Italy downgraded by S&P; repercussions expected across Europe, and possibly the US as well

This time S&P might actually have a point.

If things continue like this, then countries are going to start falling out of the Euro and pretty soon only Germany will be left.

"Coming at a time when the world's financial markets are on edge, warily watching for a default by Greece with knock-on unknown effects on the financial system, the optics of this downgrade stink," said Carl Weinberg of High Frequency Economics.

"Perceptions are more important than realities," he added.

"Investors will be shaken, as if they are not shaken enough already, by what appears to be decaying conditions for another sovereign issuer."

Black Wednesday, the day that the pound fell out of the ERM (that preceded the Euro) is starting to look like one of the luckiest escapes that Britain has had since Dunkirk. Read the rest of this post...

The President needs to push the banks to lend, and refinance mortgages

Interesting column about how banks are refusing to lend to small businesses with perfect credit ratings.

Three years ago, the federal government used tens of billions in taxpayer dollars to save the banking system. Now, at this dire economic moment, the country needs the banks to return the favor. Pushing the country’s banks to act more like Sterling Savings Bank, and less like JPMorgan Chase, is something that the president might want to put on his jobs agenda.

And how about pressuring banks to let people with stellar credit ratings refinance their mortgages to a lower rate? I contacted my lender to ask about refinancing and was told "no" because my mortgage had to be less than 75% of the total value of my house, or something like that. It didn't matter that I have a perfect credit rating, or that my place is worth a good deal more than my mortgage (in a town, DC, where property values are actually going up). No, the bank is going to insist that I pay more in my monthly mortgage payments, rather than less, because they're afraid I might not be able to pay at all.

Now think about that for a moment. They're going to make me pay MORE each month, instead of LESS, because somehow if I owed less each month that would put me at greater risk of not paying at all.

Uh, no. Kind of the contrary.  Owing less each month would put more money in my pocket, which would not only make it easier to pay the mortgage, it would give me more disposable income to spread around the rest of the economy.

It's absurd that I can't refinance. And I'm sure lots of others are in the same situation I am. These are the kind of sensible things the government can and should be addressing. And for whatever reason, they're not. Read the rest of this post...

Econ recovery is weakest since Depression

So let's focus on the deficit instead.  Sigh.  It's just what the Republicans want.  They'd like nothing better than to get one of their lifelong dreams - gutting the federal budget - and at the same time sink the economy and send Barack Obama packing in 2012.

AP:

This is one anniversary few feel like celebrating.

Two years after economists say the Great Recession ended, the recovery has been the weakest and most lopsided of any since the 1930s.

Unemployment has never been so high - 9.1 percent - this long after any recession since World War II. At the same point after the previous three recessions, unemployment averaged just 6.8 percent.

- The average worker's hourly wages, after accounting for inflation, were 1.6 percent lower in May than a year earlier. Rising gasoline and food prices have devoured any pay raises for most Americans.

- The jobs that are being created pay less than the ones that vanished in the recession.

Read the rest of this post...

Millions of Americans no longer using credit cards

It would be a good thing if this wasn't a result of the credit crisis, but it is.

An analysis by credit reporting agency TransUnion found that use of general purpose credit cards bearing MasterCard or Visa logos, or issued by Discover or American Express, fell more than 11 percent in the third quarter, compared with the July to September period last year.

About 62 million people now have an active card, compared with 70 million a year ago.

The Chicago company found that consumers in the subprime category, or those with low credit ratings, were believed to be without cards mostly because they were shut down by banks after payments fell behind or balances were written off.

Read the rest of this post...

Are student debit cards tied to loans such a good idea?

Leave it to the finance business to burden students with even more student debt. This really doesn't sound like a good idea. The worst idea in this story is Portland State that requires students to use their debit card as an official student ID. It's as if schools and the finance industry completely ignored the recent credit crisis.

"Meet your new best friend on campus," the letter reads. A school's emblem is featured in the letterhead - and even on the card - and students are urged to activate their accounts quickly.

