Wednesday, February 27, 2008

Ben Bernake on the hill, Russia sells oil in Rubles, Dollar reaches new lows

Key home price index shows record decline

Drop of 8.9 percent in late 2007 is largest in index's 20-year history.


Dollar dives to record euro low; oil and gold score record highs

In early European deals, the euro touched a record 1.5088 dollars, after smashing through the 1.50 barrier for the first ever time on Tuesday. It later stood at 1.5048 dollars, from 1.4979 dollars in New York late on Tuesday.


Manufactured goods orders plunge

Orders for big-ticket durable goods for January fall 5.3%, the largest amount in five months....


February 27, 2008

Market Place

Russia Quietly Starts to Shift Its Oil Trade Into Rubles


MOSCOW — Americans surely found little to celebrate when the price of oil settled above $100 a barrel last week.

They could, though, be thankful that oil is still priced in dollars, making the milestone of triple-digit oil prices noteworthy at all.

Russia, the world's second-largest oil-exporting nation after Saudi Arabia, has been quietly preparing to switch trading in Russian Ural Blend oil, the country's primary export, to the ruble from the dollar. Industry analysts and officials, however, say that this change, if it comes, is still some time off.

The Russian effort began modestly this month, with trading in refined products for the domestic market.

Still, the effort to squeeze the dollar out of Russian oil sales is yet another project notable for swagger and ambition by the Kremlin, which has already wielded its energy wealth to assert influence in Eastern Europe and former Soviet states.

"They are serious," said Yaroslav Lissovolik, the chief economist at Deutsche Bank in Moscow. "This is something they are giving priority to."

Oil trading is nearly always denominated in dollars. When Middle Eastern oil is sold to Asia, for example, the price is set in dollars.

Similarly, Russia's large trade with Western Europe and the former Soviet states in crude oil and natural gas is conducted in dollar-denominated contracts. Gazprom, the natural gas monopoly, set the price of gas in Ukraine at $179 per 1,000 cubic meters in 2008, for example. There are no proposals yet to switch gas pricing away from dollars.

As a result, companies and countries that buy petroleum products are encouraged to hold dollar reserves to pay for their supplies, coincidentally helping the American economy support its trade deficit.

Russia would like to change this practice, at least among its customers, as a means of elevating the importance of the ruble, a new source of national pride after gaining 30 percent against the dollar during the current oil boom.

In a speech on economic policy this month, Dmitri A. Medvedev, a deputy prime minister and the likely successor to President Vladimir V. Putin in elections on March 2, said Russia should seize opportunities created by the weak dollar.

"Today, the global economy is going through uneasy times," Mr. Medvedev said. "The role of the key reserve currencies is under review. And we must take advantage of it." He asserted that "the ruble will de facto become one of the regional reserve currencies."

Other oil-exporting countries are also chafing at dealing in the weakening dollar.

Since 2005, Iran, the world's fourth-largest oil exporter, has tried to open a commodity exchange to trade oil in currencies other than the dollar. The Iranian ambassador to Russia said Iran might choose rubles to free his country from "dollar slavery."

To be sure, some economists have dismissed the project as improbable, given the exotic nature of a security — oil futures contracts denominated in rubles — that would blend currency risk with the dollar-based global oil market.

Ruble-denominated futures contracts for Ural Blend, the main Russian grade, would be attractive only if the dollar continues to depreciate, said Vitaly Y. Yermakov, research director for Russian and Caspian energy at Cambridge Energy Research Associates.

"There is a big distance between the desire to trade commodities for rubles and the ability to do so," he said.

All this has not stopped the Kremlin from trying.

In a sign of the government's seriousness, a new glass-and-marble high-rise home for a ruble-denominated commodity exchange is rising this spring in a prestigious district in St. Petersburg, Russia's second-largest city after Moscow. The exchange will occupy three floors of the 16-story tower on Vasilievsky Island, one of the islands that make up the historic city center.

The director of the St. Petersburg exchange, Viktor V. Nikolayev, said that the intention was to move slowly and gain market acceptance; the government will not strong-arm sellers or buyers onto the exchange, even in an industry dominated by the state.

Web-based trading for refined products like gasoline or diesel is being introduced in three phases for domestic customers, beginning with government buyers like the Russian navy or municipal bus companies. Private brokers will be allowed to trade in March; futures contracts will be introduced in April.

Mr. Nikolayev said no timeline had been established for trading for export on the exchange, which also handles grain, sugar, mineral fertilizer, cement and esoteric financial products like Russian government beef and pork import quotas — all in rubles.

"We are in Russia, and the currency is rubles, not euros, not dollars," he said. "We don't want to depend on the rise or fall of the dollar."

