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Just the Facts...Again

For the holiday-shortened week, the Dow declined 1.9% (up 5.2% y-t-d) and the S&P500 fell 1.4% (up 2.5%). Today's dismal employment report supported the faltering economy view - and cyclical stocks suffered. The Transports were hit 3.1% this week (up 3.8%) and the Morgan Stanley Cyclical index 2.3% (up 12.4%). Defensive stocks performed somewhat better. The Utilities slipped 0.3%, and the Morgan Stanley Consumer index declined 1.4% (up 1.3%). The broader market was under selling pressure, with the small cap Russell 2000 down 2.2% (down 1.5%) and the S&P400 Mid-cap index 1.1% (up 6.1%). The NASDAQ100 declined 1.6% (up 11.5%), and the Morgan Stanley High Tech index slipped 0.5% (up 11.4%). The Semiconductors lost 0.9% (up 5.3%). The Street.com Internet Index declined only 0.3% (up 11.5%), while the NASDAQ Telecommunications index dropped 2.4% (up 14.5%). The Biotechs gained 1.8%, increasing y-t-d gains to 4.8%. Financial stocks were, again, under pressure. The Broker/Dealers fell 2.6% (down 10.4%), and the Bank declined 2.7% (down 12.1%). With bullion surging $27.20 to break above $700, the HUI index rallied 8.6% (up 5.9%).

Three-month T-bill rates bps this week to 4.1%. Two-year U.S. government yields bps to 4.1%, and five-year yields bps to 4.2%. Ten-year Treasury yields bps to 4.5%. Long-bond yields ended the week bps to 4.8%. The 2yr/10yr spread ended the week at bps. The implied yield on 3-month December '07 Eurodollars bps to 4.9%. Benchmark Fannie Mae MBS yields bps to 6.0%, this ...performaning Treasuries. The spread on Fannie's 5% 2017 note to 53, and the spread on Freddie's 5% 2017 note to 53. The 10-year dollar swap spread to 6. Corporate bond spreads..., with the spread on a junk index ending the week bps narrower.

September 6 - Financial Times (David Oakley and Michael MacKenzie): "Banks are issuing record amounts of dollar-denominated debt as they fear more demands for cash from troubled structured investment vehicles, according to the latest figures. Despite having to pay higher interest rates, financial institutions and investment-grade companies raised $53bn in dollar-denominated fixed income debt last month - the highest amount ever for August, according to Lehman Brothers. The bulk of that $53bn...was raised by financial institutions as they sought to shore up their balance sheets amid the threat of a fully-blown liquidity crisis. When floating rate notes are included, issuance for financial institutions and investment-grade companies rises to just under $77bn, according to Thomson Financial, also a record for the traditionally quiet month of August."

Investment grade debt issuers included Astrazeneca $6.9bn, Barclays $2.05bn, Bank of America $1.7bn, Lowes $1.3bn, Rohm & Haas $1.1bn, HSBC $750 million, Husky Energy $750 million, Cargill $750 million, Virginia E&P $600 million, CSX $1.0bn, EOG Resources $600 million, Commonwealth Edison $400 million, Starwood Hotels $400 million, Texas Eastern $400 million, Duke Realty Kentucky Power $325 million, $300 million, and National Realty Properties $250 million.

German 10-year bund yields sank 12 bps to 4.12%, while the DAX equities index dropped 2.6% (up 12.7% y-t-d). Japanese 10-year "JGB" yields declined 1.5 bps to 1.585%. The Nikkei 225 dropped 2.7% (down 6.4% y-t-d). Emerging debt and equity markets were mixed to higher. Brazil's benchmark dollar bond yields were little changed this week at 6.06%. Brazil's Bovespa equities index jumped 3.2% (up 22.7% y-t-d). The Mexican Bolsa declined 0.5% (up 14.1% y-t-d). Mexico's 10-year $ yields dropped 10 bps to 5.50%. Russia's RTS equities index slipped 1.1% (down 1.2% y-t-d). India's Sensex equities index gained 1.8% (up 13.1% y-t-d). China's Shanghai Composite index added 1.1% to close at yet another record high (up 97% y-t-d and 218% over the past year).