This is not a credit card offer. Instead, it is a new type of plastic that allows students to easily access money from their college loans everywhere from the bookstore to the bar with the swipe of a card. These cards, however, are not subject to the sweeping reforms that took effect this year and sought to curtail similar relationships between colleges and credit card issuers. Meanwhile, students complain that the loan cards are riddled with high fees, and they have organized protests at several campuses.

"That's really just not the best thing to be doing with our financial aid," said Shane Gerbert, who helped lead the campaign against Higher One at the University of North Dakota. "They're siphoning it away little by little."

Read the rest of this post...

Al Franken seeks legislation to reduce debt collection abuse

It's always good to see someone in Washington who shows more interest in regular voters rather than the deepest pockets. We sure could use people in Congress like Franken. StarTribune:

Franken would make it an unfair practice under federal law for private firms to use arrest warrants in debt collections, according to a summary of his proposed bill. Consumers would have the right to sue collectors over the practice. Franken said the bill won't limit judges' authority to issue arrest warrants against debtors who can pay, but don't show up in court when a creditor sues.

"That should come from the court, not the debt collector," said Franken, who asserted that the collections industry relies too much on public resources, such as sheriffs' offices, to collect private debts.

His legislation also would require collectors to furnish consumers with more information about what they owe, including a breakdown of fees and interest, and notify people of what rights they have.

Read the rest of this post...

Credit card issuers getting around new law

They will never learn. Well done by Schumer for calling out the banks but who has much faith in Bernanke to do anything, let alone the right thing?

Senator Charles Schumer, a New York Democrat, asked the Federal Reserve to look more closely at credit-card issuers pitching business cards to consumers, as the cards are exempt from provisions of the credit-card legislation.

“Credit-card companies are purposely hawking corporate cards to consumers who don’t own a business and may even be retired,” said Schumer in a statement today. “It is a dirty trick meant to get around the new credit-card law.”

Issuers increased mailings of corporate-card offers by 256 percent in the first quarter of 2010 compared with a year earlier, the statement said, citing data from Synovate, a London-based market research firm.

Read the rest of this post...

Credit scores drop to new lows in US

Borrowers may have been guilty of taking loans that were impossible to pay back but why are they being so heavily penalized compared to those who created this funny-money scheme? The banks have received an easy ride in this story and it's not likely to change. The Obama administration has to understand that these differences have not gone unnoticed by the public. How is it that the banks are emerging so strong, so quickly yet everyone else is suffering with little chance of bouncing back soon?

The credit scores of millions more Americans are sinking to new lows.

Figures provided by FICO Inc. show that 25.5 percent of consumers — nearly 43.4 million people — now have a credit score of 599 or below, marking them as poor risks for lenders. It's unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.

Because consumers relied so heavily on debt to fuel their spending in recent years, their restricted access to credit is one reason for the slow economic recovery.

Read the rest of this post...

Loan delinquencies rising again

Geithner remains confident (publicly, at least) that the economy is OK but there are plenty of signs out there that say otherwise. More housing problems and loan issues do not suggest a healthy environment or a move in the right direction. After the credit bubble excesses, it's not realistic to assume rapid recovery to the housing market. That process will take years. The good news in this report is that foreclosure rates are stabilizing. They're at very high numbers but leveling off is still a decent sign. CNBC:

Because the report also finds that the "cure rate," which is the rate at which bad loans actually get better, i.e. the borrowers start to pay again, is getting worse.

After a two-month decline, deterioration ratios increased, with 2.5 loans rolling to a "worse" status for every one that has improved. The number of delinquent loans that "cured" to a current status declined for every stage of delinquency, except in the "greater than six months delinquent" category. This improvement was likely the result of trial modifications made through the Home Affordable Modification Program (HAMP) that transitioned into permanent status.

Oh good, so the HAMP program is helping "cure" those 6 month+ delinquencies. No, they're just delaying them yet again, since we know that the re-default rate on HAMP is only rising. Forget cure and think remission.

Read the rest of this post...

Americans being arrested for credit card debt

Another step backwards. Nobody is excusing reckless behavior with credit but if anyone should be arrested, fingerprinted and sent to jail it ought to be the bankers that created this system. And perhaps the politicians that went along with it as well.