"We will trade in rubles, to strengthen the ruble," he said.

Bernanke Vision for Fed Evokes Investors' Frustration (Update1)

By Craig Torres

Feb. 27 (Bloomberg) -- In the second week of August, the short-term fixed-income sales team at JPMorgan Securities Inc. sat stunned as the trillion-dollar market for asset-backed commercial paper began to collapse.

In normal markets, JPMorgan sells $25 billion of short-term IOUs for clients daily. ``Within the span of six or seven business days, every single investor stopped buying asset-backed commercial paper tied to structured investment vehicles,'' said John Kodweis, a managing director at the New York bank.

How the Federal Reserve has responded to that credit debacle -- the worst since the savings and loan crisis of the early 1990s -- defines Chairman Ben S. Bernanke's reshaping of the world's most important central bank.

With its focus on building consensus around long-term goals and attempts to separate liquidity from broader monetary policy, Bernanke's approach evokes appreciation among some economists. He's also caused frustration among traders trying to discern his intentions.

``The chairman walked into a job that I can best describe as trial by fire,'' said Allen Sinai, president of New York- based Decision Economics Inc. Separating interest-rate policy from liquidity tools was ``absolutely brilliant,'' he said.

To critics, his failure to quickly recognize the economic impact of the market tumult exacerbated the slowdown and meant that when the Fed began cutting rates, reductions needed to be deeper and faster.

`Awfully Smug'

``It's hard to be democratic in a crisis when leadership and image are so key,'' said Karl Haeling, head of strategic debt distribution in New York at Landesbank Baden-Wuerttemberg, Germany's fourth-largest bank. ``The Fed seemed awfully smug until August that this subprime issue was not a big issue. Then, they had to come out with both barrels blasting.''

The 54-year-old Fed chairman is giving his semi-annual testimony to the House Financial Services Committee today. He pledged to act in a ``timely'' manner to help revive the economy. Inflation risks are greater than a month ago, he said.

In August, Bernanke defied traders' predictions of an immediate cut in the federal funds rate, which affects borrowing costs for consumers and businesses. Instead, as credit dried up, he responded with a $35 billion cash injection into banks Aug. 10. Seven days later, he lowered the cost for banks to borrow directly from the Fed.

Inflation Still Emphasized

Officials waited a month before lowering the federal funds rate. Even then, they said ``inflation risks remain,'' leading some on Wall Street to complain Bernanke was out of touch.

``They stepped on their message in the first five months,'' said Vincent Reinhart, former director of the Fed's Division of Monetary Affairs. ``They weren't willing to emphasize why, or how they arrived at that inflation risk.''

Meanwhile, the economy continued to weaken.

As mortgage delinquencies rose to a 20-year high in the third quarter, Fed officials cut the federal funds rate just a quarter-point in October and said they thought inflation risks ``roughly balance'' risks to growth. Coming after a half-point cut the previous month, the October action was seen by economists including Stephen Stanley as a signal that policy makers thought they had eased credit enough to sustain the economic expansion.

``It really kind of scares me that the Fed had no idea things were going to get worse,'' said Stanley, chief economist at RBS Greenwich Capital Markets Inc., and a former member of the Richmond Fed staff. ``They were totally blindsided by the deterioration in liquidity conditions after the October meeting.''

December Disappointment

By December, investors were expecting some promise of year- end liquidity following the Federal Open Market Committee's meeting on Dec. 11. They didn't get one. Instead, policy makers again cut the benchmark rate a quarter point and maintained their view that ``some inflation risks remain.''

Investors showed their disappointment, driving the Dow Jones Industrial Average down 2.1 percent. Markets were setting up for a panic.

The Fed again surprised Wall Street the following morning, announcing that the central bank would loan as much as $40 billion for 28 days through a facility that would let banks borrow directly from the Fed.

The Fed also arranged swap lines with the European Central Bank and the Swiss National Bank, allowing them to channel dollars into their markets.

`Credit for Trying'

The Fed's response to the credit squeeze ``wasn't handled with the aplomb you would have liked,'' said E. Craig Coats Jr., co-head of fixed income at Keefe Bruyette & Woods Inc. in New York. Still, ``it was actually pretty creative, and I give them credit for trying.''

Only after Fed officials saw the potential for higher unemployment and indicators such as retail sales declining did they have confidence that inflation risks were subsiding. They then cut the benchmark rate 1.25 percentage points in nine days in January, the fastest reduction in two decades.

Bernanke's goal of keeping policy trained on a medium-term forecast while flooding the banking system with short-term cash shows how the chairman has adopted some of the discipline of inflation-targeting central banks in the United Kingdom and Sweden.

