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Monday, 9 March 2009
‘US to recover in five years’
Billionaire Warren Buffett says the US economy could recover in five years, likening the current battle against prolonged recession as a Pearl Harbour-like situation during World War II.
NEW YORK - Billionaire Warren Buffett says the US economy could recover in five years, likening the current battle against prolonged recession as a Pearl Harbour-like situation during World War II.
“I think that economy will be fine in five years, but I wish we’d get there faster,” said Mr. Buffett, one of the world’s richest men, in an interview with CNBC.
“America’s best days are ahead, but how fast we’ll go there is in question.”
He described the current situation, in which unemployment is at a 25-year high and stocks have plunged to 12 year lows, as “an economic Pearl Harbour” and “an important war which could be won”.
Mr. Buffett, who heads the holding company Berkshire Hathaway, said the Federal Reserve’s “prompt and wise action” had prevented the situation from “getting even worse” as the central bank cut interest rates to virtually zero and took other steps to reign in turmoil.
Asked about the poor economic recovery and plunging inflation, he said “it will depend on the wisdom of government’s politics”.
“I’ve never seen Americans more fearful,” he said. “It takes five minutes to become fearful, much more time to regain confidence. The system does not work without confidence.”
By Henny Sender in New York and Javier Blas in London March 8 2009
Hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks.
The gold bulls include David Einhorn, founder of hedge fund Greenlight Capital, who last year came under the spotlight for his short selling of shares in Lehman Brothers, after arguing that the bank did not have enough capital to offset its exposure to falling property prices. Other funds looking at gold include Eton Park and TPG-Axon, investors said.
Their belief in bullion is being expressed even as gold prices have retreated from last month’s break above the $1,000 an ounce level. Spot gold in London closed last Friday at $939.10, after falling last week to $900.95 an ounce.
Investors such as Mr Einhorn are turning to gold because they are worried about the response of the US Federal Reserve and other central banks to the global economic crisis. A bet on gold is essentially a bet against all paper currencies.
“The size of the Fed’s balance sheet is exploding and the currency is being debased. Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed,” Mr Einhorn wrote in a recent letter to his investors. “Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself.”
Mr Einhorn’s comments – and the revelation he is buying gold itself – are in line with the views held by other large institutional investors in Europe, according to bankers in London. The head of commodity sales at one major bullion bank told the Financial Times that he had never been so busy dealing in gold for large investors in his life.
Goldman Sachs, Morgan Stanley and UBS all forecast the gold price will surge above $1,000 this year. Peter Munk, chairman of Barrick Gold, the world’s largest miner of bullion, told investors last week that all countries have embarked on policies that will favour gold.“The only option to governments is to print and print more money,” he said. “That will end in tears.”
In the past, hedge funds, which depend on absolute returns to earn high fees, had avoided gold because it does not produce any yield and costs money to store and insure. But those issues have become less important as central banks have pushed interest rates to nearly zero, reducing the yields on currencies.
New Wave of Overseas Buyers Shop for Prime Real Estate at Rock Bottom Prices
By DAVID KERLEY March 9, 2009
Packing for his first trip to the United States, Yin Guohua is not traveling for business or sightseeing. He's house hunting.
"It's a good time to buy property in the U.S.," he said. "I have confidence in U.S. real estate market. I think I will get a return."
This Beijing lawyer and a few dozen others well to do Chinese signed up for a real estate tour of major U.S. cities -- Los Angeles, Las Vegas, San Francisco, Boston and New York.
Many wealthy Chinese -- flush with cash -- are looking for investment opportunities. With the U.S. housing market down by double digits, many of them are traveling to America. They are bargain hunters shopping for real estate. Some ask, why not buy a second home in China?
"They call America 'mei guo' -- the beautiful land. They want a piece of it," said Chiam Katzap, founder of Lion's Property Development. "They also want to have their kids educated in America. They want to have an opportunity to go to America as often as they desire."
Looking to spend between $500,000 and a million dollars, these potential buyers have seen everything from foreclosed homes to high-rise condos with a view of an American icon: the Statue of Liberty.
Yin has focused his search on New York, where he has business contacts and a few relatives. And while he's considering buying property mostly as an investment, his search criteria are not that different from any American's. It all comes back to location, location, location.
"I want to see property in good neighborhood with breathtaking views," he said. "I want it if possible being located in school district so that it will be convenient for my son to go to school."
