Cash Strapped FDIC Considers Tapping Treasury

The WSJ is reporting FDIC Weighs Tapping Treasury as Funds Run Low.

Federal Deposit Insurance Corp. Chairman Sheila Bair said Tuesday her agency might have to borrow money from the Treasury Department to see it through an expected wave of bank failures.

Ms. Bair said the borrowing could be needed to cover short-term cash-flow pressures caused by reimbursing depositors immediately after the failure of a bank. The borrowed money would be repaid once the assets of that failed bank are sold.

The last time the FDIC borrowed funds from Treasury came at the tail end of the savings-and-loan crisis in the early 1990s after thousands of banks were shuttered. That the agency is considering the option again, after the collapse of just nine banks this year, illustrates the concern among Washington regulators about the weakness of the U.S. banking system in the wake of the credit crisis.

My Comment: Notice when the last FDIC cash shortage occurred. It was at the tail end of the S&L crisis. Arguably we are in the initial stages of this crisis.

"I would not rule out the possibility that at some point we may need to tap into [short-term] lines of credit with the Treasury for working capital, not to cover our losses, but just for short-term liquidity purposes," Ms. Bair said in an interview. Ms. Bair said such a scenario was unlikely in the "near term."

She said she did not expect the FDIC to take the more dramatic step of tapping a separate $30 billion credit line with Treasury, which has never been used.

My comment: Unrealistic optimism will be punished in due time.

Problem Banks List Rose 30% in Quarter

Bloomberg is reporting Banks on "Problem List" Rose 30% in Quarter.

The U.S. Federal Deposit Insurance Corp. said its "problem list'' of banks increased 30 percent in the second quarter to the highest total in five years as more commercial real-estate loans were overdue.

The list had 117 banks as of June 30, up from 90 in the first quarter and the highest since mid-2003, the agency said today in its quarterly report without naming any institutions. FDIC-insured lenders reported net income of $4.96 billion, down 87 percent from $36.8 billion in the same quarter a year ago.

"More banks will come on the list as credit problems worsen," FDIC Chairman Sheila Bair said at a news conference in Washington.

Second-quarter earnings fell from $19.3 billion in the previous quarter, driven by higher provisions for loan losses, the FDIC said. It was the second-lowest net income reported since the fourth quarter of 1991 behind the $600 million reported in the fourth quarter of 2007, the agency said.

"The results were pretty dismal, and we don't see a return to the high earnings levels of previous years any time soon," Bair said.

My Comment. The time it takes bank earnings to recover may be measured in decades not years.

The agency in October will consider a plan to replenish the account that will likely include an increase in the premiums charged banks, Bair said.

A greater share of the increase will be shifted to "riskier institutions so that safer institutions won't be unduly burdened,'' she said.

My Comment: Risky institutions should be shut down now. Why wait? Postponing the problem only makes matters worse.

So here we are, at the beginning of a credit crunch, and the FDIC is already considering tapping the Treasury. Supposedly it's only for "short-term cash-flow pressures". However, short term will eventually become long term, which bears the question:

How Long Can The Fed Last?

Cumberland Advisors has an interesting chart showing declining securities at the Fed. Let's take a look.

Factors Adding to Reserves and Off Balance Sheet Securities Lending Program



click on chart for sharper image
Chart Courtesy of Cumberland Advisors.

A the current pace, the Fed runs out of treasuries about a year from now. Things are about to get very interesting.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Soft Canadian Job Market Masked By Public Hiring Binge

One expects to hear ridiculous statements continually in the US, particularly from Bernanke, Paulson, President Bush, and various commentators on CNBC.

However, the US does not have a monopoly silly economic commentary by any means. Tom Jeffries at radio station CKNW Vancouver (see the audio links on the right hand side of this blog - a new one is posted every week or so as time permits) sent me a link to an article on the Canadian job market containing comments best described as "That's Loonie".

Inquiring minds may wish to consider Public hiring binge will end, expose soft job market, observers say.