``Good central banking is not a matter of magic touch,'' said Doug Elmendorf, a senior fellow at the Brookings Institution in Washington, and a former Fed staff economist under both Bernanke and former chairman Alan Greenspan. ``It is a matter of doing something systematically right.''

The Bernanke system also includes changes in governance and communication. Bernanke persuaded fellow members of the Federal Open Market Committee to publish their projections four times a year instead of two, and stretch out to a third year. The exercise transformed the undefined preferences of Greenspan into numeric priorities of an institution.

Last to Vote

Bernanke votes last in policy meetings, unlike Greenspan who argued his policy choice first. Bernanke calls it ``depersonalization.''

``It is commendable that they are implementing these changes in the midst of the most challenging environment for central banks in decades,'' said Angel Ubide, director of global economics in Washington at Tudor Investment Corp., a hedge fund.

Bernanke's scholarly work on the Great Depression also came into play as he retooled the Fed's function as lender of last resort to grapple with what NYU economist Nouriel Roubini calls ``the first crisis of financial globalization and securitization.''

Instead of bank depositors fleeing banks, as in the Depression, it was commercial paper investors who wanted safety. These investors were running from off-balance-sheet structured investment vehicles, which have some features of banks with none of the backstops.

`Frightening at Times'

Kodweis recalled how the normal din of ringing phones fell quiet inside JPMorgan's mid-town Manhattan trading room as credit markets dried up in early August. ``It was frightening at times,'' he said. ``It took longer to sell commercial paper, it was later in the day when we were done, and maturities were increasingly shorter.''

The rush by money market funds to securities not tied to mortgages or consumers created new problems for the Fed.

On Aug. 20, the three-month Treasury bill yield declined 0.66 percentage point in one day to 3.09 percent, the biggest fall in two decades, in a stampede to safety.

On Aug. 21, Bernanke, who had been holding twice-daily conference calls with the New York Fed, reached for another tool. The New York bank halved the fee for dealers borrowing securities from the central bank's portfolio.

New Challenge

By November, Fed officials faced a new challenge. ``Banks wouldn't lend to each other,'' said Haeling. ``There was enough liquidity in the system. The trouble was it wasn't getting to the right places.''

The price of three-month interbank dollar loans in London rose to an average 60 basis points over the federal funds rate in November, from 10 basis points in January to July.

By mid-February, the Fed had auctioned $130 billion in term reserves. The Libor to federal funds rate spread fell back.

Now, Fed officials have said they are considering making the facility permanent.

``He did creative intelligent things about the banking problem. He recognized that a central bank has two concerns -- the financial problem and the macroeconomic problem,'' said Allan Meltzer, a Fed historian and Carnegie Mellon University economist. ``He acted appropriately.''

To contact the reporters on this story: Craig Torres in Washington at .

Last Updated: February 27, 2008 10:02 EST

Tuesday, February 26, 2008

Euro Breaks Key 1.50 – New FX Paradigm

The Euro Bull: The New paradigm of FOREX


As the EUR/USD breaks 1.50, investors should take another look at foreign exchange. 100/barrel oil, $1,000 gold, and $10/bushel wheat are not anomalies, nor is there a 'bull' market in commodities. The US dollar is losing its value and its relevance as a world reserve currency.

What determines the value of a dollar? The common belief is that purchasing power determines the value of money, which is partially correct, but that is not the entire story. In a world of floating currencies, money is also valued in terms of other money. Simply opening a bank account in Europe, and gaining a few % per annum interest, would have returned a US based investor over a 50% return in 5 years. There are a few ways to look at that, but they all point to the same conclusion: the value of the dollar is declining. The other logical observation is that by NOT investing in the Euro, an investor is actually LOSING 50%. This is a difficult mental leap for many to make as they don't see losses in their bank account, but as we see $4/gallon gas, $3/gallon milk and skyrocketing commodity prices, many are noticing. They only have to realize the simple fact: prices are not increasing the value of US Dollars is declining.

Who is not affected by a declining dollar? The poor, debtors, manual laborers, and tradesmen (because you can continue to perform your trade for dollars, pesos, or bananas if need be regardless of the continuing slide of the dollar – tomorrow you may charge twice as much but so what?) But if you have any wealth; a house or a stock portfolio, denominated in dollars, the declining US Dollar should be the most important issue to you because that portfolio is losing value as the dollar does. In the worst case scenario, the Fed can default making US Dollars worthless overnight.