For other Chinese not ready to jump on a plane to the United States, American real estate brokers are reaching out, setting up shop inside China, equipped with home models, DVD tours and brochures to make the sale.
Chinese Buy Piece of American Dream
"There has been a lot of activity in the last month or so," said Katie Spencer, sales associate at Lion's Property Development. "The housing market [is] getting close to the bottom. So, now is really the time when people are starting to do their research and come here and look around."
"I think the Chinese are the clever ones," said Katzap. "They are coming now. We are down in prices. We are not down in values. They are buying."
For Americans battered by a disastrous housing market, an influx of Chinese investors may not be a bad thing.
"Love it, we welcome it," said one New York City resident. "Remember how scared we are with the Japanese buying up New York City. Well, look … welcome to the Chinese."
Yin thinks New York is "very cool" but said he is still carefully considering whether to buy a piece of America.
With more than 3.5 million homes for sale in the United States, Yin may be just the beginning of a wave of Chinese buyers.
"I have a good impression and high expectation of America," Yin said. "I believe it will have a bright future."
Regulatory reports show 5 biggest banks face huge losses
By Greg Gordon and Kevin G. Hall March 9, 2009
WASHINGTON — America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.
Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.
The disclosures underscore the challenges that the banks face as they struggle to navigate through a deepening recession in which all types of loan defaults are soaring.
The banks' potentially huge losses, which could be contained if the economy quickly recovers, also shed new light on the hurdles that President Barack Obama's economic team must overcome to save institutions it deems too big to fail.
While the potential loss totals include risks reported by Wachovia Bank, which Wells Fargo agreed to acquire in October, they don't reflect another Pandora's Box: the impact of Bank of America's Jan. 1 acquisition of tottering investment bank Merrill Lynch, a major derivatives dealer.
Federal regulators portray the potential loss figures as worst-case. However, the risks of these off-balance sheet investments, once thought minimal, have risen sharply as the U.S. has fallen into the steepest economic downturn since World War II, and the big banks' share prices have plummeted to unimaginable lows.
With 12.5 million Americans unemployed and consumer spending in a freefall, fears are rising that a spate of corporate bankruptcies could deliver a new, crippling blow to major banks. Because of the trading in derivatives, corporate bankruptcies could cause a chain reaction that deprives the banks of hundreds of billions of dollars in insurance they bought on risky debt or forces them to shell out huge sums to cover debt they guaranteed.
The biggest concerns are the banks' holdings of contracts known as credit-default swaps, which can provide insurance against defaults on loans such as subprime mortgages or guarantee actual payments for borrowers who walk away from their debts.
The banks' credit-default swap holdings, with face values in the trillions of dollars, are "a ticking time bomb, and how bad it gets is going to depend on how bad the economy gets," said Christopher Whalen, a managing director of Institutional Risk Analytics, a company that grades banks on their degree of loss risk from complex investments.
J.P. Morgan is credited with launching the credit-default market and is one of the most sophisticated players. It remains highly profitable, even after acquiring the remains of failed investment banker dealer Bear Stearns, and says it has limited its exposure. The New York-based bank, however, also has received $25 billion in federal bailout money.
Gary Kopff, president of Everest Management and an expert witness in shareholder suits against banks, has scrutinized the big banks' financial reports. He noted that Citibank now lists 60 percent of its $301 billion in potential losses from its wheeling and dealing in derivatives in the highest-risk category, up from 40 percent in early 2007. Citibank is a unit of New York-based Citigroup. In Monday trading on the New York Stock Exchange, Citigroup shares closed at $1.05.
Berkshire Hathaway Chairman Warren Buffett, a revered financial guru and America's second wealthiest person after Microsoft Chairman Bill Gates, ominously warned that derivatives "are dangerous" in a February letter to his company's shareholders. In it, he confessed that he cost his company hundreds of millions of dollars when he bought a re-insurance company burdened with bad derivatives bets.
These instruments, he wrote, "have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks . . . When I read the pages of 'disclosure' in (annual reports) of companies that are entangled with these instruments, all I end up knowing is that I don't know what is going on in their portfolios. And then I reach for some aspirin."
Most of the banks declined to comment, but Bank of America spokeswoman Eloise Hale said: "We do not believe our derivative exposure is a threat to the bank's solvency."
