Another Letter from the Governor to the Chancellor - UK CPI at 3.2% in October

In the UK, Inflation has exceeded 3 percent this year in every month apart from February.

Another fourth letter from Mervyn King to the Chancellor...(The governor must write to the chancellor every three months when the inflation rate deviates more than a point from the central target in either direction).

King in his open letter to the Chancellor of the Exchequer indicated that inflation will "probably" (most likely if you ask me...) stay above the bank's target of 2% till the end of next year.

He explained that inflation might (will...) increase further over the coming few months as the VAT will increase to 20.0% in January and commodity prices are rising, yet "the MPC believes that the spare capacity in companies and labor market would put downside pressure on prices till it shore it back to the target", adding that "inflation prospects remain uncertain".

In February, I argued that QE in the UK would fail and that inflation would be creeping up. I added to this analysis in April also, sating the results of QE would be inflation down the line in the UK. In May, I posted the reasons why QE was failing in the UK. It has been an ongoing theme on my blog. There is more and more a higher risk of Stagflation, low growth, high unemployement and rising commodity prices à la 70s style as I posted in July.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aicpQZswD66U&pos=3

“With continued increases in the headline rate of inflation well above target, the bank is facing an unenviable communication challenge to try and explain why further easing would be needed,” London-based Nomura International Plc economist Philip Rush said in a telephone interview today.
Source: Bloomberg article written by Svenja O'Donnell as indicated in the link above.

The temptation of reducing the debt burden by increasing inflation is clearly in the mind of our politicians, I discussed in July. Is it the game being played in the UK at the moment?

Savers are still being punished, that's the hard reality.
Pensioners in the UK are struggling. They are the hardest hit by the rise in inflation because:
-they spend less on consumer goods that have fallen in price.
-they spend more on basics and insurance where price rises have been much higher. (British Gas has just announced a 7% price hike...).
–they have seen a dramatic fall in their savings income as interest rates have been cut to the bone...

By the way CPI does not include housing or heating costs...

There is still a very real risk of a double-dip recession in the UK. At some point the Governor of the Bank of England Mervyn King will have to raise rates to counter the rise in prices. This will put additional pressure on housing prices as well as mortgages and put more households into trouble, which would impair even more the damaged balance sheets of many UK banks.

The great bank robbery runs unabated...Inflation is purely and simply theft on a large scale.

The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
John Maynard Keynes

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.
Alan Greenspan

The Irish Black Hole

On the 30th of September, I posted a long post relating to the dire situation of the state of the Irish public finances in general and the Irish banks in particular. The post was called "Ireland in a need of a lucky shamrock...".

From Credit Market Analysis Ltd: CMAvision.com, please find below an update on Ireland CDS, the spread level and number of quotes comparison, for the 5 year CDS level:

CMA's CDS Market Activity identifies increasing and decreasing activity around single name CDS, based on the total quantity of quotes observed by CMA Datavision's consortium over a given week. The biggest weekly changes in quoting volumes are identified above for Ireland.

As we can see below from the same source CMA, Ireland Sovereign CDS is moving in the same direction as Irish Banks CDS. As I stated previously in relation to the Greek situation(The Hangover...Some guys can't handle credit...; A run up to the second leg down...and no this time it is not different): "Always remember that the banking industry is a leveraged play intensively correlated to the economy it is operating in and given the GDP contraction Greece has experienced and the state of the public finances, their fate is linked."
The difference between Ireland and Greece is quite simple, in Greece the country sunk the banks, in Ireland (and Iceland...) the banks sunk the country.

The Irish Black Hole in 2010 represents a scary 32% of GDP.

We discover more and more on how the Irish Banks sunk Ireland with them.
the below article published today in Bloomberg by Alan Katz and Joe Brennan is a good illustration of the large scale fraud, lack of accountability and still non existent legal claims on the people responsible for the horrific situation of the Irish financial black hole:

http://noir.bloomberg.com/apps/news?pid=20601109&sid=aEzBmzzOjxE8&pos=11


“It was the banks doing crazy loans, it was borrowers taking crazy loans and a failure by government and regulators to do their jobs properly,” said Sean Kay, a professor of politics and government at Ohio Wesleyan University in Delaware, Ohio, who spent three months this year in Dublin interviewing officials for a book. “There was no adult supervision.”