Best case, although unlikely it should be mentioned, the Fed could raise rates to 10%, Bush could declare a flat tax, open the borders to foreign investors by deregulation and providing tax incentives, pull out US Military from all foreign engagements, and be the banker of the world. This would catapult the US economy and the US Dollar to currently unimaginable success, but this is a farfetched fantasy. In reality, we are increasing our Military presence around the world, cutting interest rates, and regulating US markets, forcing even homegrown companies to look abroad.

Let's examine why the dollar is declining and what can potentially stop the decline.

The largest player in the US Dollar is clearly the Fed, the sole issuer of the US Dollar. Investment Banks and Hedge Funds, at the end of the day, rely on the Fed for regulation, clearing, liquidity, and currency controls; they are distributors and traders of US Dollars not the manufacturer. It clearly states on the Fed's website that the Fed conducts foreign currency operations in the open market, and maintains US holdings of foreign currency and swaps. This would indicate the Fed has the ability to intervene in currency markets in order to protect the strength of the dollar, and although the Fed may have that ability, it states in the same article that:

  1. US monetary policy actions influence exchange rates. The dollar's exchange value in terms of other currencies is therefore one of the channels through which U.S. monetary policy affects the U.S. economy. If Federal Reserve actions raised U.S. interest rates, for instance, the foreign exchange value of the dollar generally would rise. An increase in the foreign exchange value of the dollar, in turn, would raise the price in foreign currency of U.S. goods traded on world markets and lower the dollar price of goods imported into the United States. By restraining exports and boosting imports, these developments could lower output and price levels in the economy. In contrast, an increase in interest rates in a foreign country could raise worldwide demand for assets denominated in that country's currency and thereby reduce the dollar's value in terms of that currency. Other things being equal, U.S. output and price levels would tend to increase—just the opposite of what happens when U.S. interest rates rise.


    The Fed therefore officially controls exchange rates of the US Dollar through Monetary Policy. The Fed, in response to a weakening US economy and a Subprime crisis, has taken an aggressive policy of cutting interest rates, thus dropping the dollar.


    So we cannot expect the Fed to solve the weak dollar issue, because they are the creators of it! The Fed could start aggressively raising interest rates and we could see the dollar soar to new highs. But there is a low chance of that happening, as they have indicated the contrary. As the credit crisis unravels, we can expect the Fed to continue cutting rates. With a weak stock market, a weak real estate market, and a weak economy, we can expect more doom and gloom before we see the light at the end of the tunnel, and in the meantime the US Dollar can sink another 80% or more, as the Great British Pound did when it lost its status as reserve currency.


    Technically, once a downward spiral starts in currency, it is very difficult to stop. In stocks, an issuer can buy back shares in order to dry up liquidity and stabilize the price; a common practice among penny stocks listed on pink sheets. However if the US Dollar declines, the Fed would need Euros in order to 'buy back' US Dollars, and since the Fed is not an issuer of Euros, it would take a near act of God to convince the ECB to loan the trillions necessary to support the dollar in the event of a default or run on the banks. While the Fed does have some mechanisms in place to stabilize the markets, the act of supporting your own currency is like pulling yourself out of a sinkhole by your own hair. Once the selling starts, it could feed on itself and create a downward spiral – as the value goes down more large holders, worried about further losses, may panic and sell, thus adding fuel to the fire.

    It would be anything but capitalism if we didn't profit from this once in a lifetime opportunity of a declining dollar. On one hand, wealth will be wiped out en masse – on the other, it will be created. A transfer of paper wealth from USD to Euro and other currencies is inevitable; why be on the wrong side of the fence? Germans, Argentineans, Japanese, French, British, Italians, Turks, and many others, can attest to the events surrounding currency collapse and hyper inflation. They say it cannot happen to USA because of the TBTF Too Big to Fail Policy, a fallacious reasoning that came out of a Senate hearing on banking regulation.

    All the facts and economic data point to massive dollar sell-off – look at a USD/CHF chart and you can plainly see it has already started.

    FX as an asset class

    There are many ways to invest in FX as an asset, but this should be done only with the help of a qualified professional or someone with experience in FX. Everbank offers foreign currency CD's and foreign currency deposit accounts: This will not excite most investors but at least you can have non-dollar denominated deposits insured by the FDIC.

    For a more versatile approach, CTA's offer FOREX Managed Accounts, usually with minimums starting at $10,000. These accounts are pure FX trading strategies, some are extremely conservative and others are extremely aggressive. Various strategies can be implemented on these accounts which vary from simple news and economic analysis by traders with 20 years experience, to fully automated quant systems.