While Bank of America advised shareholders that its risks from these instruments are no more $13.5 billion, Wachovia last year similarly said it could overcome major risks. In reporting a $707 million first-quarter loss, Wachovia acknowledged that it faced heavy subprime mortgage risks, but said it was "well positioned" with "strong capital and liquidity." Within months, losses mushroomed and Wachovia submitted to a takeover by Wells Fargo, which soon got $25 billion in federal bailout money.
Trading in credit-default contracts has sparked investor fears because they are bought and sold in a murky, private market that is largely out of the reach of federal regulators. No one, except those holding the instruments, knows who owes what to whom. Not even banks and insurers can accurately calculate their risks.
"I don't trust any numbers on them," said David Wyss, the chief economist for the New York credit-rating agency Standard & Poor's.
The risks of these below-the-radar insurance policies became abundantly clear last September with the collapse of investment banker Lehman Brothers and global insurer American International Group, both major swap dealers. Their insolvencies threatened to zero out the value of billions of dollars in contracts held by banks and others.
Until then, "we assumed everyone makes good on the contracts," said Vincent Reinhart, a former top economist for the Federal Reserve Board.
Lehman's and AIG's failures put in doubt their guarantees on hundred of billions of dollars in contracts and unleashed a global pullback from risk, leading to the current credit crunch.
The government has since committed $182 billion to rescue AIG and, indirectly, investors on the other end of the firm's swap contracts. AIG posted a fourth quarter 2008 loss last week of more than $61 billion, the worst quarterly performance in U.S. corporate history.
The five major banks, which account for more than 95 percent of U.S. banks' trading in this array of complex derivatives, declined to say how much of the AIG bailout money flowed to them to make good on these contracts.
Banking industry officials stress that most of the exotic trades are less risky — such as interest-rate swaps, in which a bank might have tried to limit potential losses by trading the variable rate interest of one loan for the fixed-rate interest of another.
In their annual reports to shareholders, the banks say that parties insuring credit-default swaps or other derivatives are required to post substantial cash collateral.
However, even after subtracting collateralized risks, the banks' collective exposure is "a big, big number" and a matter for concern, said a senior official in a banking regulatory agency, speaking on condition of anonymity because agency policy restricts public comments.
In their reports, the banks said that their net current risks and potential future losses from derivatives surpass $1.2 trillion. The potential near-term losses of $587 billion easily exceed the banks' combined $497 billion in so-called "risk-based capital," the assets they hold in reserve for disaster scenarios.
Four of the banks' reserves already have been augmented by taxpayer bailout money, topped by Citibank — $50 billion — and Bank of America — $45 billion, plus a $100 billion loan guarantee.
The banks' quarterly financial reports show that as of Dec. 31:
— J.P. Morgan had potential current derivatives losses of $241.2 billion, outstripping its $144 billion in reserves, and future exposure of $299 billion.
— Citibank had potential current losses of $140.3 billion, exceeding its $108 billion in reserves, and future losses of $161.2 billion.
— Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure.
— HSBC Bank USA had current potential losses of $62 billion, more than triple its reserves, and potential total exposure of $95 billion.
— San Francisco-based Wells Fargo, which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion, below the banks' combined reserves of $104 billion, but total future risks of about $109 billion.
Kopff, the bank shareholders' expert, said that several of the big banks' risks are so large that they are "dead men walking."
The banks' credit-default portfolios have gotten little scrutiny because they're off-the-books entries that are largely unregulated. However, government officials said in late February that federal examiners would review the top 19 banks' swap exposures in the coming weeks as part of "stress tests" to evaluate the institutions' ability to withstand further deterioration in the economy.
Representatives for Citibank, J.P. Morgan and Wells Fargo declined to comment.
Hale, the Bank of America spokeswoman, said that the bank uses swaps as insurance against its loan portfolio — they "gain value when the loans they are hedging lose value."
She said that Bank of America requires thousands of parties that are guarantors on these insurance-like contracts to post "the most secure collateral — cash and U.S. Treasuries, minimizing risk roughly 35 percent." The collateral is adjusted daily.
Bank of America's report of an $80.4 billion exposure doesn't count the collateral and "also assumes the default of each of the thousands of counterparty customers, which isn't likely," Hale said. Counterparties are the investors on the other side of the deal, often other banks or investment banks.
In response to questions from McClatchy, HSBC spokesman Neil Brazil said that the bank closely manages its derivatives contracts "to ensure that credit risks are assessed accurately, approved properly (and) monitored regularly."
The mortgage crisis in the United States could get a whole lot worse if no major preventative measures are put in place before next month.
