January, Monday 09, 2012

DOW +32 = 12.392
SPX + 2 = 1280
NAS + 2 = 2676
10 YR YLD un = 1.96%
OIL -.25 = 101.31
GOLD – 5.60 = 1612.00
SILV +.30 = 29.15
PLAT +20.00 = 1433.00

Remember the Eurozone crisis? Maybe you haven’t heard much in the past couple of weeks, what with the holidays and everything. Well, it’s still a problem; they didn’t fix anything.

The Greek government is still trying to agree a bond-swap deal with banks that is crucial to a new 130 billion euro bailout package from European partners and the International Monetary Fund (IMF). Without that package, Athens faces the threat of a debt default in March. Banks and investment funds are being asked to accept 50 percent losses on their Greek bonds to help pay for the bailout have dragged on for weeks. German Chancellor Angela merkel said today that Greece must restructure its debt. Merkel said: "From our point of view, the second Greek aid package including this restructuring must be in place quickly. Otherwise it won't be possible to pay out the next tranche for Greece."

Greece is entering its fifth straight year of contraction, with no hope of paying down its massive debt. There is a chance there won’t be a deal. Greece might default.

Both France and Greece are scheduled to hold elections in a few months and that could complicate decision-making at the national level and make it tougher to finalize agreements sealed at an EU summit last month. Greece has been operating under a technocratic Prime Minister that was not elected. An election might not produce an outright winner. Democracy can be messy.

A key element of the summit package was a deal to funnel 200 billion euros from the ECB, the European Central bank,  through the EFSF, the European Fubar Slush Fund,  to the IMF, money that could be used to offer precautionary credit programs to Italy and possibly Spain. But the euro zone is struggling to get the 50 billion euros it needs from nations outside the currency bloc to meet its goal, and even if they get the funding, neither Italy nor Spain have shown any willingness to accept aid -- and greater fiscal oversight that would come with it.

Italian 10-year bond yields have pushed back above the 7 percent mark over the past week, approaching record euro-era highs, and both Rome and Madrid must sell bonds this week in the first major market tests of 2012 for the euro zone's third and fourth biggest economies. The 7 percent level is considered unsustainable and if yields can’t be controlled, then it is just a matter of time until the bond vigilantes smell blood. Spain’s jobless rate jumped to almost 23% in November. The unemployment rate for the European Union rose to 10.3%.

After several years of fiscal consolidation to push down debts and deficits swollen by the global financial crisis of 2008, the euro zone is headed for recession -- a factor that has pushed the euro down to 16-month lows against the dollar. And the response will almost certainly be a move to even greater austerity. The headline in the Guardian reads: “Angela Merkel has the whip hand in an orgy of austerity”. The visual is a bit strange but so is the notion that Euro economic policy is that economic pain is the only route to pleasure.

Alcoa kicked off the fourth quarter earnings reporting season by posting a loss from continuing operations was $193 million, or 18 cents per share, compared with a profit of $172 million, or 15 cents per share in the same quarter of 2010.

Excluding restructuring and other charges (also known as the cost of doing business), the loss was $34 million, or 3 cents per share.

Exxon took Venezuela to the World Bank's International Center for Settlement of Investment Disputes, or ICSID, seeking as much as $12 billion in compensation after Chavez ordered the nationalization of the Cerro Negro oil project in 2007.

"I tell you now: we will not recognize any decision by ICSID," Chavez said during a televised speech. He has repeatedly accused Exxon of using unfair deals in the past to "rob" the South American OPEC member of its resources.

"They are immoral ... How much could they steal in 50 years? Who would dare launch this madness without any foundation? They wanted $12 billion. From where, compadre?"

Chevron’s bid to protect its assets that could be seized as part of an $18 billion environmental damages verdict against the company in Ecuador was denied by a U.S. judge, who said the request could be renewed at a later date.