    Funds such as the MERK hard currency fund offer FX specific returns as a mutual fund. From their website:

    The Merk Hard Currency Fund (MERKX) is a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the U.S. dollar relative to other currencies. Many consumers are aware of the falling dollar but don't know how to protect their capital against its decline. Others are uncomfortable choosing specific foreign currencies to invest in or investing in currency derivatives. The Fund may serve as a valuable diversification component as it seeks to protect against a decline in the dollar while potentially mitigating stock market, credit and interest risks-with the ease of investing in a mutual fund. The Fund may be appropriate for you if you are pursuing a long-term goal with a hard currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market.

    Hedge Funds are another venue for FX investing, but they typically have a $1 Million minimum and employ risky strategies.

    FX Overlay

    If a business or portfolio has exposure to multiple currencies, a hedging program can be implemented that combines multiple strategies to deal with currency risk. Large corporations such as Intel may have their own treasury desks, but smaller companies or financial firms may not have the resources or knowledge in place to justify such programs, however there are many companies who offer this service, or it could be built using proven models from the ground up.

    FX as an industry

    Explosive growth opportunities exist in the FX industry as US based investors take notice. The real opportunity in FX is in marketing, because of the widespread lack of knowledge about FX. Sadly, you don't need to know much to make a fortune in this field, and it's the marketers that will ultimately make the most, as they introduce an uneducated and unenlightened public into the most significant market of our age. What will out of work real-estate developers do as the market continues to weaken?

    Beware FX Scams!

    Because FX is completely deregulated, FX attracts many criminals. The allure of a secretive market only traded by large banks makes a good pitch to unsuspecting suckers. However there are a few easy ways to determine scams from the real thing, such as the NFA, CFTC, SEC, or by dealing with only companies and individuals who associate themselves with large FX firms who are registered with the NFA. The fact that FX attracts criminals doesn't diminish the opportunities in FX any more than the movie "Boiler Room" proves that all stock brokers are cocaine snorting crooks.

    This article is by no means exhaustive nor is it intended to be. Regarding bias on the topic, considering we are in this business, the fact that these opportunities exist, and the fact that dollar is declining, is why we ARE in this business and not in stocks or bonds. A day may come where FX is the only significant market left in the world, as domestic exchanges are ravaged by reckless monetary policies and rogue political administrations. In the meantime, protect yourself against calamity and position yourself to capitalize on the opportunity of a lifetime.

    If you aren't familiar with Elite E Services, we recommended buying Gold at 279 and investing in New Zealand Dollars in 2002 when the NZD/USD was .39. George Soros made his fortune trading currencies, not selling stocks. In the mid-1990's, Intel made more money in FX than selling processors.

    February 26th, 2008 - This day will be remembered by many as the last day of the Dollar's reserve status. May we remember the US Dollar well, in the good times.

    For more information please visit Elite E Services: or sign up for our Fore Group:


    Let your plans be dark and as impenetrable as night, and when you move, fall like a thunderbolt.

Bad US Data – Euro Breaks Key 1.50

Key home price index shows record decline

U.S. home prices dropped 8.9 percent in the final quarter of 2007 compared with a year ago, Standard & Poor's said Tuesday, the steepest decline in the 20-year history of its housing index.

After subprime debacle, U.S. wrestles with question of bank bailouts

Over the past two decades, few industries have lobbied more ferociously or effectively than banks to get the government out of its business and to obtain freer rein for "financial innovation."

Greenspan Urges Gulf States To Abandon Dollar

"It [de-pegging] is probably the most useful thing that can be done to stop the increasing influence of foreign assets on the monetary system and therefore the monetary base which is basically the major force in inflationary pressures," Greenspan told the Abu Dhabi Corporate Leadership Forum yesterday.

Foreclosures up 57 percent in the past year

The number of homes facing foreclosure jumped 57 percent in January compared to a year ago, with lenders increasingly forced to take possession of homes they couldn't unload at auctions, a mortgage research firm said Monday.

One in 10 Home Loans Under Water

And one in every five homes is in tax trouble.

World Grain Demand Straining U.S. Supply

Okay, so the global warming "cult" promised us all that if we turned food production farmland into ethanol production, that we would have a zero carbon footprint source of energy.