Option ARM (adjustable rate mortgages) that were completed back in April 2004 are due to reset in the next couple of weeks and may bring about another sub-prime of greater magnitude.
This means global stock markets may once again be sent into a downward spiral.
Loan servicers have the option to freeze the current rates at the start rate and this would have some beneficial effect. However, it's hard to say whether they will actually get there in time to prevent another major mortgage catastrophe.
One of the problems with the mortgage plan is that it only allows institutions such as Fannie Mae and Freddie Mac to refinance loans as long as the loan to value or LTV does not exceed 105 percent.
As the housing market is still very bleak and the majority of properties are now in negative equity it's hard to fathom how the mortgage plan will be of any real benefit. Put simply, the 105 percent LTV finance just won't help the masses.
House prices are continuing to plunge and the current plan gives little hope to homeowners as it does not address the main problem.
In addition, President Barack Obama's mortgage plan only applies to owner-occupied homes so those who have bought investment property and falling behind on their mortgage payments will also have difficulties. It also rules out non-occupiers whose mortgages exceed US$417,000 (HK$3.25 million) or surpass US$729,750 in high priced regions.
Meanwhile, the Obama administration is backing legislative efforts to allow bankruptcy judges to bring down mortgage balances, by specifically allowing judges to treat the portion of a mortgage amount that exceeds the current value of the borrower's home as unsecured debt. US courts routinely slash unsecured debt as part of the bankruptcy process.
Apparently, (according to the Obama administration) the plan will help seven million families restructure or refinance their loans and aims to prevent house prices from declining an additional US$6,000.
This is seriously questionable given what is happening with the housing market right now. If you take a major state such as Florida as an example, some houses there have lost US$6,000 in a matter of weeks.
Cities facing the sharpest declines are Phoenix, Las Vegas and Minneapolis. Bright notes are Boston, Denver and New York, which are notching relatively smaller declines.
A revised plan that directly provides relief to the stricken housing market should be put forward because it shows no signs of bottoming out amid slumping sales and rising foreclosures.
The Obama plan will in essence have very little impact and won't do much to heal the very sick housing market. It may help some borrowers but it's doubtful that we'll see any sort of housing recovery until mid 2010 onwards.
5 comments:
‘US to recover in five years’
AFP
9 March 2009
NEW YORK - Billionaire Warren Buffett says the US economy could recover in five years, likening the current battle against prolonged recession as a Pearl Harbour-like situation during World War II.
“I think that economy will be fine in five years, but I wish we’d get there faster,” said Mr. Buffett, one of the world’s richest men, in an interview with CNBC.
“America’s best days are ahead, but how fast we’ll go there is in question.”
He described the current situation, in which unemployment is at a 25-year high and stocks have plunged to 12 year lows, as “an economic Pearl Harbour” and “an important war which could be won”.
Mr. Buffett, who heads the holding company Berkshire Hathaway, said the Federal Reserve’s “prompt and wise action” had prevented the situation from “getting even worse” as the central bank cut interest rates to virtually zero and took other steps to reign in turmoil.
Asked about the poor economic recovery and plunging inflation, he said “it will depend on the wisdom of government’s politics”.
“I’ve never seen Americans more fearful,” he said. “It takes five minutes to become fearful, much more time to regain confidence. The system does not work without confidence.”
Hedge funds turn to gold
By Henny Sender in New York and Javier Blas in London
March 8 2009
Hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks.
The gold bulls include David Einhorn, founder of hedge fund Greenlight Capital, who last year came under the spotlight for his short selling of shares in Lehman Brothers, after arguing that the bank did not have enough capital to offset its exposure to falling property prices. Other funds looking at gold include Eton Park and TPG-Axon, investors said.
Their belief in bullion is being expressed even as gold prices have retreated from last month’s break above the $1,000 an ounce level. Spot gold in London closed last Friday at $939.10, after falling last week to $900.95 an ounce.
Investors such as Mr Einhorn are turning to gold because they are worried about the response of the US Federal Reserve and other central banks to the global economic crisis. A bet on gold is essentially a bet against all paper currencies.
“The size of the Fed’s balance sheet is exploding and the currency is being debased. Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed,” Mr Einhorn wrote in a recent letter to his investors. “Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself.”
Mr Einhorn’s comments – and the revelation he is buying gold itself – are in line with the views held by other large institutional investors in Europe, according to bankers in London. The head of commodity sales at one major bullion bank told the Financial Times that he had never been so busy dealing in gold for large investors in his life.