Weakness in the labour market that has been masked by strong public-sector job growth could soon be laid bare as softening government finances put the hiring frenzy on hold.

Despite sharp declines in Canada's manufacturing sector in recent times, the country's labour market has been buffeted from overall losses - with 55,000 jobs eliminated from the economy in July - by gains in the public sector.

"We look at the overall quality of employment and were surprised to see that it has improved despite the weakening economy," said CIBC World markets senior economist Benjamin Tal. "One of the reasons for that was the fact that a lot of the new jobs were in the public sector, which has relatively high-quality jobs.

How can anyone can possibly think that the "overall quality of employment" can rise on account of public sector jobs?

In honor of Daffy Duck, I say "That's Loonie".

To be fair, Tal went on to say "This probably will not last. The days that governments run high surpluses are over. In fact, I would expect government hiring to slow down significantly over the next two to three years."

Statements of economic reality are enough to knock one out of contention for the gold medal in economic "Loonacie". With those subsequent statements, Tal has disqualified himself from the gold medal round.

The article continues with Niels Veldhuis, the Fraser Institute senior economist, chiming in with realistic concerns about public sector growth.

According to the Statistics Canada report, the proportion of public sector workers among the total employed in the workforce has remained stable at 19 per cent since 2001.

"This number is quite concerning," Veldhuis said. "The public sector as a percentage of employment is critical in terms of how that impacts our economy and our labour market, and we need to be focusing on reducing that further than 19 per cent rather than being pleased with 19."

As jurisdictions with higher rates of public sector employment tend to attract less investment and suffer slower rates of economic growth, it is imperative to make ourselves comparable to competitors, Veldhuis said.

But we are a long way off from that, as Canadian provinces have much bigger public sectors than most U.S. states.

"When you look at place like Nevada, Wisconsin and Massachusetts, they're all sitting at 10 or 11 per cent of employment. Alberta has Canada's smallest public sector at about 15.5 per cent. But when you start looking at places like Newfoundland and Saskatchewan, Saskatchewan has the highest (proportional) public sector in North America, at 27.4 per cent."

Veldhuis said government hiring should not be seen as a bromide for troubled times, as the increased government spending could force the economy into deficit and the government to raise taxes.

Loonie Comments Of The Month

Tal's initial comments got me thinking about a possible feature about the most ridiculous Canadian comments of the month. Possible titles include "That's Loonie" and "Loonie Comments Of The Month"

Thinking further, why not have a competition from the UK as well? Something like "Sterling Comments Of The Month" could work.

For the US, something like Nocents Comments Of The Month" is a possibility. I am open to other title suggestions as well as ideas on how to present them.

I am considering a competition of submitted entries in which I would post a link to the winning blog or simply the winning commentary person if there was no blog. What I would be looking for is the 5 most ridiculous country specific comments of the month (US, UK, Canada), with a short rebuttal. The only problem is I cannot spend a lot of time on this, as I am swamped as it is.

If anyone has some ideas on how to organize such a monthly competition, please email me. To help me quickly sort through the ideas, please put "That's Loonie" in the Email header.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

White Elephants Rampage UK

Previously we discussed the Growing Herd Of White Elephants in the US. Today, let's take a look at white elephants in the UK.

Preemptive White Elephant Demolition

The Telegraph is reporting Buildings razed turning British cities into 'bombsites'.

Hundreds of buildings are being razed as a result of an empty property tax, turning British cities into "bombsites", a government regeneration chief said.

The levy on empty shops, offices and warehouses, which was introduced in April, is aimed at landlords who left buildings deliberately empty as they waited for rents to rise. It intended to reduce rents, raise property supply and earn the Treasury almost £1 billion in tax.

That tax policy decision in the UK is a prime example of bureaucratic idiocy at its finest. The Guardian offers more details as proof. Please consider Property tax leaves cities 'looking like broken teeth'

One of the government's most senior advisers on the regeneration of cities has warned that a tax imposed on empty commercial buildings is threatening to derail efforts to breathe new life into some of the most blighted parts of Britain.

