Financial Crisis

[LaoPo]

Excerpts:

"Investors are pulling cash out of Europe at a record pace...."

“Down the line, not this year or two years from now, we could have a breakup of the monetary union,” said Roubini..."

“The euro is cheap at current levels,” Eppacher said. “We will use this emotional market environment to build up euro long positions."

From:

Euro Proving No Reserve Alternative as Central Banks Lead Shift

January 31, 2010, 10:21 PM EST

http://www.businessweek.com/news/2010-01-3...t-update1-.html

LaoPo

[Abrak]

Here's a nice chart from GS showing 'vulnerability to foreign capital flows' as measured by external debt/exports ratio.

Now if we place Greece on the table it comes in around 23x (based on Greek CB numbers). However, in a single currency it is really only public sector external debt that counts. All that the EU asks of a country is to keep its public finances in check in return for independent fiscal policy.

(It would be incredibly silly to give a country freedom over its finances with access to unlimited euro at a fixed interest rate if you were going to guarantee their debt if they got into trouble - if all countries sovereign is guaranteed and each government has unlimited spending potential, then the credit rating of the Euro should be equivalent to the least prudent country. And worse, each country should compete to be least prudent.)

So if you look at public sector external debt/ exports it is (hmmm) only 15x. So completely off the chart....

The reason is that exports as a percent of GDP are about 6% (probably the lowest in the Western world) and a remarkable achievement given all those capital inflows.

[Abrak]

Excerpts:

“The euro is cheap at current levels,” Eppacher said.

I find it impossible to value the euro.

If you looked at say, Germany (much respect btw) the euro looks cheap (relative) but if you looked at Spain or Ireland it would look expensive.

If you added everything up it might still look cheap but as capital flows from the sensible to the moronic it should do. Germany which has pretty consistently had the highest real interest rate in the euro (inflation always below the average) has seen capital flee to the likes of Greece which probably has (well had) the lowest. So Germans save (well actually they tend be sensible generally), German's put up with low nominal and real wage growth but probably waste all the surplus through banks lending to rubbish and may well have to rescue them at the end.

In my view the euro is dysfunctional - eventually it "will collapse under the weight of its own contradictions”. Single currencies, like derivatives, do not reduce risk, simply bottle them up until they ultimately 'explode'. The Germans will learn that if you wish to dictate economic policy over a country, it is wise to invade them first.

(That is not meant as an anti-german comment, merely that there seems no economic justification for being part of the euro, so it must inherently be political.)

[lannarebirth]

It's time for bondholders to eat it. They've been blessed this past year with public largesse, or more exactly plundering of the public wealth. Take the risk, eat the paper.

[Naam]

In my view the euro is dysfunctional - eventually it "will collapse under the weight of its own contradictions”. Single currencies, like derivatives, do not reduce risk, simply bottle them up until they ultimately 'explode'. The Germans will learn that if you wish to dictate economic policy over a country, it is wise to invade them first.

i wish you were right but think the Tchermanns will fight teeth and claw and will be the last ones to abandon the bloody €UR

[Abrak]

In my view the euro is dysfunctional - eventually it "will collapse under the weight of its own contradictions”. Single currencies, like derivatives, do not reduce risk, simply bottle them up until they ultimately 'explode'. The Germans will learn that if you wish to dictate economic policy over a country, it is wise to invade them first.

i wish you were right but think the Tchermanns will fight teeth and claw and will be the last ones to abandon the bloody €UR

Actually in many ways I agree with you. A single currency - essentially led by Germany - makes no economic sense whatsoever and in particular for Germany. It is essentially a game of abusing Germany's goodwill. When the time comes to pay the piper - will they deflate or bug off? Deficit bias and moral hazard.

But if they underwrite Greek indiscretions, the underlying philosophy of the euro makes no sense. I actually very much respect the Germans ability to suffer and maintain discipline at the expense of other people but when it comes to guaranteeing their indiscretions and subsidizing their over inflated economy and incomes, presumably even the political will in Germany will begin to crumble.

And if Germany chooses to underwrite the weaklings the end game is here....

http://www.spiegel.de/international/europe...,675196,00.html

Namely to try and bail out the weakest by inflating away your liabilities through depreciating your currency. Rather than the euro being about convergence to hard fundamentals it ends with Germany converging to weak ones.