Freddie Mac posted 30-year fixed mortgage rates added one basis point this past week to 6.46% (down 1bp y-o-y). Fifteen-year fixed rates rose 3 bps to 6.15% (down 1bp y-o-y). One-year adjustable rates fell 10 bps to 5.74% (up 11bps y-o-y), reversing less than half of last week's sharp increase.

Bank Credit expanded $18.8bn (week of 8/29) to a record $8.810 TN (5-wk gain of $169bn). Bank Credit has expanded $513bn y-t-d, or 9.2% annualized. For the week, Securities Credit was about unchanged. Loans & Leases jumped $18.7bn to $6.454 TN (5-wk gain of $125bn). C&I loans increased $6.2bn, and Real Estate loans rose $8.3bn. Consumer loans gained $4.6bn. Securities loans slipped $0.7bn, while Other loans added $0.3bn. On the liability side, (previous M3) Large Time Deposits increased $1.4bn.

M2 (narrow) "money" surged $64.9bn (2-wk gain $111bn) to a record $7.400 TN (week of 8/27). Narrow "money" has expanded $356bn y-t-d, or 7.5% annualized, and $522bn, or 7.6%, over the past year. For the week, Currency added $0.2bn, and Demand & Checkable Deposits rose $15bn. Savings Deposits jumped $18bn, and Small Denominated Deposits increased $2.3bn. Retail Money Fund assets surged $29.4bn.

Total Money Market Fund Assets (from Invest. Co Inst) jumped $38bn last week to a record $2.802 TN (5-wk gain of $195bn). Money Fund Assets have increased $420bn y-t-d, a 25.5% rate, and $576bn over 52 weeks, or 25.9%.

Total Commercial Paper contracted another $54.1bn last week to $1.925 TN. After a four-week decline of $298bn, total CP outstanding is now down $49bn y-t-d. Asset-backed commercial paper fell $26bn to $959bn, with a four-week decline of $214.4bn (after beginning the year at $1.084TN). Total CP has now increased only $66bn, or 3.5%, over the past 52 weeks.

Asset-backed Securities (ABS) issuance was a puny $500 million this week. Year-to-date total US ABS issuance of $443bn (tallied by JPMorgan) is now running about 24% behind comparable 2006. At $209bn, y-t-d Home Equity ABS sales are about a half of last year's pace. Year-to-date US CDO issuance of $242 billion is now running only 5% ahead 2006 sales.

Fed Foreign Holdings of Treasury, Agency Debt last week (ended 9/5) increased $0.8bn to $1.980 TN. "Custody holdings" were up $228bn y-t-d (18.8% annualized) and $300bn during the past year, or 17.8%. Federal Reserve Credit last week expanded $6.6bn to $857bn. Fed Credit has increased $4.4bn y-t-d and $24.5bn over the past year (2.9%).

September 7 - Market News International: "Japan's foreign reserves hit a record $932.16 billion at the end of August, rising for the third consecutive month and surpassing the previous record high of $923.72 billion marked at end-July... The country's forex reserves remain the second largest in the world, next to China's, which is estimated at $1.33 trillion..."

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $920bn y-t-d (27.6% annualized) and $1.143 TN y-o-y (24.9%) to $5.731 TN.

Credit Market Dislocation Watch:

September 7 - Bloomberg (Steve Rothwell): "The three-month rate banks charge each other for dollars rose for a 12th day to a new seven-year high, signaling efforts by central banks to free up lending are sputtering. The overnight rate fell. The three-month London interbank offered rate, or Libor, for dollars climbed 1 basis point, or 0.01 percentage point, to 5.73%... It was at 5.36% on July 31... Concern that defaults on U.S. home loans to people with poor credit histories will curb economic growth has driven up corporate borrowing costs in the past month. At least $329 billion, or 40% of all U.S. corporate bonds sold in 2007 used Libor as a benchmark. Central banks added more than $400 billion to money markets since Aug. 9 to free up bank lending. 'There's a lack of liquidity and a lack of trust,' said Padhraic Garvey, head of investment-grade debt strategy at ING Bank NV in Amsterdam. 'We're not looking at weeks. We're looking at months before the market normalizes.'"