Goldman Sachs, Morgan Stanley and UBS all forecast the gold price will surge above $1,000 this year. Peter Munk, chairman of Barrick Gold, the world’s largest miner of bullion, told investors last week that all countries have embarked on policies that will favour gold.“The only option to governments is to print and print more money,” he said. “That will end in tears.”
In the past, hedge funds, which depend on absolute returns to earn high fees, had avoided gold because it does not produce any yield and costs money to store and insure. But those issues have become less important as central banks have pushed interest rates to nearly zero, reducing the yields on currencies.
Coming to America: Chinese Looking for Bargains
New Wave of Overseas Buyers Shop for Prime Real Estate at Rock Bottom Prices
By DAVID KERLEY
March 9, 2009
Packing for his first trip to the United States, Yin Guohua is not traveling for business or sightseeing. He's house hunting.
"It's a good time to buy property in the U.S.," he said. "I have confidence in U.S. real estate market. I think I will get a return."
This Beijing lawyer and a few dozen others well to do Chinese signed up for a real estate tour of major U.S. cities -- Los Angeles, Las Vegas, San Francisco, Boston and New York.
Many wealthy Chinese -- flush with cash -- are looking for investment opportunities. With the U.S. housing market down by double digits, many of them are traveling to America. They are bargain hunters shopping for real estate. Some ask, why not buy a second home in China?
"They call America 'mei guo' -- the beautiful land. They want a piece of it," said Chiam Katzap, founder of Lion's Property Development. "They also want to have their kids educated in America. They want to have an opportunity to go to America as often as they desire."
Looking to spend between $500,000 and a million dollars, these potential buyers have seen everything from foreclosed homes to high-rise condos with a view of an American icon: the Statue of Liberty.
Yin has focused his search on New York, where he has business contacts and a few relatives. And while he's considering buying property mostly as an investment, his search criteria are not that different from any American's. It all comes back to location, location, location.
"I want to see property in good neighborhood with breathtaking views," he said. "I want it if possible being located in school district so that it will be convenient for my son to go to school."
For other Chinese not ready to jump on a plane to the United States, American real estate brokers are reaching out, setting up shop inside China, equipped with home models, DVD tours and brochures to make the sale.
Chinese Buy Piece of American Dream
"There has been a lot of activity in the last month or so," said Katie Spencer, sales associate at Lion's Property Development. "The housing market [is] getting close to the bottom. So, now is really the time when people are starting to do their research and come here and look around."
"I think the Chinese are the clever ones," said Katzap. "They are coming now. We are down in prices. We are not down in values. They are buying."
For Americans battered by a disastrous housing market, an influx of Chinese investors may not be a bad thing.
"Love it, we welcome it," said one New York City resident. "Remember how scared we are with the Japanese buying up New York City. Well, look … welcome to the Chinese."
Yin thinks New York is "very cool" but said he is still carefully considering whether to buy a piece of America.
With more than 3.5 million homes for sale in the United States, Yin may be just the beginning of a wave of Chinese buyers.
"I have a good impression and high expectation of America," Yin said. "I believe it will have a bright future."
Regulatory reports show 5 biggest banks face huge losses
By Greg Gordon and Kevin G. Hall
March 9, 2009
WASHINGTON — America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.
Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.
The disclosures underscore the challenges that the banks face as they struggle to navigate through a deepening recession in which all types of loan defaults are soaring.
The banks' potentially huge losses, which could be contained if the economy quickly recovers, also shed new light on the hurdles that President Barack Obama's economic team must overcome to save institutions it deems too big to fail.
While the potential loss totals include risks reported by Wachovia Bank, which Wells Fargo agreed to acquire in October, they don't reflect another Pandora's Box: the impact of Bank of America's Jan. 1 acquisition of tottering investment bank Merrill Lynch, a major derivatives dealer.
Federal regulators portray the potential loss figures as worst-case. However, the risks of these off-balance sheet investments, once thought minimal, have risen sharply as the U.S. has fallen into the steepest economic downturn since World War II, and the big banks' share prices have plummeted to unimaginable lows.
With 12.5 million Americans unemployed and consumer spending in a freefall, fears are rising that a spate of corporate bankruptcies could deliver a new, crippling blow to major banks. Because of the trading in derivatives, corporate bankruptcies could cause a chain reaction that deprives the banks of hundreds of billions of dollars in insurance they bought on risky debt or forces them to shell out huge sums to cover debt they guaranteed.
