International Forecaster Weekly

Building Permits Falling Down

Building permits falling down, Bernanke's pill for the economy, suing brokerage firms, jail likely for Conrad Black, Virginia speeding ticket money grab, American assets being scooped up, credit derivatives bought and sold, bank risks

Bob Chapman | July 21, 2007

Home construction rose 2.3% in June, but building permit activity, a sign of future construction plans, fell to its lowest rates in ten years. Building permits fell 7.5% in June to a 1.406 million units.

Ben Bernanke’s delivery to Congress was pathetic and we predicted it would be - a moderate advancing economy and persistent inflation problems. It never occurred to Ben that he might tell us the truth. All he did was supply a verbal tranquilizer.

All the major brokerage firms are in serious trouble and the financial damages they’ll have to pay will be enormous if they lose the lawsuit brought against them by for naked short sales. Of course the SEC is nowhere to be found.

The California Superior Court for San Francisco has found and its co-plaintiffs have stated viable claims for market manipulation under California Securities Law for common law claims for conversion (stealing) and trespass to chattels, as well as for injunctive relief under California’s Unfair Business Practices Act against the defendant prime brokerage firms based on those defendants allegedly executing the shares of those companies’ stocks. The court granted the co-plaintiffs leave to amend their other claims of interference with advantage, to more specifically plead the factual basis of these claims.

The federal court system should have handled these cases, but because federally appointed judges are in Wall Street’s back pocket the plaintiffs had to go through state court. The SEC has done virtually nothing under “Show” and at that was forced to act by exterior forces. Let’s hope the plaintiffs win. These brokerage firms have been screwing the public for years.

Lord Conrad Black will get no special treatment to restore his citizenship or to return to Canada to serve a possible prison sentence. Canada’s jails for white-collar crooks are palatial compared to the US equivalent. In Canada lawbreakers can be paroled after serving only 1/6th of a sentence.

Black’s turncoat deputy David Radler, who lives in Vancouver, BC, will probably only serve six months in a county club jail for ratting out his old boss.

Moody’s has been excluded from 70% of new commercial mortgage-backed securities after toughening up guidelines. It has been shut out of nine of the past 13 deals as underwriters shopped for higher ratings from rivals. Normally they’d rate 75% not 30%.

Virginia has imposed huge new fines for driving 20 miles over the speed limit – up to $2,500. The fines are to finance road projects. As a result more than 100,000 people have signed a petition calling for the laws repeal. The 140 members of the legislature have been deluged with calls and e-mails from constituents threatening to vote them out of office if they do not ask the Governor to call a special session to reconsider the law. Criminal and civil penalties shouldn’t be created for raising money. This is nothing less than a tax increase and a bonus for insurance companies, who will raise rates on the speeders. Naturally the poor will get hit hardest.

As the dollar weakens foreigners are scooping up American assets. The Chinese and others are diversifying their reserves away from the dollar. Foreigners are not buying US assets because of a robust economy; they are buying to dump dollars, which are shrinking in value daily.

This is going to go on for years unless the US declares bankruptcy. In 2006 foreigners bought $147.8 billion of US businesses, up 77% from 2005. The Europeans dumped $109.9 billion, twice what they got rid of in 2005. Germany was the largest buyer at $22.7 billion. Middle Easterners spent $12.4 billion and the Japanese $8.7 billion. Have no fear the Chinese are on the way. Selling will turn into a tidal wave over the next few years as the dollar drops 35% to 50%.

Fitch Ratings’ global credit derivatives survey of 65 banks and insurers found that the total amount of credit derivatives bought and sold reached nearly $50 trillion at year-end 2006, an increase of 113% over the $23.4 trillion reported for year-end 2005. It also represents a 1,326% boost from the volumes of credit derivatives bought and sold in 2003, when Fitch first started the survey. Credit derivatives include credit default swaps, which allow investors to bet that a company can’t pay back its debt. They also include collateralized debt obligations, or CDOs, which bundle together bonds, loans or other kinds of debt securities and sell notes that represent different levels of risk in the group. The levels of risk range from large triple A-rated tranches, which pay modest returns, to small-unrated equity tranches, which are most likely to be among the first defaults. Banks and broker-dealers dominate credit derivatives volumes, according to Fitch. Around 44 banks held about $24.6 trillion of the securities at the end of 2006, more than double the $11.3 trillion of volume at the end of 2005. 

However, a rising proportion of last year’s debt derivatives have low credit ratings, which means the banks are often holding securities that have a higher risk of defaults and difficulty in paying them back. At the end of 2006, 38% of the credit derivatives were speculative grade, meaning junk status, or unrated. That’s more than double the proportion of unrated credit derivatives in 2003, when they made up only 18% of the market. The banks primarily use credit-default swaps as a way to hedge their risks. However, banks increasingly said they use credit derivatives in general to aid their trading operations, Fitch said. The study also found that most of the respondents have concerns about a credit crisis, but put the greatest risk beyond a year from now. Among the top 20 traders of credit derivatives, only five increased their use of the securities last year: Morgan Stanley, ABN Amro, Dresdner, Bear Stearns and Royal Bank of Scotland. Nine others reduced their volumes, including Goldman Sachs, Deutsche Bank, Merrill Lynch, Credit Suisse and Citigroup. 
Earlier this week, a report from Phoenix Partners Group found that the top investment banks, including Bear Stearns, Lehman Brothers, Goldman Sachs, Merrill Lynch, Morgan Stanley, Bank of America, Citi and JPMorgan, have seen significant increases in the cost of protecting their debt against default. Bank of America saw its cost of protection jump 48%, while Citi’s cost rose 45%. The independent banks, including Bear, Goldman, Lehman, Morgan Stanley and Merrill, have seen their cost of protection grow in the range of 20%.