It's not a crime to owe money, and debtors' prisons were abolished in the United States in the 19th century. But people are routinely being thrown in jail for failing to pay debts. In Minnesota, which has some of the most creditor-friendly laws in the country, the use of arrest warrants against debtors has jumped 60 percent over the past four years, with 845 cases in 2009, a Star Tribune analysis of state court data has found.

Not every warrant results in an arrest, but in Minnesota many debtors spend up to 48 hours in cells with criminals. Consumer attorneys say such arrests are increasing in many states, including Arkansas, Arizona and Washington, driven by a bad economy, high consumer debt and a growing industry that buys bad debts and employs every means available to collect.

Read the rest of this post...

Warren Buffet's reputation takes another hit

This time it's his defense of the credit rating agencies. Again, Buffet owned a substantial portion of Moody's which is one of the leading agencies and also one of many who over-rated products that lead to the economic crisis. Buffet has enough money and claims to want to give it away before he dies. He also always has talked about investing in what you know, so it can be argued that he should have known. Wouldn't it be nice if he could one day admit he was wrong and played a role in this painful crisis? Yesterday he sounded like Alan Greenspan.

"The entire American public was caught up in a belief that housing prices could not fall dramatically," said Mr Buffett.

He added that if he had known how far the US housing market would collapse, he would have sold his investment firm's stake in Moody's, which currently stands at 13%.

Moody's chief executive Raymond McDaniel admitted to the commission that his company "is certainly not satisfied" with the performance of the ratings it gave the mortgage-linked debt.

In this critical piece by The Independent, you can see how the system worked. (How much change today is still debatable.) It's much like the infamous big accounting firms that we heard so much about during the Enron and other "cooking the books" scandals. The deals with businesses become "too big to fail" so nobody wants to rock the boat. Whatever the client wants, the client gets or else the deal is canceled and given to another business that will agree to anything. If none of this had any impact on others -such as retirement accounts or even keeping the economy afloat- this would not matter nearly as much. Unfortunately, this is a critical issue that impacts us all.

He said analysts had growing suspicions that Wall Street was packing CDOs full of increasingly dubious mortgages, but in ways that were difficult for Moody's to detect. Gary Witt, another ex-managing director, said he argued repeatedly for more resources to properly investigate the underlying mortgages and to test more of the assumptions that went into the company's models. He quit when his requests were repeatedly denied.

Both men said Wall Street bankers would exercise their power as the rating agencies' clients. Mr Kolchinsky said they were granted requests to bar unsympathetic analysts from particular projects, though this was denied in later testimony by the company's chief executive, Raymond McDaniel. Mr Witt said bankers would go over analysts' heads to appeal to their superiors to improve ratings. "They would pull any lever they could," he said.

Mr Kolchinsky called it "a chess game which we kept losing", and he said the balance of power shifted even further in the bankers' favour after they stepped up the pace of CDO creation in 2006, using derivatives of derivatives.

Read the rest of this post...

Debt collection agency owes $1.5 million after leaving racist, vulgar messages

Sounds like an expensive way of trying to collect $200. Especially when even the $200 was being disputed. When you think about the credit problems in the US, this is probably one of many similar abusive situations. Owing money is one thing but the collection agency went too far and got what they deserved. Compare this to the gentle touch treatment for Wall Street who made off with slightly more than $200 after causing a global crisis. Read the rest of this post...

Sarkozy threatened to leave euro during bailout fight

If true, that's a pretty big deal. The Guardian:

Nicolas Sarkozy threatened to abandon the euro unless Angela Merkel dropped her hostility to the EU's €750bn safety net for the single currency, sources in Brussels and European capitals said yesterday.

In a confrontation between Europe's two most powerful politicians, the French president said he would walk out of the talks and warned of lasting damage to the Franco-German relationship unless the German chancellor backed the plans.

"It was a standup argument. He was shouting and bawling," said one official in Brussels. "It was Sarkozy on steroids," said a European diplomat. "He's always very energetic. This time he was very emotional, too." The French leader banged his fist on the table, according to yesterday's El País newspaper in Spain.