The credit binge party is definitely over and the taxpayers are left on the hook to bear the costs as well as the massive hangover, which is threatening even the sovereignty of Ireland (IMF and European Stability Fund bail out down the line?).

In my article relating to the Zombie state of the Irish Banking system, I pointed out there were some Zombie Hotels as well in Ireland linked to the Zombie Banks.

Banks in Ireland are facing increasing difficulties in funding due to deposit outflows. The deposit outflows are linked to the uncertainties of the financial situation of these institutions. In order to face these outflows, Irish banks are depending more and more borrowing from monetary authorities.

Irish banks sub debt are trading at distressed level currently. Reflecting the difficult situations of the Irish Financial sector.

http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201011110946dowjonesdjonline000450&title=anglo-irish-subordinated-debt-below-offer-value-as-ireland-fears-spread

"Anglo Irish Bank Corp.'s subordinated debt is being priced below the value offered as part of a government-backed exchange offer, as contagion from Ireland's sovereign situation spreads.

The bank's Lower Tier 2 paper, which was valued at 20% of face value through an exchange offer made three weeks ago, is now indicated in the market at around 18%, according to Markit."

"Allied Irish Banks' 12.5% 2019 bonds are trading at 44%-46% of face value, a drop from its price of around 81% at the beginning of the month. In the same period, Bank of Ireland's 10% 2020 bonds have dropped from around 96% of face value to 60%-62%."

There will be a restructuring and sub debt bondholders will take a haircut on the existing debt.

Given the extensive damages created by the housing bust on the deeply impaired balance sheet of the Irish banks, the Irish Government will have to ask for some help from the IMF and/or the European Financial Stability Facility.

The Irish banks are taking the public finances of Ireland down the drain. Ireland, after Greece. Who will be the next to fall? Portugal? Spain?

Irish 10-year bond spreads widened to a fresh all-time EMU high at +720bps above the benchmark German Bund on the 12th of November which is aroun d to Irish 10-year bond yielding 9.3% !
As for Greece earlier this year, time is running out for Ireland and they will need to seek external support in 2011, because Irish banks are becoming more and more dependent on borrowing to the European Central Bank to stay afloat. The zombie banks are indeed taking large chunks of flesh from the Irish public finances.

Repo Man - The Repo Mess and the Housing Funk

It's 4 AM.
Do you know who owns your house?

Ask the Repo Man...

The big issue of mortgage repurchase obligations for big banks is a hot topic and represents for them serious headwinds.

Bank of America bears the highest mortgage repurchase risk to earnings according to CreditSights, mostly due to the "ill-fated" acquisition of Sunny Subprime-Alt A mortgage player Countrywide (Countrywide was bought for 4 Billion USD in January 2008.). The former Countrywide tanned CEO Mozilo settled for a cool 67.5 millions USD fine with the SEC (although he bailed out early and made a juicy 129 millions USD in 12months in 2007, selling shares). Bank of America shareholders are left on the hook for more pain to come unfortunately. Please also note that out of the 67.5 Millions settlement fine, Countrywide (now Bank of America...) will pay 20 millions USD of it.

http://noir.bloomberg.com/apps/news?pid=20603037&sid=ajkIkoKst7xo


This is what we can read from the Bloomberg article as indicated above regarding the situation for Bank of America and the foreclosure mess they are facing.

"Delinquencies and defaults kept rising through the recession of 2009 and into this year. Today, of the 14 million Bank of America mortgage customers, 1.3 million are in some form of delinquency, including 195,000 who haven’t made a payment in more than 2 years. The troubles prompted the bank to triple its loan workout staff to 18,000 in the 18 months ended in October."

"Fannie Mae, Freddie Mac, mortgage insurers and other investors had made $12.9 billion in claims on BofA as of Sept. 30. Those demands may eventually exceed $35 billion, says Christopher Gamaitoni, vice president at Compass Point Research and Trading LLC in Washington. During the five quarters ended on Sept. 30, the bank had approved repurchase of loans with a face value of $4.9 billion, it announced on Oct. 20."