September 7 - Bloomberg (John Glover): "Money markets have seized up because lenders don't trust the quality of assets they hold and reckon their peers are in the same boat, said Bob Janjuah, a credit strategist at Royal Bank of Scotland... Central banks around the world have pumped more than $350 billion into financial markets to ease cash shortages prompted by banks refusing to fund each other for longer than overnight. Lenders are concerned they will need to bail out their own businesses that bought bonds backed by assets including U.S. subprime mortgages. 'Banks know they're probably going to have to take a heap of assets on to their balance sheets,' said...Janjuah... 'There is concern as to the quality of the assets that will be coming onto the balance sheet, so this creates fear in the interbank market.'"

September 7 - Dow Jones (Michael Wilson): "Bank's short-term funding arrangements are set to come under renewed pressure again next week, when a large amount of outstanding commercial paper comes up for renewal, European credit analysts said... A total of $113 billion of commercial paper is due to roll over between Sept. 11 and 18, which includes some asset-backed commercial paper. But the current liquidity squeeze has meant that in recent weeks, commercial-paper issuers haven't been able to roll over some of their maturing paper. 'Next week, a huge amount, $113 billion, of commercial paper needs to roll over,' Lehman Brothers' head of European credit strategy told Dow Jones... The lack of liquidity has made valuing commercial paper almost impossible, prompting fears that more banks will be forced to realize their losses and even sell the underlying assets that back ABCP in order to pay off investors. 'There is roughly $2.2 trillion of CP out there of which approximately $1.2 trillion belongs to ABCP conduits and SIVs,' said Mehernosh Engineer, credit strategist at BNP Paribas. 'Generally this rolls each month and no one notices. What is happening now is that people are paying attention to this market. If we look at certain sectors, say ABCP conduits and SIVs, some of these may not get funded and that may have to be taken on to banks balance sheets. We may even see some forced selling.'"

September 6 - Financial Times (Paul J Davies): "Structured investment vehicles, the off-balance sheet vehicles run by banks and asset managers that buy bonds backed by mortgage and other debt, face renewed pressure after Moody's issued warnings yesterday on a number of their ratings. The ratings agency said it had put the ratings for different parts of the debt of five different SIVs on review for downgrade... SIVs and their near cousins, SIV-lites, have been hurt by funding problems as short-term debt markets have seized up and by declining values in the kinds of assets they hold as investors have deserted asset-backed securities over fears of contagion from the US subprime mortgage markets. Paul Kerlogue, senior credit officer for SIVs at Moody's, said: "The rapid spread-widening and decline in the market value of assets across the board, combined with a prolonged market disruption for commercial paper, is unprecedented in structured finance. This is a situation in which volatilities in market value are not significantly correlated with declines in asset quality.'"

September 7 - Bloomberg (Jody Shenn): "Collateralized-debt obligations backed mostly by subprime-mortgage bonds and with A ratings were offered for sale last month at prices between 25 cents and 50 cents on the dollar, according to Deutsche Bank AG. The prices reflect more CDO ratings downgrades amid increasing U.S. homeowner defaults, as well as 'heightened risk version,' analysts led by Anthony Thompson in New York wrote... BBB and BB rated bonds were quoted from 15 cents to 40 cents on the dollar, they said."

September 7 - Bloomberg (Hamish Risk and Neil Unmack): "Regulators are unable to quantify losses from collateralized debt obligations, the fastest growing part of the credit markets, according France's financial markets watchdog. 'Structured finance products have become considerably more complex and difficult to understand,' Michel Prada, president of Autorite des Marches Financiers, told delegates at an investor conference in London today. 'Regulators do not have a global view on all the instruments and positions in the market.'"