Dollar Falls to Record Low of $1.50 per Euro on Rate Outlook Feb. 27 (Bloomberg) -- The dollar fell to an all-time low of $1.50 per euro on speculation Federal Reserve Chairman Ben S. Bernanke today will indicate the U.S. central bank is prepared to keep lowering interest rates. The currency is headed for its second straight monthly decline versus the euro on expectations a government report today will show a drop in U.S. home sales, bolstering the Federal Reserve's case for cutting borrowing costs. ``It's crunch time for the dollar,'' said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, a unit of France's second-largest bank by market value. ``Bernanke may know that monetary policy alone cannot support the slowing U.S. economy.'' The U.S. currency touched $1.5047 per euro, the lowest since the European single currency was introduced in 1999, before trading at $1.5012 as of 8:17 a.m. in Tokyo from $1.4979 in late New York yesterday. It also was at 107.24 yen from 107.28. The U.S. currency may fall to $1.51 per euro and 106.80 yen today, Saito forecast. The U.S. dollar slid against 11 of the 16 most-active currencies after Fed Vice Chairman Donald Kohn said yesterday turmoil in credit markets and the possibility of slower economic growth pose a ``greater threat'' than inflation.

Forex Trading Channel #19

Gabcast! Forex Trading Channel #19

Sunday, February 24, 2008

Brewing Balkan War

"As regards the deal between Russia and Serbia, we can blame the EU for some of this," said Borut Grgic, an energy expert and director of the Institute for Strategic Studies in Ljubljana, Slovenia.

"There is a big political dimension to this," he added. "In all its negotiations with Serbia when dealing with the future status of Kosovo, the EU never brought up with Serbia the issue of energy security and how Serbia could play an important role for Europe."....

That aim appeared to be gathering force Saturday as Serbs in northern Kosovo erected a metal container and hung Serbian flags on electrical posts on a main road between Zubin Potok, a Serbian town, and Mitrovica, a city divided between ethnic Albanians and Serbs. Meanwhile, there were increasing reports in Pristina that officers were deserting the multiethnic police force in Kosovo and pledging their allegiance to the government in Belgrade.

BELGRADE, Feb 24 (Reuters) - Serbia was back on the offensive over Kosovo's independence on Sunday, blaming the United States for crisis in the Balkans while its ally Russia accused the Americans of destroying "world order".

Three days after young rioters in Belgrade embarrassed the country by attacking Western embassies and looting shops, Serbian Prime Minister Vojislav Kostunica said it is Washington that is threatening peace and stability.

In a strongly worded statement from Moscow, Russia also accused Washington of trampling on international law....

Moscow slams Burns statement

MOSCOW -- A war of words over Kosovo is raging between Russia and the United States...

Indeed, dozens of armoured vehicles and tanks have been deployed at key points in the border region, after Belgrade officials announced that they would march into Kosovo in their thousands — albeit for peaceful rallies. "KFOR troops are trained and well-equipped to answer any challenges coming from inside or outside of Kosovo," a radio advertisement, paid for by KFOR, warns Serbian listeners...

The US needs Croatia over an agreement between Iran and Serbia... Serbian Tanks on the Kosovo Border

Kosovo border police have reported Serb tanks are taking positions near the Kosovo-Serb border.

Friday, February 8, 2008

Hedge Fund Implode o meter The Hedge Fund Implode-O-Meter (HFI) was created in mid-2007 amidst the ongoing collapse of the housing finance sector and a general credit crunch to track as hedge funds learn the double-edged-sword nature of the often-extreme leverage they use.

DB CEO: Downgrade creates debt tsunami

Australia releases whaling photos BBC. Australia has caused a diplomatic row with Japan by releasing photos that show that its claims that its whale killing is for "scientific research" is a "charade." Good for them.

Sentiment Signs Says US$ Will Rally Mish's Global Economic Trend Analysis

To Catch a Country What happens if a sovereign wealth fund engages in insider trading?

Loss Mitigation Lacking for Seriously Delinquent Borrowers: State Bank Supervisors Housing Wire

Economists Who Missed the Housing Bubble Give Low Marks to Bernanke Dean Baker

Deutsche Bank CEO: Bond Insurer Downgrade Will Create Debt " Tsunami"

Deutsche Bank's CEO Josef Ackermann issued a stark warning today: bond insurer downgrades would have catastrophic consequences, on par with the subprime crisis.

Note tha this view is in contrast with teh comparatively sanguine readings that have been coming from some US analysts and the US media, which now appears to regard teh increasing possibility of bond insurer downgrades are No Big Deal. The stock market is staging a wee rally despite a downbeat reading on the odds of success for the bailout talks led by New York insurance superintendent Eric Dinallo.

Ackermann's warning is consistent with a rumor we heard earlier this week from a well-placed source, who said that Trichet, the ECB's chief, had made a strong plea for the Treasury to bail out the bond guarantors. And by that we don't mean mean merely "get involved in Dinallo's talks"; we mean stump up cash. (Note this same source predicted Trichet's about face on interest rate cuts, and said they would be triggered by worries about the banking system, so his quote at the end of the Bloomberg story may be obligatory posturing).