But it is not only Bank of America who is feeling the heat on the housing funk and the repo mess...JP Morgan Chase is on the hook as well thanks to its acquisition of Washington Mutual (WAMU) in September 2008 according to an article in Bloomberg:

http://noir.bloomberg.com/apps/news?pid=20601109&sid=aBc1G2i8oquE&pos=10

"JPMorgan did buy WaMu in September 2008 after it was seized by the Federal Deposit Insurance Corp., which meant the assets came at a bargain price of $1.9 billion, Bloomberg Markets magazine reports in its December issue.

The 2,200 WaMu branches in California, Washington and 12 other states gave JPMorgan’s consumer bank, Chase, a total of 5,410 branches -- the second-biggest network in the nation. And it moved Chase to first from third in deposits, with $905 billion after the deal closed.

Dimon, 54, got what he wanted -- and a lot that he didn’t want. JPMorgan is now saddled with $74.8 billion in nonperforming home loans inherited from WaMu, a third of the $230.7 billion in mortgages on its books."

"Both the WaMu mortgages and JPMorgan’s own home-equity loans are spilling red ink."

"In addition to the WaMu losses, Dimon has to deal with $113 billion in risky subprime, home-equity and adjustable-rate loans that JPMorgan originated."

The housing funk:

"The debacle in the housing market is still the biggest headache for U.S. banks. Payments on some 8 million U.S. mortgages were delinquent in late September, and almost 7 million of those may end up in foreclosure, says Laurie Goodman, a senior managing director at Austin, Texas-based Amherst Securities Group LP.

11.5 Million Seizures

Those projections exclude the 200,000 additional borrowers that become delinquent each month for the first time, she says.

In total, Goodman estimates that 11.5 million homes could be repossessed by banks during the next five years."

This will keep the Repo Man very busy...



The SEC is stepping in:

http://all247news.com/sec-tells-banks-to-disclose-potential-losses-from-the-mortgage-and-foreclosures-crisis/7194/


“Items that should be considered include, without limitation, the impact of various representations and warranties regarding mortgages made to purchasers of the mortgages (or to purchasers of mortgage-backed securities) including to the government-sponsored entities (GSEs), private-label mortgage-backed security (MBS) investors, financial guarantors and other whole loan purchasers.”

"Investors have been pressuring the banks for refunds on billions of dollars of securities. Earlier, we reported that Bank of America creditors are demanding for a repurchase of mortgage-backed bonds valued at $47 billion which was assembled by Countrywide Financial."

The sharks are circling the wounded banking whale, and they ain't no small sharks: PIMCO, BlackRock (Bank of America owns 34% of BlackRock),as well as the New-York Fed.

http://www.minyanville.com/businessmarkets/articles/foreclosures-mortgages-wall-st-thomas-cox/10/28/2010/id/30831


"In testimony before the Congressional Oversight Panel yesterday, Katherine Porter, a University of Iowa law professor and expert on mortgage servicers, noted that despite banks' attempts to narrowly characterize the problems as minor technicalities, the flaws in the process are far from fixed:

The problems in such cases range from the imposition and collection of improper fees, a lack of standing to foreclose in judicial foreclosure states, the pursuit of foreclosure without rights in the note and mortgage, mortgage origination fraud, or liability to investors for poor underwriting or improper servicing. The key point is that the vast majority of the alleged problems cannot accurately be described as "technicalities."

"Because [the banks] are being allowed to control the definition of error and are being allowed to audit themselves, we cannot have confidence in such reports," Porter noted."

Ouch...

http://moneywatch.bnet.com/economic-news/blog/daily-money/the-foreclosure-mess-the-start-of-another-bank-bailout/1468/


“This isn’t the other shoe dropping,” says Barry Ritholtz, a lawyer and investment expert and the CEO of Fusion IQ. “This is the third iceberg.”

"The ultimate lesson in all this? Ritholtz sees it as further proof that when a firm screws up, taxpayers should not ride to the rescue. “This goes back to why you don’t bail out banks,” he says. “You don’t know what other shortcuts were on the books.”

Will Bank of America be forced to buy back these Mortgage backed securities? The implications for large players in that space (JP Morgan, Wells Fargo, etc.) could be serious. As I previously posted, there is a strong need for a new RTC to be set up. Problems are adding up for banks, faster than the balance sheets are being repaired thanks to zero rate policy and Quantitative Easing. TPC from the excellent Pragmatic Capitalism website, argues that QE2 is aimed at Wall Street, yet again, not Main Street.

Another story to follow closely.