanke said Wednesday.
Health spending is set to increase over the long term as the U.S. population grows older, posing challenges to the country’s already strained finances, the Fed chief warned.
But Pimco’s Bond King and Barron’ s Roundtable member Bill Gross contends the relatively high yield on a 30-year bond (compared to a less than 1% on a two-year note) reflects the mounting unfunded obligations taken on by the U.S. government.
In his latest monthly missive, Gross notes the discounted present value of future social-insurance expenditures, mainly Social Security and Medicare, total $46 trillion. The passage of health-care reform will only add to that entitlement.
“No investment vigilante worth their salt or outrageous annual bonus would dare argue that current legislation is a deficit reducer as asserted by Democrats and in fact the Congressional Budget Office,” Gross writes. “Common sense alone would suggest that extending health-care benefits to 30 million people will cost a lot of money and that it is being ‘paid for’ in the current bill with standard smoke, and all-too-familiar mirros that have characterized such entitlement legislation for decades.”
In that regard, Gross cites an op-ed piece in Sunday’s New York Times by former CBO director Douglas Holtz-Eakin, who wrote that rather than reducing the budget deficit by $138 billion over the next 10 years, health-care reform will add $562 billion to the deficit over that span. “Long-term bondholders beware,” he warned.
Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.
The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.
“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”
The forced march to pass ObamaCare continues, and all that matters now is raw politics. But opponents should go down swinging, and that means exposing such policy debacles as President Obama’s 11th-hour decision to apply the 2.9% Medicare payroll tax to “unearned income.”
That’s what savings and investment income are called in Washington, and this destructive tax wasn’t in either the House or Senate bills, though it may now become law with almost no scrutiny.
The United States, Germany and other major economies could see their top-notch credit rating come under pressure if the recovery in the global economy stalls, Moody’s Investors Service warned Monday in a report.
The ratings of the Aaa governments ”” which also include Britain, France, Spain and “the less fiscally challenged Denmark, Norway, Finland and Sweden” ”” “are currently well positioned despite their stretched finances,” Moody’s said in its quarter Sovereign Monitor report.
But the agency noted that “the recovery that has taken hold across the global economy remains fragile in several of the large advanced economies, most of which have also implemented the most aggressively expansionary fiscal and monetary policies.”
The United States, Germany and other major economies could see their top-notch credit rating come under pressure if the recovery in the global economy stalls, Moody’s Investors Service warned Monday in a report.
The ratings of the Aaa governments ”” which also include Britain, France, Spain and “the less fiscally challenged Denmark, Norway, Finland and Sweden” ”” “are currently well positioned despite their stretched finances,” Moody’s said in its quarter Sovereign Monitor report.
But the agency noted that “the recovery that has taken hold across the global economy remains fragile in several of the large advanced economies, most of which have also implemented the most aggressively expansionary fiscal and monetary policies.”