The reason is that European banks were big buyers of later vintage CDOs (2006-2007) and RMBS, which will not only take a hit when any credit enhancement provided by the bond guarantors is removed but independent of any price impact, downgrades will also reduce their statutory capital. Why? Banks (which bought primarily AAA tranches) can treat AAA paper as a risk free asset; the reserve requirements are minimal. A downgrade to AA increases the reserve requirements markedly, and CDOs are generally downgraded more than a mere grade or two when they fall (I wish I could be more crisp here, but Basel II makes matters more complicated). Thus a loss of the bond guarantor AAA has a quick and nasty impact on bank capital adequacy.

From Bloomberg:

Deutsche Bank AG Chief Executive Officer Josef Ackermann said rating downgrades for bond insurers pose risks that could match the U.S. subprime market collapse.

``It could be a tsunami-like event comparable to subprime,'' Ackermann said in a Bloomberg Television interview in Frankfurt today. Deutsche Bank, Germany's biggest bank, is ``well positioned'' on its risk from bond insurers, he said.....

Banks and securities firms have already reported credit losses and writedowns of $146 billion. Downgrades of the bond insurers may force financial firms to write down a further $70 billion, Oppenheimer & Co. analyst Meredith Whitney said last month....

``It is bad practice to rely on the judgment of those whose misjudgments have caused the current crisis,'' Ackman wrote in the letter dated Feb. 5.

European Central Bank President Jean-Claude Trichet rejected Ackermann's characterization of the potential fallout from bond insurer downgrades.

``I certainly would not mention anything like waves of tsunami or any other mention of that sort,'' Trichet said at a press conference in Frankfurt. ``The fact that this correction continues along various markets is not something which should surprise us, its an ongoing process.''

Wachovia Knew and profited from theft

Evidence Wachovia Knew of and Profited from Theft

This story is so heinous that I couldn't let it go by. Court filings indicate Wachovia not only permitted telemarketers to steal from individuals, but they were aware of the practice and turned a blind eye because it was profitable to them. And the targets of the fraud were typically elderly.

The suit was filed last spring; Wachovia implemented some anti-fraud measures last summer, after the case was written up in the New York Times, with the usual blandishments about ": "Earning the trust of our customers is at the heart of what we do every day." Actually, that bit of corporate pablum is true even if the fraud allegations are proven true (likely). The Wachovia customers were stealing from accounts at other banks, yet Wachovia refused to shut them down, despite warnings from other institutions and red-flag levels of bad checks.

Note also that the victims of the fraud had to turn to civll suits because banks accused of participation in this type of fraud have never been prosecuted or publicly fined.

From the New York Times:

Last spring, Wachovia bank was accused in a lawsuit of allowing fraudulent telemarketers to use the bank's accounts to steal millions of dollars from unsuspecting victims. When asked about the suit, bank executives said they had been unaware of the thefts.

But newly released documents from that lawsuit now show that Wachovia had long known about allegations of fraud and that the bank, in fact, solicited business from companies it knew had been accused of telemarketing crimes.

Internal Wachovia e-mail, for example, show that high-ranking employees at the nation's fourth-largest bank frequently warned colleagues about telemarketing frauds routed through its accounts.

Documents also show that Wachovia was alerted by other banks and federal agencies about ongoing deceptions, but that it continued to provide banking services to multiple companies that helped steal as much as $400 million from unsuspecting victims.

"YIKES!!!!" wrote one Wachovia executive in 2005, warning colleagues that an account used by telemarketers had drawn 4,500 complaints in just two months. "DOUBLE YIKES!!!!" she added. "There is more, but nothing more that I want to put into a note."

However, Wachovia continued processing fraudulent transactions for that account and others, partly because the bank charged fraud artists a large fee every time a victim spotted a bogus transaction and demanded their money back. One company alone paid Wachovia about $1.5 million over 11 months, according to investigators.

"We are making a ton of money from them," wrote Linda Pera, a Wachovia executive, in 2005 about a company that was later accused by federal prosecutors of helping steal up to $142 million.

Ms. Pera left Wachovia in 2006, and could not be located.

Lawyers pursuing the lawsuit against Wachovia, which was filed in a Pennsylvania federal court on behalf of a woman named Mary Faloney and other apparent victims, have asked a judge to declare the case a class action, which could expand it to as many as 500,000 plaintiffs.

The lawsuit alleges that Wachovia accepted fraudulent, unsigned checks that withdrew funds from the accounts of victims, often elderly. Wachovia forwarded those checks to other banks that were unaware of the frauds, which in turn sent money to the swindlers.