John Nicholls, who chairs a group representing the government-funded urban regeneration companies (URCs), said yesterday that owners are demolishing empty buildings to avoid paying the tax introduced in the most recent budget, leaving parts of the country "resembling bomb sites". Regeneration projects had been rendered unworkable, threatening jobs and new homes, he said. Some developers are simply leaving sites unfinished rather than risk liability for the tax.

"There is a lot of pre-emptive demolition going on. This is already having a visual impact - cities are beginning to look like broken teeth."

The measure has been fiercely opposed by business lobby groups including the Confederation of British Industry, the British Chambers of Commerce and the British Retail Consortium - the latest in a series of clashes between business and Labour since Gordon Brown became prime minister and Alistair Darling took over as chancellor.

Before the changes, vacant offices and shops received rate relief of 50% and industrial units gained full relief. Now all unused commercial property has to pay full business rates after a three-month period of grace for commercial premises and six months for industrial property and warehouses, adding about £1.3bn a year to government coffers.

Swindon council has joined the campaign to get the tax repealed. It is demolishing a 14-acre former factory at the cost of £430,000 rather than continue to pay £110,000 a year in tax on that one site alone.

"We are spending public money demolishing buildings to avoid this ill-thought out stealth tax," said Nick Martin, lead member for finance at Swindon council. "Swindon, like many other towns across the country, could suffer if regeneration projects are shelved as a result of this."

Salmon Developments, a property company in London's West End, said it had implemented a policy of demolishing all of the older buildings in its portfolio that it had failed to let after three months.

Idiotic tax policy is such that it makes more sense to demolish perfectly usable sites (leaving "bomb-sites" in their wake) rather than owners holding properties hoping to find renters. It also precipitates builders leaving sites 3/4 finished rather than completing them. The tax hike that was supposed to bring in extra money will end up having the exact opposite effect. It's a lose-lose situation as most government mandated solutions are.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Frugality Is The New Reality At Citigroup

Citigroup has hopped on the large and ever-growing frugality bandwagon. Please consider Citigroup Limits Meetings, Pares Color Photocopies.

Aug. 26 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank by assets, banned off-site meetings among employees and cut back on color photocopying to reduce expenses as investment- banking revenue declines.

Executives in the New York-based bank's institutional clients group will need to ensure spending is "highly efficient," according to an internal memorandum confirmed by a Citigroup spokesman in London today.

Citigroup is clamping down on spending after cutting about 14,000 jobs in the first half of 2008 and reporting $55 billion of writedowns and credit losses, more than any other bank, according to data compiled by Bloomberg. Revenue at the company's corporate and investment bank plunged 71 percent in the second quarter because of losses on subprime-related assets.

Under the new policy, employee meetings must be held within Citigroup offices and client events will require approval, the memo said. Color photocopiers will be removed from some locations and their use will be limited to client presentations. The memo didn't say how much money the new rules will save.

"We have spent considerable time looking at our headcount and related expense, and while we have made progress in that area, we still have more work to do," the memo said.

Citigroup is also scaling back external training, which will be limited to that which is "strictly necessary," the memo said. Purchases of computer hardware and software must also be pre-approved under the new rules, as must all non-client travel, the bank said. The U.K.'s Daily Telegraph newspaper reported the contents of the memo earlier today.

"We will be conducting a review of our Blackberry usage," Citigroup said. "In the interim, all new Blackberries will require pre-approval."

Merrill Lynch, Deutsche Bank Opt For Frugality

The article also points out restrictions on meals and taxi tipping at Deutsche Bank, and a hiring freeze and jet usage restrictions at Merrill Lynch.

Changes in behavior begin with changes in attitudes. And there's no better place to build a proper attitude than in the youth of America. And the youth of America have spoken: It's Cool to Be Frugal.

The Future Is Frugality and that future is now

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Is China's Growth Story Coming Unglued?