September 5 - Financial Post (John Greenwood): "Owners of billions of dollars of troubled asset-backed commercial paper issued in Canada could lose as much as half of their money because of poorly disclosed exposure to derivatives trades, industry observers are warning. The vast majority of about $35-billion of non-bank ABCP is backed by risky bets on credit default rates that are now so far underwater that investors could be looking at losses as high as 50 on the dollar, said Edward Devlin, Canadian portfolio manager for highly respected California-based bond fund manager Pacific Investment Management Co. 'You've got to think people are not going to be pleased about that,' he said..."

September 5 - Financial Times (Gillian Tett and Catherine Belton): "Leading City financiers meet the Bank of England today as a senior banker warned that capital markets had suffered a 'heart attack' this summer and faced a critical period of convalescence. Discussions at what is normally a routine monthly meeting are expected to be dominated by growing concern over the seizing up of money markets in spite of large injections of liquidity by central banks. The cost of borrowing money in the London interbank market was at a nine-year high yesterday. Hans Jörg Rudloff, chairman of Barclays Capital, said the next four to six weeks would be crucial as investors tried to establish price levels for risk and banks expanded balance sheets to take on assets held by stricken investment vehicles. 'This is the big question: are we capable of establishing a new price level for these assets? If we stay stuck, the patient is going to die,' Mr Rudloff said... 'Trading of assets has to be resumed. Transmission mechanisms have to be restored,' he said, speaking in his capacity as chairman of the International Capital Markets Association..."

September 5 - Financial Times (Gillian Tett): "As bankers have returned to their desks this week after the summer break, they have been searching frantically for signs that the markets are gaining a semblance of calm after the August turmoil. However, the money markets are notably failing to offer any reassurance. While the tone of equity markets has calmed, the sense of crisis in the interbank markets actually appears to be growing - especially in London. In particular, the cost of borrowing funds in the three-month money markets - as illustrated by measures such as sterling Libor or Euribor - is continuing to rise, suggesting a frantic scramble for liquidity among financial groups. This trend is deeply unnerving for policymakers and investors alike, not least because it is occurring even though the European Central Bank and the US Federal Reserve have taken repeated steps in recent weeks to calm down the money markets. 'What is happening right now suggests that the moves by the Fed and ECB just haven't worked as we hoped,' admits one senior international policymaker. Or as UniCredit analysts say: 'The interbank lending business has broken down almost completely . . . it is a global phenonema and not restricted to just the euro and dollar markets...' One of the most important functions of the money markets is to channel liquidity in the banking system to where it is most needed. If these markets seize up for any lengthy period, there is a risk that individual institutions may discover they no longer have access to the funds they need."

September 5 - Bloomberg (Jesse Westbrook): "The U.S. Securities and Exchange Commission is 'monitoring' the biggest Wall Street securities firms to gauge whether they face losses from investment vehicles that sold short-term debt, an agency official said. The SEC, concerned about the collapse of the subprime mortgage market, is reviewing 'contingencies that might place additional strains on the balance sheets' of investment banks, said Erik Sirri, head of the agency's market regulation division, in congressional testimony... 'These include the potential unwinding of off-balance sheet funding structures, such as conduits.'"

September 5 - Bloomberg (Sean B. Pasternak): "Owners of asset-backed commercial paper issued in Canada could lose half their money because the funds are backed by credit default swaps that have lost value, a fund manager told the National Post. Most of the C$35 billion ($33.2 billion) in Canadian commercial paper not owned by banks is backed by bets on credit default swaps, the newspaper said."

September 5 - Bloomberg (Darrell Hassler): "Global sales of new collateralized debt obligations fell to the lowest in more than year as investors fled securities that hold subprime mortgages, Morgan Stanley said. There were $17 billion in CDO sales from 35 transactions in August, down 54% from July..."