Chevron, the second-largest U.S. oil company, had asked U.S. District Judge Lewis Kaplan in New York to block the collection of the judgment and the “dissipating” of any proceeds pending resolution of the company’s racketeering lawsuit alleging that the plaintiffs engaged in fraud to win the Ecuadorean judgment. The company sought to “temporarily ensure the availability” of all assets while the U.S. case proceeds. Chevron was ordered on Feb. 14 to pay as much as $18 billion in compensatory and punitive damages for Texaco Inc.’s alleged dumping of toxic drilling wastes in the Ecuadorean jungle from 1964 to about 1992. The ruling came in an 18-year- old lawsuit decided by a judge in Lago Agrio, a provincial capital near the Colombian border.

While Kaplan blocked the collection of the Ecuadorean judgment in March, a federal appeals panel in September tossed that ruling. The appeals court hasn’t issued a full opinion in the matter.

Chevron denies wrongdoing in the Lago Agrio lawsuit. They say they won’t pay, and they will continue to appeal and fight until hell freezes over, and then they will fight on the ice. The idea of cleaning up their mess is apparently unconscionable.

The U.S. Securities and Exchange Commission has modified its boilerplate settlement language to require that defendants admit wrongdoing when they have already done so in parallel criminal proceedings.

The change doesn’t affect the SEC’s typical approach of settling cases without requiring the subject of the action to admit wrongdoing when there is no criminal conviction,

SEC Enforcement Director Robert Khuzami said:  “The new policy does not require admissions or adjudications of fact beyond those already made in criminal cases, but eliminates language that may be construed as inconsistent with admissions or findings that have already been made in criminal cases.”

One such example was when both the SEC and the Justice Department charged Wachovia of profiting from rigging bids in municipal bond reinvestment transactions in 25 states and Puerto Rico.

In the Justice Department settlement, Wachovia said it “admits, acknowledges and accepts responsibility for” manipulating the bidding process in the sale of derivatives on tax-exempt bonds to institutional investors  like cities, hospitals and pension plans over a six-year period ending in 2004.

But in fashioning a settlement with the SEC based on the same facts, Wachovia agreed to settle the charges “without admitting or denying the allegations.”

It is a small step toward transparency, a very, very, very small step.

The Obama administration, in conjunction with federal regulators and led by the overseer of Fannie Mae and Freddie Mac, is very close to announcing a pilot program to sell government-owned foreclosures in bulk to investors as rentals, according to administration officials.

There currently are about a quarter of a million foreclosed properties on the books of Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA), and millions more are coming.

The foreclosure processing delays of last year created a mammoth backlog of properties yet to be processed, which are just now being re-started. One of the initiatives of this program is for the federal government to be in the position to mitigate and manage any new wave of foreclosures.

Late-stage delinquencies still in the pipeline number close to two million. Foreclosure starts outnumber foreclosure sales by two to one and "the trend toward fewer loans becoming delinquent, which dominated 2010 and the first quarter of 2011, appears to have halted,"

Knowing this all too well, the Treasury Department, Federal Reserve, HUD, FDIC, Fannie Mae and Freddie Mac, with their conservator, the Federal Housing Finance Agency (FHFA) at the helm, are engaged in a collaborative effort to face this new wave of foreclosures head on and figure out a way to keep these properties from sitting on the books of the government and sitting empty in the nation's neighborhoods.

As the Federal Reserve alluded to in its white paper on housing last week, "A government-facilitated REO-to-rental program has the potential to help the housing market and improve loss recoveries on reo portfolios." REO's (Real Estate Owned) are bank-owned properties, or, in this case, properties owned by the government-sponsored enterprises and the FHA. Three Fed governors pushed for similar plans in speeches last week, as well.

A pilot sales program will be starting in the very near future, according to administration officials. They are working on what the market potential is, what pricing would be, how government can partner with private investors, and who has the operational experience to manage so many properties.

The Federal Reserve’s report notes that the market is not expected to improve and that interest in rentals will continue to increase, thereby opening the door to a government investment opportunity. Some critics believe, however, that the ulterior motive here is to neutralize an area (rental costs) that accounts the for the Fed’s “core” inflation rate by placing more rentals on the market, thereby providing more room to print money in the event of a new fiscal emergency.

One idea that was not presented in the Fed’s research paper – a way to get people to inhabit houses – don’t foreclose in the first place – maybe some effort at principal reduction. – just a thought.