The biggest concerns are the banks' holdings of contracts known as credit-default swaps, which can provide insurance against defaults on loans such as subprime mortgages or guarantee actual payments for borrowers who walk away from their debts.
The banks' credit-default swap holdings, with face values in the trillions of dollars, are "a ticking time bomb, and how bad it gets is going to depend on how bad the economy gets," said Christopher Whalen, a managing director of Institutional Risk Analytics, a company that grades banks on their degree of loss risk from complex investments.
J.P. Morgan is credited with launching the credit-default market and is one of the most sophisticated players. It remains highly profitable, even after acquiring the remains of failed investment banker dealer Bear Stearns, and says it has limited its exposure. The New York-based bank, however, also has received $25 billion in federal bailout money.
Gary Kopff, president of Everest Management and an expert witness in shareholder suits against banks, has scrutinized the big banks' financial reports. He noted that Citibank now lists 60 percent of its $301 billion in potential losses from its wheeling and dealing in derivatives in the highest-risk category, up from 40 percent in early 2007. Citibank is a unit of New York-based Citigroup. In Monday trading on the New York Stock Exchange, Citigroup shares closed at $1.05.
Berkshire Hathaway Chairman Warren Buffett, a revered financial guru and America's second wealthiest person after Microsoft Chairman Bill Gates, ominously warned that derivatives "are dangerous" in a February letter to his company's shareholders. In it, he confessed that he cost his company hundreds of millions of dollars when he bought a re-insurance company burdened with bad derivatives bets.
These instruments, he wrote, "have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks . . . When I read the pages of 'disclosure' in (annual reports) of companies that are entangled with these instruments, all I end up knowing is that I don't know what is going on in their portfolios. And then I reach for some aspirin."
Most of the banks declined to comment, but Bank of America spokeswoman Eloise Hale said: "We do not believe our derivative exposure is a threat to the bank's solvency."
While Bank of America advised shareholders that its risks from these instruments are no more $13.5 billion, Wachovia last year similarly said it could overcome major risks. In reporting a $707 million first-quarter loss, Wachovia acknowledged that it faced heavy subprime mortgage risks, but said it was "well positioned" with "strong capital and liquidity." Within months, losses mushroomed and Wachovia submitted to a takeover by Wells Fargo, which soon got $25 billion in federal bailout money.
Trading in credit-default contracts has sparked investor fears because they are bought and sold in a murky, private market that is largely out of the reach of federal regulators. No one, except those holding the instruments, knows who owes what to whom. Not even banks and insurers can accurately calculate their risks.
"I don't trust any numbers on them," said David Wyss, the chief economist for the New York credit-rating agency Standard & Poor's.
The risks of these below-the-radar insurance policies became abundantly clear last September with the collapse of investment banker Lehman Brothers and global insurer American International Group, both major swap dealers. Their insolvencies threatened to zero out the value of billions of dollars in contracts held by banks and others.
Until then, "we assumed everyone makes good on the contracts," said Vincent Reinhart, a former top economist for the Federal Reserve Board.
Lehman's and AIG's failures put in doubt their guarantees on hundred of billions of dollars in contracts and unleashed a global pullback from risk, leading to the current credit crunch.
The government has since committed $182 billion to rescue AIG and, indirectly, investors on the other end of the firm's swap contracts. AIG posted a fourth quarter 2008 loss last week of more than $61 billion, the worst quarterly performance in U.S. corporate history.
The five major banks, which account for more than 95 percent of U.S. banks' trading in this array of complex derivatives, declined to say how much of the AIG bailout money flowed to them to make good on these contracts.
Banking industry officials stress that most of the exotic trades are less risky — such as interest-rate swaps, in which a bank might have tried to limit potential losses by trading the variable rate interest of one loan for the fixed-rate interest of another.
In their annual reports to shareholders, the banks say that parties insuring credit-default swaps or other derivatives are required to post substantial cash collateral.
However, even after subtracting collateralized risks, the banks' collective exposure is "a big, big number" and a matter for concern, said a senior official in a banking regulatory agency, speaking on condition of anonymity because agency policy restricts public comments.
In their reports, the banks said that their net current risks and potential future losses from derivatives surpass $1.2 trillion. The potential near-term losses of $587 billion easily exceed the banks' combined $497 billion in so-called "risk-based capital," the assets they hold in reserve for disaster scenarios.