Something is going on in China that simply does not add up. Let's start with the GDP. ChinaView is reporting China think tank forecasts GDP growth at 10.2% in Q3.

BEIJING, Aug. 8 (Xinhua) -- China will record a GDP growth of 10.2 percent in the third quarter, roughly the same as the second-quarter level, according to a report released on Friday by the State Information Center, a government think tank. The report said consumption would continue to be a major driving force for the national economy. However, auto and home purchases ebbed notably in the first half, adversely affecting consumption in the third quarter.

I doubt 10.2% growth is anywhere close to sustainable in a world economy slowing so fast that a global recession is visible on the horizon. Furthermore China has a major pollution mess that needs to be addressed. China is poisoning its land, air, water, and most importantly its citizens.

Pollution In China

The guardian has a gallery of eleven stunning images of Pollution In China. Here are a few of them.



Yutian, Hebei province: Cyclists ride through a cloud of pollution produced by a nearby factory. Photograph: Peter Parks/AFP/Getty Images



Wuhan, Hebei province: A man collects dead fish in Donghu lake, where officials say an estimated 30,000kg of fish have been killed by a combination of pollution and hot weather. Photograph: Wuhan/AP



Lanzhou, Gansu province: A resident takes a water sample from the polluted Yellow river. Photograph: Dang Yun/ChinaFotoPress/Getty Images

Here is a second piece of a puzzle that just does not quite fit.

China considering economic stimulus package

Forbes is reporting China considering 370 billion yuan economic stimulus package.

China is considering a 370 bln yuan package of fiscal expenditures and tax cuts to stimulate the economy, the Economic Observer reported, citing a source close to the matter. The report said the plan includes 220 bln yuan in government spending and 150 bln worth of tax cuts.

The plan received initial approval from the Central Leading Group on Economic and Financial Affairs, a body under the State Council, but further details will be finalized by the finance ministry and other government departments.

If China was growing as fast as reported, one might think they should be putting on the brakes. Instead China is considering a stimulus. Other than pollution control, exactly what is it that needs stimulating? The stock market perhaps? Let's see how a third piece of the economic puzzle fits.

China May Turn to Bond Sales to Bolster Stocks

Bloomberg is reporting China May Turn to Bond Sales to Bolster Stocks, Official Says.

Aug. 26 (Bloomberg) -- China may let investors sell bonds that can be swapped for shares to deter equity sales and support the stock market, the world's worst-performing this year.

The China Securities Regulatory Commission is studying exchangeable bonds as part of a package of measures to restrict sales of state-owned shares, said a Beijing-based official of the regulator who declined to be identified before a proposal is made public.

The plan would enable state shareholders to raise funds without selling stock on the market, limiting supply after the benchmark index slumped 55 percent this year.

Lockup restrictions are set to expire on shares accounting for more than half the combined $2.29 trillion capitalization of the Shanghai and Shenzhen markets. The overhang is the legacy of a 2005 government-led shakeup that converted non-tradable shares into common stock that can be bought and sold on exchanges.

Under the commission's plan, shareholders wanting to sell after lockups expire would have to transfer their stakes to a third party such as a clearing house, according to the official. They would then be allowed to sell bonds to investors that could be swapped for the shares later.

Shanghai Index



click on chart for sharper image

Whatever is going on in China, one thing is perfectly clear: The Shanghai Stock Index does not seem to care much for it. To that I will add that China's ridiculous scheme to prop up prices simply will not work.

The Olympic Bust

Another piece of the puzzle to consider is China's Olympic Sized Bust. The opening ceremonies were fantastic, but where was the payback? In a command economy there does not have to be a payback. Appearances are often more important than realty, and deviations from plans are simply not tolerated.

Buses Ran On Time

Sometimes economic highlights appear in the strangest of places, like sports columns. Thomas Boswell, sports columnist for the Washington Post is reporting They Made the Buses Run on Time.