September 5 - Financial Times: "The dislocation in interbank lending stems not just from distrust of rivals' balance sheets. Banks also have doubts about their own. On one hand, financial institutions are wary about certain hard-to-value, illiquid assets as a threat to the stability of counterparties. On the other, banks want maximum flexibility in case they need to take a wave of new assets on to their own balance sheets. Those include about $1,000bn of assets in structured vehicles originally funded by the troubled asset-backed commercial paper market and more than $300bn of bridge finance commitments for buy-outs."

September 4 - Bloomberg (Elizabeth Stanton and Daniel Kruger): "The global flight to the safety of government debt is causing the widest price swings in Treasuries in three years, driving away traders who rely on computer models to guide their strategies and raising costs for investors. Volatility rose last month to the highest since May 2004 as investors, jolted by losses in securities contaminated by defaulted subprime mortgages, bought U.S. debt, according to data compiled by Merrill Lynch & Co. Morgan Stanley...halted computer-driven buying and selling of Treasuries, said Sanjay Verma, head of U.S. government bond trading. The retreat by so-called black-box traders and hedge funds caused orders for Treasuries to drop as much as 80%..."

September 5 - The Wall Street Journal (David Reilly, Carrick Mollenkamp and Robin Sidel): "Though few investors realize it, banks such as Citigroup Inc. could find themselves burdened by affiliated investment vehicles that issue tens of billions of dollars in short-term debt known as commercial paper. The investment vehicles, known as 'conduits' and SIVs, are designed to operate separately from the banks and off their balance sheets. Citigroup, for example, owns about 25% of the market for SIVs, representing nearly $100 billion of assets under management. The largest Citigroup SIV is Centauri Corp., which had $21 billion in outstanding debt as of February 2007, according to a Citigroup research report. There is no mention of Centauri in its 2006 annual filing with the Securities and Exchange Commission."

September 6 - Bloomberg (Sebastian Boyd): "Citigroup Inc. funds that borrow in the commercial paper market to buy longer-dated debt, sold $5.3 billion of assets last month 'in the interests of prudence.' Seven so-called structured investment vehicles, or SIVs, announced the sales in separate Regulatory News Service statements... The surge in asset-backed commercial paper yields is 'completely unprecedented and predictably we have received a number of questions from investors,' the statements said."

September 6 - Bloomberg (Steve Rothwell): "The global credit rout sparked by the U.S. subprime mortgage slump may leave as much as $34 billion of leveraged loans for railroads, tollways and similar projects 'paralyzed,' said analysts at Standard & Poor's. Banks are less likely to lend to infrastructure projects after being saddled with as much as $332 billion of unsold leveraged loans, the S&P report said."

September 5 - Bloomberg (Ben Sills): "The surge in short-term rates caused by rising defaults of U.S. subprime mortgages exposed 'serious imperfections' in the way global credit and housing markets function, said Jean-Philipe Cotis, chief economist at the Organization for Economic Cooperation and Development. 'Recent developments have revealed serious imperfections in the functioning of U.S. housing markets and, more broadly, in credit markets worldwide,' Cotis said."

Currency Watch:

The dollar index declined 1.0% to 79.96, a 15-year low. On the upside, the Japanese yen increased 2.3%, the Swiss franc 1.7%, the Norwegian krone 1.5%, the Swedish krona 1.5%, the Danish krone 1.1%, and the Euro 1.1%. On the downside, the New Zealand dollar declined 1.9%, the Mexican peso 1.1%, the South African rand 0.9%, and the South Korean won 0.3%.

Commodities Watch:

September 7 - Financial Times (Javier Blas): "Developing countries face serious social unrest as they struggle to cope with soaring food prices, the United Nations' top agriculture official has warned. Jacques Diouf, director-general of the UN's Food and Agriculture Organisation, said surging prices for basic food imports such as wheat, corn and milk had the 'potential for social tension, leading to social reactions and eventually even political problems'. Mr Diouf said food prices would continue to increase because of a mix of strong demand from developing countries; a rising global population, more frequent floods and droughts caused by climate change; and the biofuel industry's appetite for grains."