Edited February 1, 2010 by Abrak

[midas]

Greek government on edge

of default due to deficit, debt

BY BOBBIS MISAILIDES

AND GEORGES MEHRABIAN

ATHENS, Greece—Tens of thousands of workers here face loss of jobs as the economy continues to contract. Capitalist investors are also concerned over the possibility of a government default as a result of its ballooning budget deficit and public debt.

The recently elected social-democratic government of the Panhellenic Socialist Movement (PASOK) has vowed to take measures that will deepen the attacks on workers as bosses seek to make them pay for the sharpening financial crisis.

It has been a little disappointing that over the last couple of years we havent seen more civil unrest, impaling of bankers heads on stakes etc.. I wonder if that is about to change in Greece...

Afterall, people may accept responsibility for their own debts but they are less keen to have to repay to foreign banks huge debts accumulated by their grossly incompetent Government. They can probably even accept some modest cutbacks imposed by the new Socialist Government but when the EU turns around and tries to impose a serious austerity package (not that it will do much good), I suspect they will decide that depression and EU political hegemony is not a price they are willing to pay.

The Leftists in Greece refer to the Euro as a 'banker's ramp.'

Forget Greece, With Nearly 19% Unemployment, Spain Should Have You Freaking Out

Today Spain reported that its unemployment rate in Q4 rose to 18.8% from 17.9% in Q3. The consensus was for a rise toward 18.5%. The unemployment rate has doubled in the past two years. As seems to be typical in Europe, the unemployment [rate] is especially pronounced for young people. In Spain it’s 40%…

http://www.businessinsider.com/forget-gree...king-out-2010-2

[LaoPo]

Forget Greece, With Nearly 19% Unemployment, Spain Should Have You Freaking Out

Today Spain reported that its unemployment rate in Q4 rose to 18.8% from 17.9% in Q3. The consensus was for a rise toward 18.5%. The unemployment rate has doubled in the past two years. As seems to be typical in Europe, the unemployment [rate] is especially pronounced for young people. In Spain it’s 40%…

http://www.businessinsider.com/forget-gree...king-out-2010-2

Yep:

Eurozone unemployment rate at 10%

Spain is even higher in November: 19,4% and youth up till 25: 44,5%

http://www.thaivisa.com/forum/Gold-Market-...66#entry3309566

LaoPo

[Abrak]

Forget Greece, With Nearly 19% Unemployment, Spain Should Have You Freaking Out[/size]

To be honest I am most concerned about Spain. What you have to realize about a single currency is that the public sector finances are at the core to its stability. Ultimately Euroland is one big private sector.

Spain's problems basically are in the private sector, namely too much lending into a bubble property economy - in addition, I suspect, given they havent been recapitalized, that there is a problem in the banking sector.

So what concerns me is this - public sector debt is fairly low - about 50% of GDP - and as such a very large squeeze on what was the first sizable fiscal deficit last year is inappropriate. Namely I would like to see them maintain spending in the current environment but they cannot because of the current situation. Public sector debt is less than 2x Greece's while the economy is 4x and exports are 20x.

The idea of a single currency is that you have a single private sector - on that basis the EU can intervene to supply liquidity funds to say the banking sector and new players might come in. I dont think it would be good for their economy to quit the euro and devalue.

Serious look at Greece it is a basket case. Spain is damaged but not beyond repair.

[12DrinkMore]

youth up till 25: 44,5%

This is a disastrous pattern showing up in many western countries. There are many issues at stake here

- the ageing population is living and working longer and expect the younger generation to provide an income for their old age.

- the younger generation is not gaining any work ethic/experience/opportunities and thinks the state will provide

- the company pension schemes are all unable to meet their long term liabilities

- the national pension schemes rely on the current contributions to fund them

- the "civil service" pensions are funded by the increasingly burdened tax payers

The average savings in the UK is, wait for it, around 2,000 Quid per person, a negligible 100,000 Baht, peanuts. The private debt in the UK is about 1.5 times the average annual income. (I am not sure exactly how these statistics are worked out, but you get the picture)

In the UK I cannot see how they can stop monetizing government debt. Surely they will carry on until some explosion occurs? A devaluation of the GBP by 25%, the reduction of interest rates to zero and 200,000,000,000 Quids worth of government debt monetized has resulted in 0.1% GDP growth, 3% inflation, some stabilization of the holy UK house price God and a boost to the FTSE. Well, that was really good value for the money spent.