Read the rest of this post...

EU bailout sputters - euro drops again

Something had to be done though the markets are now absorbing the enormous costs including more credit debt. Paying off the old debt has perhaps somewhat easier though it still has to be paid. The euro-bears are holding firm on their forecasts of a declining euro and as of this morning, the euro is back to where it started Monday morning before the trillion dollar injection. EU finance ministers will need a steady supply of Rolaids until this settles.

The emergency plan -- the biggest since G20 leaders threw money at the global economy following the collapse of Lehman Brothers in 2008 -- impressed markets with its sheer size and sparked a spectacular rally in world stocks and the euro.

Yet financial markets turned cautious when they reopened for business in Asia on Tuesday, with investors concerned that the plan was not a long-term solution to problems plaguing the 11-year old single currency area.

Read the rest of this post...

EU rolls out massive €500 billion package - euro surges

The European Union went with a substantial rescue plan that immediately calmed the markets. The IMF is also providing an additional €250 billion in credit. Much like the massive bank bailout plan in the US, it appears to have brought an end to the constant speculation of who might be next to fail. The euro immediately reacted, bouncing back over $1.30, up a few cents from the Friday $1.27 close. Now that this panic has been settled - for now - where will the market look next? California?

EU finance ministers have agreed on emergency measures worth 500bn euros (£430bn) to prevent the Greek debt crisis from affecting other countries.

The 16 members of the single currency bloc will have access to 440bn euros of loan guarantees and 60bn euros of emergency European Commission funding.

The International Monetary Fund (IMF) will also contribute up to 250bn euros.

Read the rest of this post...

Senate committee claims credit rating agencies were not accurate

It's nice to see that they confirmed what everyone knew. I just hope they don't have any new surprise reports such as that prestigious accounting firms have helped cook books for their clients because that's the easiest way to hold onto a lucrative contract. There are only so many surprises that one can handle after all. Who could have guessed because they all went to the prestigious schools, lived in the right neighborhoods, wore nice suits and even ties. Ties, for goodness sakes! Shocking, shocking, shocking. Please get me a glass of water and a cold towel for my forehead.

A probe of the credit-rating industry by the Senate Permanent Subcommittee on Investigations found that firms used outdated models, were influenced by their clients and waited too long to downgrade investments as the collapse in the housing market intensified in the year before the financial crisis.

The probe shows that some employees at the credit-rating companies were hungry for fees and apparently willing to compromise objective analysis of the quality of investments, according to material released Thursday.

One e-mail suggests that a Moody's employee explicitly agreed to negotiate ratings for investments based on a promise of future fees.

Read the rest of this post...

WaMu's former chief risk officer contradicts ex-CEO on warnings

So again, blaming the old boy, 'clubby' attitudes may not have necessarily been completely wrong, but the real problem was bad business practices. The ex-CEO and many others cashed in and never looked back. Getting away with that sounds pretty clubby to me. LA Times:

James G. Vanasek, who was WaMu's chief risk officer from 1999 to 2005, told a Senate committee that "at times borrowers were coached to fill out applications with overstated incomes or net worth adjusted to meet the minimum underwriting policy requirements."

Asked if he ever warned top executives of his concerns, Vanasek replied, "Constantly."

"I stood in front of thousands of senior Washington Mutual managers and executives at an annual management retreat in 2004 and countered the senior-executive speaker ahead of me on the program who was rallying the troops with the company's advertising tag line, 'The Power of Yes,' " he said.

"The implication of this statement was that Washington Mutual would find some way to make a loan. The tag line symbolized the management attitude about mortgage lending more clearly than anything that I can tell you," Vanasek said.

Read the rest of this post...

WaMu ex-CEO: bank wasn't 'clubby' enough to be saved

To a degree, I hear what he's saying. As I've mentioned before it does seem strange that despite everything we witnessed from the "too big to fail" crowd, they've walked away from the crisis pretty much unscathed. Sure the bonuses were trimmed a little, but hardly back to what their value should be compared to every other industry. If anything, those banks are now even larger, so the "too big to fail" issue is more of a problem today than it was before the crisis.