September 5 - Financial Times (Richard McGregor and Peter Smith): "China's soaring energy demand has forced it back into the global natural gas market in search of cleaner burning though potentially more expensive fuels to power industry and provide residential electricity. Hu Jintao, China's president, presided over the signing of a 20-year agreement between PetroChina and Royal Dutch Shell in Perth yesterday for liquefied natural gas from the Gorgon project off Western Australia."

For the week, Gold jumped 4.0% to $700.6, and Silver gained 4.3% to $12.76. Copper, on the other hand, was hit for 4.3%. October crude rose $2.66 to $76.70. October gasoline gained 1.1% and October Natural Gas 0.6%. For the week, the CRB index incrreased 1.1% (up 1.6% y-t-d), and the Goldman Sachs Commodities Index (GSCI) jumped 2.2% (up 16.7% y-t-d).

Japan Watch:

September 6 - The Wall Street Journal (Sebastian Moffett and Yuka Hayashi): "Taking over as Japan's finance minister after his party suffered a bad election defeat, Fukushiro Nukaga needs to grapple with his country's big financial dilemma. Japan, since the turn of the century, has amassed the largest outstanding debt by far among the world's rich nations.... This year, outstanding debt is equivalent to 179% of gross domestic product, according to calculations by the Organization for Economic Cooperation and Development. The U.S. figure is around 63%."

September 5 - Financial Times (Michiyo Nakamoto): "The head of Japan's second biggest housebuilder on Wednesday warned Japanese property prices were a bubble set to burst, fuelling concerns that real estate prices have reached unsustainable levels just a few years into a recovery from a prolonged slump. 'The property market has become dangerous and I wouldn't be surprised if the real estate bubble goes bust,' Takeo Higuchi, chairman of Daiwa House, told Bloomberg. Mr Higuchi's remarks come as two of the world's hitherto most buoyant property markets - the US and the UK - face widening problems, raising fears of a global property slump."

China Watch:

September 7 - Bloomberg (Li Yanping): "China's central bank governor, Zhou Xiaochuan, said there's too much money in the financial system, a day after banks were ordered to set aside more deposits as reserves for the seventh time this year. 'Liquidity has continued to increase rapidly since the second half of last year,' Zhou said..."

September 6 - Bloomberg (Nipa Piboontanasawat): "China ordered banks to put aside more money as reserves for a seventh time this year to cool the world's fastest-growing major economy after inflation surged to a 10-year high. Lenders must set aside 12.5% of deposits...up from 12%..."

Unbalanced Global Economy Watch:

September 5 - Financial Times (Jonathan Guthrie): "The credit crunch has "sown the seeds of a very major downturn," according to Jon Moulton, the prominent private equity investor... The scenario sketched by Mr Moulton in a speech in Birmingham will add to foreboding among non-banking businesses over the tightening of credit. This has seen inter-bank borrowing rates rising to historically high levels above the Bank of England's official base rate. The private equity investor said the Bank was hampered in its efforts to manage the crisis by its sketchy knowledge of such important debt vehicles as collateralised loan obligations (CLOs). These are securities backed by leveraged loans, which can include US subprime mortgages and whose creditworthiness may be questionable. Mr Moulton said that during a breakfast meeting with Bank officials 'it became clear they did not know what a CLO was. I had to show a senior man [by drawing a diagram] on the back of a napkin... It was really reassuring to see they did not know what was going to explode on them.'"

September 7 - Bloomberg (Greg Quinn): "Canada's unemployment rate stayed at a 33-year low in August and wages rose the most in six years, suggesting there's a risk of faster inflation even as central bankers pause amid turmoil in financial markets. The economy created 23,300 jobs, beating forecasts and keeping the jobless rate at 6%..."

September 6 - Bloomberg (Simone Meier): "German manufacturing orders dropped the most in at least 16 years in July after a decline in sales of ships, trains and airplanes. Orders, adjusted for seasonal swings and inflation, fell 7.1% from June, when they gained 5.1%..."

September 6 - Bloomberg (Robin Wigglesworth): "Norway's statistics agency raised its forecast for economic growth this year after unemployment fell to the lowest in 19 years and consumer demand soared. The mainland economy, which excludes oil and shipping, will expand 5.1%, compared with the previous estimate of 4.1%..."