But moving to the Euro and how the PIGS will affect it. From my naive point of view, I think that the EUR will end up stronger. The PIGS will either have to pay much more interest on EUR borrowings to offset the increased risk of default or leave the EUR, in which case holding the new local currency will have the attraction of trying to hold molten lead in your bare hands. For example the Greek population will simply not accept a new rapidly devaluing Drachma. Even if employees are paid in Drachma, they will surely convert it immediately on the black market to EUR, USD or simply buy stuff to store and trade. Inflation in the new currency would be immense.

This dam_n mess has only just begun.

And all the current politicians and all the civil services will not put Humpty Dumpty together again. They all have their self interested snouts is their huge salaries and inflation proofed, tax payer funded pensions.

Edited February 1, 2010 by 12DrinkMore

[12DrinkMore]

And if Germany chooses to underwrite the weaklings the end game is here....

http://www.spiegel.de/international/europe...,675196,00.html

This will not happen.

Inflation in Germany, as Naam surely knows, is the worst evil that can possibly occur. It is very deep rooted in the German soul that rampant inflation is the devil to be fought at all costs. This is in stark contrast to Bernanke, the devil incarnate, who sees evil in the deflation of already over-inflated asset prices purely in order to prove his thesis and keep his partners in crime solvent.

WW III will break out before the German tax payers will bail out the incompetent and incontinent spenders in the PIGS of Europe.

Edited February 1, 2010 by 12DrinkMore

[Abrak]

In the UK I cannot see how they can stop monetizing government debt. Surely they will carry on until some explosion occurs? A devaluation of the GBP by 25%, the reduction of interest rates to zero and 200,000,000,000 Quids worth of government debt monetized has resulted in 0.1% GDP growth, 3% inflation, some stabilization of the holy UK house price God and a boost to the FTSE. Well, that was really good value for the money spent.

I basically agree. We are seeing a very monetary recovery in the UK with asset inflation but no real growth (unless you include a little bit of life from the consumer. I am not so sure they will lead the race to the bottom though...

But moving to the Euro and how the PIGS will affect it. From my naive point of view, I think that the EUR will end up stronger. The PIGS will either have to pay much more interest on EUR borrowings to offset the increased risk of default or leave the EUR, in which case holding the new local currency will have the attraction of trying to hold molten lead in your bare hands. For example the Greek population will simply not accept a new rapidly devaluing Drachma.

Not sure I agree with any of this - the Greeks are perfectly happy to have inflation and a deflating currency - it is what they are used to - they dont export any thing anyway. When (or if) they leave the Euro they will have to accept some responsibility for their own actions while as before the Germans did. At the moment I think the euro is a bit of a lose if Greece is bailed out, lose if it defaults and everyone wins as we are on a race to the bottom.

Finally, just when you thought the US were losing this race out comes Obama with some staggering fiscal deficit numbers for the next few years. One reason I would be optimistic about the euro is that the Germans are so very sensible - in point of fact most other euro countries would be better off pegging to the dollar. Seriously, can you imagine the Germans (with a C/A surplus) coming out with this from the USA (dont know the meaning of the word).

http://www.latimes.com/news/nation-and-wor...,0,451958.story

10 years ago there were debates about whether a 3% budget deficit was sustainable, now Obama is looking for 4% in 2015 (read and that will be another 10%). Essentially the public sector is just taking up from where the private sector finished almost exactly. It is massively destructive and massively destabilizing in the long run. It is also the road to socialism. The Congressional Budget Office released forecasts on Thursday that differ by this by about 30%. Basically Obama is taking the Japanese road. Krugman will be happy. All these currencies look <deleted> in my opinion - at least Thailand makes an effort.

[ronz28]

Credit risk is improving a little and probability of default today by Greece is a little less and getting closer to that of California.

http://www.cmavision.com/market-data

[LaoPo]

Unemployment in Europe is worrying and in the US it isn't much better:

A Majority Of States Are Now Insolvent: Quantifying The Disastrous Unemployment Situation

Zero Hedge recently highlighted the ever increasing Federal outlays on unemployment insurance, leading to questions on whether the true unemployment rate, as indicated by actual cash outlays, may be materially higher than indicated in increasingly dubious governmental reports.

One proposed alternative has been that the Federal government is directly subsidizing standalone states' depleted unemployment insurance trust funds.

