The main subsidiary of mortgage insurer PMI Group Inc. has been seized by insurance regulators in Arizona, and will begin paying just 50% of claims beginning Monday, according to its website…… Mortgage insurers have suffered from billions of dollars in losses on policies they sold in the years just before the housing bubble burst. PMI alone has reported about $3 billion in losses since the fourth quarter of 2007.
Europe’s highly-leveraged banking sector
Comparing common equity to total assets, 10 major European banks are leveraged more than 25 to 1 (a ratio of less than 4.0%). According to The Big Picture, Dexia is the highest at close to 77 times, but the others are:
- Deutsche Bank
- Credit Agricole
- Credit Suisse
- Commerzbank
- Barclays
- ING
- BNP Paribas
- Societe Generale
- UBS.
Using total equity may indicate slightly lower leverage but the results offer some idea as to why the issue of recapitalizing banks is taking so long to resolve.
Obama Announces Complete Drawdown of U.S. Troops From Iraq by Year’s End – ABC News
“Today, I can report that as promised, the rest of our troops in Iraq will come home by the end of the year,” the president [Obama] said. “After nine years, America’s war in Iraq will be over.”
via Obama Announces Complete Drawdown of U.S. Troops From Iraq by Year’s End – ABC News.
Doesn’t it just inspire you with confidence in the political system when battlefield decisions are made to coincide with the presidential election campaign — and enemies are notified of troop withdrawals two months in advance — so they can plan a “going away” party for your troops.
Three Ways to Save the Eurozone – Jean Pisani-Ferry – Project Syndicate
The eurozone’s creeping fragmentation is primarily the result of the mutual dependence of banks and governments. In the eurozone, banks are vulnerable to sovereign-debt crises because they hold a lot of government bonds – frequently issued by their country of origin. Governments, for their part, are vulnerable to bank crises because they are individually responsible for rescuing national financial institutions. Each episode in the current crisis illustrates the fragility caused by this interdependence.
via Three Ways to Save the Eurozone – Jean Pisani-Ferry – Project Syndicate.
Ron Paul: “Blame The Fed For The Financial Crisis” | ZeroHedge
The Fed fails to grasp that an interest rate is a price—the price of time—and that attempting to manipulate that price is as destructive as any other government price control. It fails to see that the price of housing was artificially inflated through the Fed’s monetary pumping during the early 2000s, and that the only way to restore soundness to the housing sector is to allow prices to return to sustainable market levels. Instead, the Fed’s actions have had one aim—to keep prices elevated at bubble levels—thus ensuring that bad debt remains on the books and failing firms remain in business, albatrosses around the market’s neck.
The Fed’s quantitative easing programs increased the national debt by trillions of dollars. The debt is now so large that if the central bank begins to move away from its zero interest-rate policy, the rise in interest rates will result in the U.S. government having to pay hundreds of billions of dollars in additional interest on the national debt each year. Thus there is significant political pressure being placed on the Fed to keep interest rates low. The Fed has painted itself so far into a corner now that even if it wanted to raise interest rates, as a practical matter it might not be able to do so.
via Ron Paul: “Blame The Fed For The Financial Crisis” | ZeroHedge.
I agree that the Fed should not interfere with interest rates. It causes market imbalances that later lead to recessions and bubbles in stocks and housing and threaten the very survival of the banking system the Fed is trying to protect.
QE achieved the opposite of its stated objectives, raising long-term interest rates with lowering unemployment, but did not really increase the national debt by a dollar. Sales of bonds by the Federal Treasury to the Federal Reserve is like the US government selling to itself. The Fed is just an off-balance sheet, special-purpose entity (think Enron, bank CDOs and other bad smells) created by the government and banks in 1913 to bypass restrictions in the Constitution on the issue of bank notes. In all but name it is a division of the US Treasury. The majority of the “independent” board of directors are political appointments. Ever seen a dissenting vote coming from one of the political appointees? Regional board members, where most dissenting votes come from, are a minority appointed by regional banks. They can dissent, but when it comes to counting the votes they’re outnumbered.
China’s U.S. Debt Holdings
According to China Daily, China owns $1.13 trillion of US debt. China has $3.20 trillion in foreign exchange reserves.
via Chart of the day: China’s U.S. Debt Holdings | Credit Writedowns.
The key statistic here is the $36.5 billion decline in August which dwarfs previous monthly changes. No wonder the yuan jumped against the dollar.