At 3 a.m. on most Olympic nights, a bus with a few reporters would return to the Beijing Tibet Hotel. A dozen security officials met us to make sure we had credentials. During the day, knee-high tape outside the hotel created lanes for entering and exiting -- a reasonable way to keep things organized.

But in the middle of the night in a sleeping city, the tape was irrelevant. So, exhausted, we'd step over the tape and take the direct route to the front door. And every night the security people objected, insisting forcefully that we obey the stupid tape maze.

Finally, a Chinese solution was devised. Instead of stopping by the front door, our bus continued to the side of the hotel so, even though our walk was longer, the direct route now obeyed the tape.

Common sense was irrelevant. The tape -- symbolic of a decision made by somebody somewhere in an unknowably complex and security-conscious control structure -- was all that mattered. They had uniforms. We didn't. That's big everywhere. It's huge here.

All day long, every 20 minutes (to the split second), hundreds of buses run back and forth from media hotels to the Olympic venues. There's even a special "Olympic lane" for all official traffic to the Games. Because the Chinese are obsessed with appearing efficient, the number, size and frequency of buses comically exceed the need. I often had a bus to myself.

However, I can barely believe what I saw Saturday when, by accident, I had to return to my hotel at 1 p.m., when almost no reporter has reason to leave the Olympics. Several football fields full of buses all pulled out simultaneously, headed to hotels all over Beijing, theoretically transporting media.

But I was the only rider on any bus I saw. They still made their runs. They still wasted fuel. They still clogged traffic. But nobody, in an activity as state-controlled and Communist Party-scrutinized as these Olympics, would deviate from the original plan, no matter how stupid it might be.

Everyone was helpful until you went one inch past where you were supposed to go. Then, arms sprang out to stop you. Everywhere you went, even alone at 2 a.m., you felt completely safe. Because every hundred feet there were a pair of guards -- at attention in the middle of the night.

The complete lack of dissent here -- not one person could get a permit to use the designated Olympic "protest area," though some were detained for trying -- has an eloquence of its own.

I'll leave here more concerned about China's future, and its impact on those around it, than the future of the United States. Part of that is probably xenophobia, though I've spent a lifetime repeating, "Patriotism is the last refuge of a scoundrel."

Some of it, however, is my suspicion that the cycles of capitalism and the inflexibility of authoritarian regimes make for a spectacularly happy marriage in the virtuous-cycle good times, but perhaps an ugly partnership in the inevitable bad periods.

China got aboard the free-market love train at roughly the time -- in the early 1980s -- that worldwide capitalism hit one of its long secular hot streaks that frequently last 15 to 20 years. Money couldn't wait to invest itself here. Let's see how the Party enjoys its first secular bear market.

When political writers wander into sports, they often sound like rubes. The odds are high that I've merely flipped that script. But if China were a stock, based on what I've seen and felt at this Olympics, I'd downgrade it from buy to hold.

Maybe things will get back to normal now that the Olympics are over. And maybe normal, whatever normal means, will start making sense. And Maybe the Shanghai index will soon be headed back to a new all time high. And maybe China's pollution mess just doesn't matter or better yet the mess will be cleaned up next year. But maybe, just maybe, China's growth story is starting to come unglued, in more ways than one.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Jefferson County Alabama Considering Bankruptcy

I have talked about Jefferson County many times before. Details on the problems facing Jefferson County can be found in Jefferson County Death Spiral Swaps and Fraud, Antitrust Investigation Involving JPMorgan, Jefferson County.

A brief synopsis is that Jefferson County officials entered into an illadvised interest rate swap arrangement when they financed a $3.2 billion sewer cleanup. To say the arrangement blew up is a massive understatement.

Let's pickup the story now with Bankruptcy option for Jefferson County now considered, Collins says.

The president of the Jefferson County Commission has softened her opposition to bankruptcy and is instructing lawyers to begin research on the impact a bankruptcy filing would have on the county.

President Bettye Fine Collins' move could substantially alter the course of negotiations as advisers work with Wall Street creditors on how to handle Jefferson County's $3.2 billion sewer debt and soaring interest rates the county is unable to pay.