Using data provided by ProPublica we have been able to confirm that indeed standalone states are for the most part now bankrupt and have no reserves left in their coffers when it comes to funding ever increasing insurance benefits. As ProPublica indicates, there are now 26 states which have depleted their trust funds, among these are the usual suspects including California, Michigan, New York, Pennsylvania and Ohio, which now rely exclusively on borrowings from the Federal government to prevent the cessation of insurance payments to recently unemployed workers. Currently all states collectively posses $10.7 billion in trust fund assets(with the bulk held by less impacted states such as Washington ($2.6 billion), Louisiana ($1.1 billion) and Oregon ($1.1 billion). On the other hand, 26 states currently rely exclusively on the Federal Government, and have borrowed a combined $30 billion through December to fund payments. ProPublica estimates that another 8 states will be insolvent within 6 months, as their trust funds also approach 0.

The chart below demonstrates the amount of borrowing per state, as well as trust fund holdings.

data by ProPublica

Another way of visualizing the damage can be seen on the following chart which highlights:

data by ProPublica

The most bankrupt states are California, with $6.8 billion in borrowings, Michigan ($3.4 billion), New York ($2.4 billion), Pennsylvania ($2.2 billion) and Ohio ($1.9 billion).

Third chart, (California) see in article, link below

So what is happening on the Federal side of the ledger?

Recall that in December the government spent $14.65 billion in Unemployment Insurance Benefits, which was a 24% jump from the $11.8 billion in November.

How is January shaping up? Through January 28th, the Federal Government had spent a total of $13.85 billion for this outlay. Once we get the Friday additional data, we will update our previous chart" we expect the final number to be about $14.1 billion, roughly in line with the December total.

DAILY TREASURY STATEMENT - Cash and Debt operations of The United States Treasury -January 28, 2010

From:

http://www.zerohedge.com/article/majority-...yment-situation

LaoPo

[Naam]

And if Germany chooses to underwrite the weaklings the end game is here....

http://www.spiegel.de/international/europe...,675196,00.html

This will not happen.

1. Inflation in Germany, as Naam surely knows, is the worst evil that can possibly occur. It is very deep rooted in the German soul that rampant inflation is the devil to be fought at all costs. This is in stark contrast to Bernanke, the devil incarnate, who sees evil in the deflation of already over-inflated asset prices purely in order to prove his thesis and keep his partners in crime solvent.

2. WW III will break out before the German tax payers will bail out the incompetent and incontinent spenders in the PIGS of Europe.

1. correct

2. i am not so sure about that

[Naam]

Credit risk is improving a little and probability of default today by Greece is a little less and getting closer to that of California.

http://www.cmavision.com/market-data

credit default swaps are priced by the market and the market (as proven so often) knows shit.

[Wrong Turn]

laopo,

Thanks for the charts above ^^^^.

With long-term unemployment in the US, and a higher base rate of unemployment I see more trouble ahead for CA, NY, and other states.

What are the prospects for California actually going bankrupt/involvent?

And is CA does go bankrupt, would could be the result?

[midas]

The most bankrupt states are California, with $6.8 billion in borrowings, Michigan ($3.4 billion), New York ($2.4 billion), Pennsylvania ($2.2 billion) and Ohio ($1.9 billion).

And take a look at this amazing chart for the world

Check Out The Breathtaking Speed At Which Countries Are Headed To The Debt Crisis Abyss

http://www.businessinsider.com/check-out-t...is-abyss-2010-2

[lannarebirth]

Unemployment in Europe is worrying and in the US it isn't much better:

A Majority Of States Are Now Insolvent: Quantifying The Disastrous Unemployment Situation

Zero Hedge recently highlighted the ever increasing Federal outlays on unemployment insurance, leading to questions on whether the true unemployment rate, as indicated by actual cash outlays, may be materially higher than indicated in increasingly dubious governmental reports.

One proposed alternative has been that the Federal government is directly subsidizing standalone states' depleted unemployment insurance trust funds.

Using data provided by ProPublica we have been able to confirm that indeed standalone states are for the most part now bankrupt and have no reserves left in their coffers when it comes to funding ever increasing insurance benefits. As ProPublica indicates, there are now 26 states which have depleted their trust funds, among these are the usual suspects including California, Michigan, New York, Pennsylvania and Ohio, which now rely exclusively on borrowings from the Federal government to prevent the cessation of insurance payments to recently unemployed workers. Currently all states collectively posses $10.7 billion in trust fund assets(with the bulk held by less impacted states such as Washington ($2.6 billion), Louisiana ($1.1 billion) and Oregon ($1.1 billion). On the other hand, 26 states currently rely exclusively on the Federal Government, and have borrowed a combined $30 billion through December to fund payments. ProPublica estimates that another 8 states will be insolvent within 6 months, as their trust funds also approach 0.