But ask yourself: why has a poor country like China (GDP per capita of $4000 a year) invested more than $1T in US Treasuries? It could not be for the yield. Inflows on the US capital account are used by China to suppress its currency and give its exporters a massive trade advantage against US manufacturers. Imposing punitive tariffs on Chinese imports would provoke a tit-for-tat response and lead to a trade war. But a US withholding tax on foreign capital inflows could not provoke retaliation as China already strictly controls capital inflows. And exemptions to the withholding tax — only to countries who have reciprocal open capital markets — could be negotiated on a country-by-country basis as an extension of existing tax treaties.
That would force currency manipulators to repatriate their investments in US capital markets. This should be welcomed by the US as it would suppress the dollar against the yuan and other currencies, giving US manufacturers a massive advantage in export markets.
Greece: Banks and Pols at Impasse
The debate over how to divide the costs of rescuing Greece is one of the central questions European officials hope to resolve at a weekend summit that comes almost two years to the day after a newly elected government in Athens admitted that the country’s finances were “off the rails.”
……On Wednesday evening, an unexpected gathering of top European officials and IMF Managing Director Christine Lagarde in Frankfurt failed to bridge a divide between Germany, which is footing much of Greek’s bill and supports larger private-sector losses, and France, which is more concerned about the impact of greater losses on its banks.
via Greece: Banks and Pols at Impasse.
My money is on Germany — and a bigger haircut for banks. Then the next headache is how to recapitalize the banks. The cause of the problem: Basel II allowed 50:1 leverage on government (including Greek) bonds.
Draft Proposes Fast, Flexible Bailout Fund – WSJ.com
According to the draft guidelines, the EFSF would replace the European Central Bank in its role of intervening in sovereign-debt markets, but the EFSF’s scope for action would be more limited. The EFSF, for example, would only be allowed to purchase euro-denominated bonds in the open market that are issued by the public sector.
On primary market purchases—bonds bought directly from issuers—the EFSF purchases would be restricted to countries already receiving aid or precautionary credit and be limited to 50% of the total auction. Purchases of sovereign bonds in primary markets would require prior approval of European finance ministers.
The guidelines also…….. allows the fund to engage in limited leveraging of its assets.
Forex overview
The euro is consolidating above $1.365; failure of support would re-test $1.315, warning of another primary decline. A 63-day Twiggs Momentum peak below the zero line would confirm a strong primary down-trend.
* Target calculation: 1.32 – ( 1.40 – 1.32 ) = 1.24
The pound retraced to test resistance at $1.59/1.60 on the weekly chart. Declining 63-day Twiggs Momentum, below zero, suggests a strong down-trend. Reversal below $1.53 would offer a target of $1.46*.
* Target calculation: 1.53 – ( 1.60 – 1.53 ) = 1.46
Canada’s Loonie resembles the Aussie dollar: reversal below short-term support at $0.975 would test $0.94. Respect of the descending trendline would also warn of a decline to $0.88*.
* Target calculation: 0.94 – ( 1.00 – 0.94 ) = 0.88
The Aussie dollar is testing support at $1.28 against its Kiwi counterpart after completing a double bottom. Respect of support would confirm the target of $1.32*.
* Target calculation: 1.28 + ( 1.28 – 1.24 ) = 1.32
The greenback is ranging in a narrow band above ¥76, supported by the Bank of Japan. 63-Day Twiggs Momentum holding below zero confirms the strong down-trend.
The greenback recovered above R8.00 on the weekly chart against the South African Rand. Expect another test of R8.50. Upward breakout would warn of an accelerating up-trend that is likely to lead to a blow-off.
* Target calculation: 8.50 + ( 8.50 – 7.70 ) = 9.30
Aussie Dollar down-trend
Another monthly chart — this time of the Aussie dollar against the greenback. The decline of the last 3 months found support at $0.94 before rallying to a high of $1.04. Breach of the rising trendline indicates that the primary up-trend has ended; confirmed by bearish divergence on 63-day Twiggs Momentum and reversal below zero. Failure of support at $0.94 would signal a decline to $0.84.
* Target calculation: 0.94 – ( 1.04 – 0.94 ) = 0.84
The daily chart shows consolidation between $1.01 and $1.04 over the last week. Failure of support at $1.01 is likely and would warn of a decline to $0.94. Breakout above $1.04 and the descending trendline is unlikely, but would indicate a rally to the July high of $1.10.