Bursting Bubble Economy Watch:

September 7 - Bloomberg (Elizabeth Hester): "Countrywide Financial Corp., the nation's biggest mortgage company, may reduce its workforce by 10,000 to 12,000 in the next three months, a 20 percent cut. The lender expects loan originations to drop 25% in 2008 from this year's levels, the ...company said... The cuts are the biggest in the mortgage industry during the worst housing slump in 16 years. More than 15,000 jobs have been eliminated this week alone..."

September 7 - Bloomberg (Elizabeth Hester): "IndyMac Bancorp Inc., the second-biggest U.S. mortgage company, plans to cut 10 percent of its workforce and lower the dividend as housing sales falter and home-loan defaults climb. It may post a loss for the first time in at least eight years."

September 7 - Bloomberg (Bob Willis): "The U.S. economy unexpectedly lost jobs in August for the first time in four years, increasing speculation that the Federal Reserve will have to reduce interest rates to counter an economic slowdown. Employers cut 4,000 workers from payrolls, compared with a revised gain of 68,000 in July that was smaller than previously reported, the Labor Department said today in Washington. The unemployment rate held at 4.6 percent as almost 600,000 people left the workforce. Bonds rallied and the dollar weakened. 'The recession risk has certainly increased,' said Zach Pandl, an economist at Lehman Brothers... The drop in jobs is the clearest sign yet that the deepening housing recession and turmoil in credit markets are hurting the wider economy... LandAmerica Financial Group Inc., a...Virginia-based title insurer, said...it will eliminate 1,100 jobs...as mortgage originations decline. Lehman Brothers Holdings Inc. and Accredited Home Lenders Holding Co., and HSBC Holdings...said last month they would cut a total of 3,400 jobs..."

Central Banker Watch:

September 7 - Bloomberg (Gabi Thesing and Christian Vits): "European Central Bank policy makers signaled the bank is ready to raise interest rates further to curb inflation once financial market turbulence has abated. The ECB has a 'determination to act in the future whenever it is necessary,' ECB President Jean-Claude Trichet said... He called monetary policy 'still on the accommodative side.'"

September 7 - Bloomberg (Jonas Bergman): "Sweden's Riksbank raised its benchmark interest rate to 3.75% to contain inflation, becoming the latest central bank to focus on domestic issues and ignore the global clamor for lower borrowing costs. The repurchase rate was lifted by a quarter point to the highest since March 2003..."

September 6 - Bloomberg (Ellen Pinchuk and Cherian Thomas): "Stephen Roach, chairman of Morgan Stanley in Asia, comments on the subprime crisis and the role of central banks: 'World central banks in the last seven years have allowed the world to lurch from equity bubbles, property bubbles, credit bubbles to subprime bubbles. They claim they can accomplish everything by their fixation on the narrow consumer price inflation target. Guess what, that target doesn't work in today's increasingly interdependent, complex world financial markets. We really need an overhaul in the way central banks go about conducting monetary policy before it's too late... Look at Japan. Eighteen years later after the equity bubble burst, its economy is going nowhere. And that's the lesson of letting an asset dependent economy get out of control.'"

Mortgage Finance Bust Watch:

September 6 - Associated Press: "A third of home loans originated by mortgage brokers failed to close in August as investors shied away from riskier borrowers, a new survey says. The survey of 1,700 mortgage brokers sponsored by trade publication Inside Mortgage Finance comes as numerous lenders that catered to subprime borrowers with weak credit close down and lenders back away from riskier lending practices common in recent years. That has led to many borrowers being stuck without a loan as they prepare to settle. 'There's a problem with funding commitments not being honored'by lenders, said Thomas Popik, who designed the survey for...Campbell Communications. Three years ago, Popik said, a survey of real estate agents found that only 4% of transactions failed to close on average. The survey also found that some homebuyers backed away from deals last month... The survey also found that nearly half of borrowers with adjustable rate mortgages were not able to refinance their loans. That's a major concern of policymakers as an estimated that 2.5 million mortgages given to borrowers with weak credit will reset at higher rates by the end of next year, according to the FDIC."