"A lot of it depends on Wall Street, as to whether we have to file bankruptcy or not," Collins said in an interview with The Birmingham News. "My sympathies are not with Wall Street. I think they realize now they are in a situation where the clock is ticking."

The idea of bankruptcy emerged as a viable option in July, when Alabama pension chief David Bronner said the Retirement Systems of Alabama would buy Jefferson County's sewer system for as much as $1.4 billion if commissioners agreed to file for court protection under Chapter 9 of the U.S. Bankruptcy Code.

Under Bronner's plan, that money then would go to creditors, who would be left to try to recover the rest from firms that insured the county's sewer bonds.

While Commissioners Jim Carns and Bobby Humphryes supported the Bronner plan, Collins, Smoot and Bowman rejected it. The issue has bitterly divided the five-member board that governs Alabama's most populous county.

Meantime, the Jefferson County Mayors Association last week unanimously approved a resolution urging the county to file bankruptcy if a deal with creditors cannot be worked out by Sept. 1.

Commissioner Humphryes, who already supports bankruptcy, said Friday he felt it was time to start initiating the process of filing under Chapter 9.

Commissioner Carns, who also supports bankruptcy, said he expects any plan the commission approves would require Wall Street to "take a hit" and not require additional taxes for residents.

If I could vote I would cast my vote for bankruptcy. Of course I never would have entered into that interest rate swap in the first place if I could have voted.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Tyrone Georgia finance director: "We’re broke"

On May 7th city of Vallejo, California voted to declare Chapter 9 bankruptcy. Tyrone, Georgia could be next.

The Citizen is reporting Tyrone finance director: "We’re broke"

The Tyrone Town Council got a huge dose of reality Thursday night. “We’re broke,”said Finance Director Mary Sturm. Sturm said the city’s operating costs per month are $275,000 per month, but the town has only collected $53,000 in revenue this month.

The economic climate has taken its toll on the town, with only two building permits this month, she added. The town currently has a Certificate of Deposit valued at $794,000 that earns just over 4 percent interest. Sturm recommended cashing in the CD, and invest in another CD when tax money starts rolling in at the end of the year.

“We only have 7,000 residents and we’re providing services that towns such as Peachtree City with a population of 40,000 provide,” she added. The town reluctantly agreed to cash in the CD, but Councilman Tracey Young wants to make sure this does not happen again.

Math Lesson Needed

Cuuncilman Young and finance director Sturm need a math lesson. The city is currently losing $222,000 a month. At the current pace, Tyrone will run out of money in 3 1/2 months or so. Tax money will start coming in at the end of the year. That is 4 months away.

What then? How long will it last? I see no evidence of a debate on why Tyrone is offering services that cities over 5 times as large are providing, or more importantly what the city intends to do about it. The solution is the same one bureaucrats almost always make: postpone the problem, squandering cash in the meantime.

Cities spent way beyond their means in the property boom. The only option now is a drastic cutback in services that perhaps people got used to. Facilities are going to be closed and services reduced or taxes will have to raised to pay for them. Can Tyrone afford to raise property taxes? I doubt it.

Already, Taxpayer Revolts Are Brewing in Massachusetts, Nevada, and North Dakota.

Nationwide, hundreds, perhaps thousands of libraries, swimming pools, local museums, senior citizen facilities and the like are headed for the White Elephant List. Indeed, the Herd Of White Elephants Is Large And Growing. Entire cities are on the list. Inquiring minds who have not yet done so will want to take a look at that link for some shocking images of abandoned malls and factories.

Economic conditions are now deteriorating rapidly. The Fed, Congress, and we the people are all to blame for wanting and believing in the free lunch theory of economic advancement.

Indeed, much of the so called growth of the last seven years was nothing more that a giant Ponzi scheme with Greenapan, Bernanke, and Paulson acting as the head cheerleaders. All the financial wizardry schemes have now run their course. The payback is deflation, and the payback time is now.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List