Four of the banks' reserves already have been augmented by taxpayer bailout money, topped by Citibank — $50 billion — and Bank of America — $45 billion, plus a $100 billion loan guarantee.
The banks' quarterly financial reports show that as of Dec. 31:
— J.P. Morgan had potential current derivatives losses of $241.2 billion, outstripping its $144 billion in reserves, and future exposure of $299 billion.
— Citibank had potential current losses of $140.3 billion, exceeding its $108 billion in reserves, and future losses of $161.2 billion.
— Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure.
— HSBC Bank USA had current potential losses of $62 billion, more than triple its reserves, and potential total exposure of $95 billion.
— San Francisco-based Wells Fargo, which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion, below the banks' combined reserves of $104 billion, but total future risks of about $109 billion.
Kopff, the bank shareholders' expert, said that several of the big banks' risks are so large that they are "dead men walking."
The banks' credit-default portfolios have gotten little scrutiny because they're off-the-books entries that are largely unregulated. However, government officials said in late February that federal examiners would review the top 19 banks' swap exposures in the coming weeks as part of "stress tests" to evaluate the institutions' ability to withstand further deterioration in the economy.
Representatives for Citibank, J.P. Morgan and Wells Fargo declined to comment.
Hale, the Bank of America spokeswoman, said that the bank uses swaps as insurance against its loan portfolio — they "gain value when the loans they are hedging lose value."
She said that Bank of America requires thousands of parties that are guarantors on these insurance-like contracts to post "the most secure collateral — cash and U.S. Treasuries, minimizing risk roughly 35 percent." The collateral is adjusted daily.
Bank of America's report of an $80.4 billion exposure doesn't count the collateral and "also assumes the default of each of the thousands of counterparty customers, which isn't likely," Hale said. Counterparties are the investors on the other side of the deal, often other banks or investment banks.
In response to questions from McClatchy, HSBC spokesman Neil Brazil said that the bank closely manages its derivatives contracts "to ensure that credit risks are assessed accurately, approved properly (and) monitored regularly."
Obama’s mortgage plan gives little hope
Paul Ramscar
09/03/2009
The mortgage crisis in the United States could get a whole lot worse if no major preventative measures are put in place before next month.
Option ARM (adjustable rate mortgages) that were completed back in April 2004 are due to reset in the next couple of weeks and may bring about another sub-prime of greater magnitude.
This means global stock markets may once again be sent into a downward spiral.
Loan servicers have the option to freeze the current rates at the start rate and this would have some beneficial effect. However, it's hard to say whether they will actually get there in time to prevent another major mortgage catastrophe.
One of the problems with the mortgage plan is that it only allows institutions such as Fannie Mae and Freddie Mac to refinance loans as long as the loan to value or LTV does not exceed 105 percent.
As the housing market is still very bleak and the majority of properties are now in negative equity it's hard to fathom how the mortgage plan will be of any real benefit. Put simply, the 105 percent LTV finance just won't help the masses.
House prices are continuing to plunge and the current plan gives little hope to homeowners as it does not address the main problem.
In addition, President Barack Obama's mortgage plan only applies to owner-occupied homes so those who have bought investment property and falling behind on their mortgage payments will also have difficulties. It also rules out non-occupiers whose mortgages exceed US$417,000 (HK$3.25 million) or surpass US$729,750 in high priced regions.
Meanwhile, the Obama administration is backing legislative efforts to allow bankruptcy judges to bring down mortgage balances, by specifically allowing judges to treat the portion of a mortgage amount that exceeds the current value of the borrower's home as unsecured debt. US courts routinely slash unsecured debt as part of the bankruptcy process.
Apparently, (according to the Obama administration) the plan will help seven million families restructure or refinance their loans and aims to prevent house prices from declining an additional US$6,000.
This is seriously questionable given what is happening with the housing market right now. If you take a major state such as Florida as an example, some houses there have lost US$6,000 in a matter of weeks.
Cities facing the sharpest declines are Phoenix, Las Vegas and Minneapolis. Bright notes are Boston, Denver and New York, which are notching relatively smaller declines.
A revised plan that directly provides relief to the stricken housing market should be put forward because it shows no signs of bottoming out amid slumping sales and rising foreclosures.
The Obama plan will in essence have very little impact and won't do much to heal the very sick housing market. It may help some borrowers but it's doubtful that we'll see any sort of housing recovery until mid 2010 onwards.
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