September 7 - Financial Times (Jim Pickard): "Real estate investors are finding it much harder to borrow against property assets as banks tighten their loan criteria amid the financial markets squeeze. Typical maximum loan-to-value (LTV) ceilings have dropped from more than 80% two months ago to about 70%, according to some experts. This means that a typical buyer of commercial property would have to inject about 50% more equity than before... One expert said: 'The key is value, the banks are saying, you are buying this asset for 100 but in six months' time it will be worth 90. 'Plus, we're cutting our LTV from 80 to 70, so you may end up with just 70% of 90 (63%). 'Investors' gearing is also cut, in effect, by rising bank margins.'"

September 5 - Financial Times (Eoin Callan): "The fate of the US housing market is increasingly in the hands of an opaque part of the financial system normally associated with moves to evict families from their homes. Mortgage service companies, which are responsible for calling on Americans to keep up with their loan payments, have assumed a pivotal role in President George W. Bush's market-oriented strategy for dealing with the pending wave of foreclosures... An estimated 6m high-risk subprime loans, worth a total of more than $1,000bn, are outstanding, which will in many cases reset to higher interest rates in the next 18 months, putting more than 2.5m Americans at risk of foreclosure. 'It is sort of like being in New Orleans a month before Hurricane Katrina hit when you know there is a storm coming,' said Guy Cecala, of Inside Mortgage Finance. Economists fear that a wave of evictions of borrowers unable to afford the higher payments will blight neighbourhoods, hit home prices, deepen the worst housing downturn in 16 years, and harm the wider economy."

Foreclosure Watch:

September 6 - Bloomberg (Kathleen M. Howley): "The number of Americans who may lose their homes to foreclosure reached a record in the second quarter as late payments by subprime borrowers surged to one out of every seven loans. The share of all U.S. mortgages entering foreclosure rose to 0.65% in the second quarter, an all-time high, from 0.58% in the first quarter, the Mortgage Bankers Association said... The percentage of subprime borrowers making late payments increased to 14.82 from 13.77."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

September 6 - Bloomberg (Jody Shenn): "Payments on $285 billion of subprime mortgages that are packaged into securities will start to reset higher by 2009, as 'teaser' periods on the loans expire, according to Credit Suisse Group. The figure represents about 70% of the balances in bonds of adjustable-rate subprime mortgages scheduled for resets by the end of next year, analysts led by Rod Dubitsky wrote... The other 30% of loans would be paid off through home sales or refinancing, they said.'"

September 6 - Bloomberg (John Glover): "Credit derivatives awarded the top ratings by Moody's...and Standard & Poor's may be as vulnerable to default as high-risk, high-yield bonds, according to independent research firm CreditSights Inc. Constant proportion debt obligations use credit-default swaps to speculate that a group of companies with investment-grade ratings will be able to repay their debt. An increase in credit rating downgrades for investment-grade companies may cause losses that CPDOs would struggle to recoup, CreditSights said in a report entitled 'Distressed CPDOs: We're Doomed!'"

September 6 - Bloomberg (Shannon D. Harrington): "Trading in an index that reflects speculation on the leveraged loan market soared to $350 billion since debuting May 22 as investors rushed to hedge the risk that debt prices would plunge under the weight of leveraged buyouts."

Real Estate Bubbles Watch:

September 5 - Bloomberg (Hui-yong Yu and David M. Levitt): "U.S. commercial real estate prices may fall as much as 15% over the next year in the broadest decline since the 2001 recession as rising borrowing costs force property owners to accept less or postpone sales. 'People aren't willing to do deals right now,' said Howard Michaels, the New York-based chairman of Carlton Advisory Services Inc., which has arranged financing for real estate purchases including the Lipstick Building in midtown Manhattan. 'The expectation is that prices will come down.'"

My apologies, but I had obligations at home this evening...


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