One of the few targeted companies in the crisis fallout has been run by a brown-skinned CEO who had created his own company that is small compared to the big players. The losses there were in the low tens-of-millions which is a lot until you compare that to the established players on Wall Street and their losses. There's obviously something seriously wrong with the law if the old boy network of Wall Street can protect you from such a global failure. But hey, that's why "respected" politicians retire and become lobbyists. They get to write the law to give their deep pocketed friends a free ride. So as easy as the laws are today, imagine what the former political leaders are doing to the Wall Street reform. Now *that* is clubby.

To that end, the ex-CEO of Washington Mutual may have a point. But then again, I didn't hear him complaining much about the $25 million he made in the final year as the bank fell apart. How "severe" were the feds with the bank in reality? Did he pay back the tens of millions that he made on bad deals that had little hope of ever surviving? He should be kissing the ground and thanking those "clubby" folks for helping to write easy laws that keeps people like him out of prison for running such a mess of a company.

The panel's 18-month investigation found that WaMu's lending operations were rife with fraud and that management failed to stem the deception despite internal probes.

Killinger rejected that conclusion. He argued that even before the crisis struck with force, the government treated WaMu unfairly. He noted it was excluded from a list of large financial firms whose stock couldn't be sold short under a temporary government ban in July 2008.

In short-selling, traders bet a stock price will drop and use borrowed shares to profit from any decline.

"For those that were part of the inner circle and were 'too clubby to fail,' the benefits were obvious," Killinger said. "For those outside of the club, the penalty was severe."

Read the rest of this post...

Iceland delivers report on banking crash

It's a list of who's who in the country, though probably not a list anyone wants to be on. Whether they will take legal action is difficult to say but they should. One hopes that when the US finally gets around to doing its report on the financial crisis, they will name names and prosecute. The 9/11 commission was a sorry whitewash that only delivered the traditional "nobody did anything wrong" report that we've come to expect. The Guardian:

"Rules about large risk exposures were not followed," the truth commission report found. "Judging by data the commission has requested from Kaupthing, it is hard to see that lending, to the extent that Tchenguiz companies received it during times of liquidity crisis, was decided with the banks' interests in mind."

The report also delivers unflinching attacks on Iceland's most senior politicians and civil servants, for their role in presiding over an out-of-control banking system. The most high-profile among them is David Oddsson, chairman of Iceland's central bank at the time of the crash, who shaped Iceland's economy as prime minister between 1991 and 2004, during which time he was the driving force behind a rapid privatisation of the banking sector.

The truth commission's report delivers formal findings of "mistakes or negligence" against Oddson, former prime minister Geir Haarde, former finance minister Árni Mathiesen and former minister of commerce Björgvin Sigurdsson. Two other former governors of Iceland's central bank are also named and shamed, as is the former head of the financial supervision authority (FME), Jónas Jónsson.

Read the rest of this post...

UK could lose AAA credit rating

Putting aside the many failures of the credit rating industry (who deserve a lot of blame for the crisis) this is very bad news for the UK. Losing the AAA rating will mean higher costs for borrowing, which means higher taxes and/or fewer services. Once again, the selfishness of the bankers who have bounced back will probably end up costing people yet again. Not to be alone, other European countries as well as the US are also eying potential problems in the near future with financing debt. Tell me again why both Obama and Bush made it so easy for the bankers to recover so easily?

Scott Mather, the head of global portfolio management at the world's largest bond investor Pacific Investment Management Co (Pimco), also said the eurozone's potential joint bailout of Greece with the International Monetary Fund would be ineffective.

On Monday, there was a marked sell-off of Greek government debt and an auction of bonds on Tuesday went badly. The spread between the yield on Greek bonds and German Bunds soared again to 340 basis points. Pimco has previously said that Greece's "initial conditions and demographics are abominable".

Pimco is reducing the weight of UK, US and European sovereign debt in its portfolios. "Miracles are needed in the next six months in order to keep economic growth in the developed world," Mr Mather said. Pimco stated last month that it was keeping its negative outlook on British gilts because of fears of inflation and a further deprecation of sterling.

Read the rest of this post...