A judge is expected to rule on the class action request by this summer. Wachovia, in court filings, has denied the suit's allegations. The company declined to comment on the pending litigation.

However, Wachovia's senior vice president for risk management, Alan Chudoba, said that the bank introduced reforms aimed at telemarketing frauds last summer. Those changes, which came about after an article in The New York Times last May reported that thieves had used Wachovia accounts, include greater scrutiny of accounts used by telemarketers and stronger fraud protections...

The Pennsylvania suit against Wachovia alleges that the bank's involvement with telemarketing thefts dates to October 2003, when Wachovia was warned by another bank that a Wachovia client named AmeriNet had tried to process more than $100,000 in improper withdrawals.

AmeriNet was a "payment processor," a company that creates unsigned checks on behalf of telemarketers to withdraw funds automatically from customer accounts. Such checks, once widely used by businesses collecting monthly fees, are legal if customers approve the transactions.

However, a Wachovia executive wrote to colleagues, evidence suggested AmeriNet was creating unapproved checks.

"Keep in mind historically, telemarketing is an easy way to money launder and commit fraud. To knowingly bank a customer who is perpetrating fraud places the bank at great exposure," wrote that executive, Tim Brady, according to documents that are part of the lawsuit.

Mr. Brady, who did not return phone calls, recommended closing the AmeriNet account in 2003, according to that e-mail message. But Wachovia continued working with the company until 2005, when AmeriNet paid $50,000 to settle complaints filed by the attorneys general of five states. Wachovia was not named in those complaints.

In late 2003, a Wachovia executive announced to colleagues via e-mail that her unit, because of AmeriNet, had seen "an increase in our annual revenue projection."

Wachovia declined to comment on those e-mail messages, citing pending litigation.

Wachovia also worked with other payment processors, according to court documents. In 2004, Wachovia held a lunch for the owner of a payment processor that the bank knew had drawn thousands of previous complaints.

"It is important that our relationship is firm and in good standing" with the owner of that company, Your Money Access, wrote the Wachovia executive, Ms. Pera, to colleagues. Your Money Access was sued last year by the Federal Trade Commission and seven states on suspicion of helping to steal up to $69 million.

There were other internal warnings, as well.

In 2005, a Wachovia fraud investigator wrote to colleagues that 79 percent of the checks submitted by one Wachovia client, Suntasia, had been returned in August because of unauthorized withdrawals and other problems. Regulators say return rates in excess of 2.5 percent is evidence of potential fraud.

"I have good reason to believe that all of the deposited items are unauthorized drafts," wrote the fraud investigator, Bill McCann in a 2005 e-mail message.

But Wachovia continued doing business with Suntasia until last year, when the company was shut down by a court order, according to the lawsuit.

Wachovia declined to comment on Mr. McCann's e-mail. Mr. McCann declined to return calls.

Moreover, executives at other banks, including Bank of America, Wells Fargo, Citizens Bank, the Social Security Administration and the Justice Department Federal Credit Union also warned Wachovia multiple times that its accounts were being used for fraud, according to the lawsuit against the bank.

In 2006, an executive at Citizens Bank wrote via e-mail that thieves were routing unauthorized checks through Wachovia that stole from Citizens account holders.

"We have spoken to many of our customers who have been victimized by this scam," wrote the Citizens executive, according to court documents. "We would appreciate it if you would shut down accounts of any customers of yours that may be engaging in improper activity."

But Wachovia kept that account open until it was frozen by a federal court a few weeks later, as part of a government lawsuit against the client.

A Wachovia spokeswoman said that in every case where a bank complained, an investigation was opened and that some accounts were closed.

But court records show that many of those accounts stayed open for years after the complaints were received.

Last June, after Wachovia's involvement with telemarketing thefts was reported by The Times, Congressional lawmakers, including Representative Edward J. Markey, Democrat of Massachusetts and senior member of the House Energy and Commerce Committee, asked five regulatory agencies to answer questions regarding the unsigned checking system that fraud artists used. Senator Tom Harkin, Democrat of Iowa, also asked the Senate Banking Committee to investigate the issue.

Many of those agencies responded by saying they lacked jurisdiction. "Clearly, more needs to be done to prevent fraud in this area," Mr. Markey said in a statement. A spokeswoman for Mr. Harkin said lawmakers were considering hearings.

Other regulators say the banks are to blame.

"These types of crimes only are possible because banks tolerate them," said the United States attorney in Philadelphia, Patrick L. Meehan, who prosecuted a payment processor accused of using Wachovia accounts to steal more than $100 million.

"Who knows how many other crimes like this are occurring every day without anyone realizing it?" Mr. Meehan said.

Monday, February 4, 2008

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