The chart below demonstrates the amount of borrowing per state, as well as trust fund holdings.

data by ProPublica

Another way of visualizing the damage can be seen on the following chart which highlights:

data by ProPublica

The most bankrupt states are California, with $6.8 billion in borrowings, Michigan ($3.4 billion), New York ($2.4 billion), Pennsylvania ($2.2 billion) and Ohio ($1.9 billion).

Third chart, (California) see in article, link below

So what is happening on the Federal side of the ledger?

Recall that in December the government spent $14.65 billion in Unemployment Insurance Benefits, which was a 24% jump from the $11.8 billion in November.

How is January shaping up? Through January 28th, the Federal Government had spent a total of $13.85 billion for this outlay. Once we get the Friday additional data, we will update our previous chart" we expect the final number to be about $14.1 billion, roughly in line with the December total.

DAILY TREASURY STATEMENT - Cash and Debt operations of The United States Treasury -January 28, 2010

From:

http://www.zerohedge.com/article/majority-...yment-situation

LaoPo

The fiscal condition of the individual states and counties within them is pretty distressing. I think there is a growing realization that a large amount of the TARP funds which were to have been used as "stimulus" will become diverted to prop up these government bodies. That and the need to reduce deficit expansion are really starting to put a damper on the idea of a "V" shaped recovery. Talk of increased and new forms of taxation should be coming next. May be good for the $ but wouldn't think markets will like it very much.

[midas]

A " novel " way to earn 2.5 million euros

Germany willing to pay for secret Swiss bank data

German Chancellor Angela Merkel said on Monday that she was in favor of acquiring the information on citizens who had allegedly sheltered millions in secret Swiss bank accounts. The Frankfurter Allgemeine Zeitung reported that the whistleblower is asking for 2.5 million euros for the confidential data.

http://www.dw-world.de/dw/article/0,,5196492,00.html

[Gambles]

[Naam]

A " novel " way to earn 2.5 million euros

Germany willing to pay for secret Swiss bank data

German Chancellor Angela Merkel said on Monday that she was in favor of acquiring the information on citizens who had allegedly sheltered millions in secret Swiss bank accounts. The Frankfurter Allgemeine Zeitung reported that the whistleblower is asking for 2.5 million euros for the confidential data.

http://www.dw-world.de/dw/article/0,,5196492,00.html

not "novel" at all. less than a year ago the German Secret Service paid €UR 4.5 million with data from the Liechtenstein financial institution LGT. german finance minister Wolfgang Schäuble confirmed yesterday evening in an interview that "deal will be done!" Switzerland is outraged.

[LaoPo]

A " novel " way to earn 2.5 million euros

Germany willing to pay for secret Swiss bank data

German Chancellor Angela Merkel said on Monday that she was in favor of acquiring the information on citizens who had allegedly sheltered millions in secret Swiss bank accounts. The Frankfurter Allgemeine Zeitung reported that the whistleblower is asking for 2.5 million euros for the confidential data.

http://www.dw-world.de/dw/article/0,,5196492,00.html

not "novel" at all. less than a year ago the German Secret Service paid €UR 4.5 million with data from the Liechtenstein financial institution LGT. german finance minister Wolfgang Schäuble confirmed yesterday evening in an interview that "deal will be done!" Switzerland is outraged.

...and now the Dutch Ministry of Finance wants the Dutch clients on that CDRom also, if any, and they have asked the German authorities already; the problem is that the Surpreme Court in The Hague allowed, in te past, that the Dutch Tax authorities could use information from abroad, even in the case it was stolen since the tax payers "knew" that it was illegal to "stall" black money in foreign tax havens like Switzerland, Liechtenstein, Luxembourg, Channel Islands etc.

Therefore the Supreme Court allowed Dutch Tax authorities to use that info.

It would be interesting to see if European Laws go along with the Dutch Supreme Court....

It seems that underworld gangs all over Europe now have relations within China and move black money there....

How they will move it out of there again is the question but I'm sure the Chinese mafia will find a way for a nice fee.

LaoPo

Edited February 2, 2010 by LaoPo

[LaoPo]

In the meantime in the US:

"Growing Bubble In Commercial Real Estate" As S&P Observes Recognition Of CRE* Losses Could Wipe Out Banking System"

* CRE: Commercial Real Estate; LP)

A worrying message:

http://www.zerohedge.com/article/kanjorski...losses-could-wi

Report:

Industry Outlook: The Worst May

Still Be Yet To Come For U.S.

Commercial Real Estate Loans

http://www.zerohedge.com/sites/default/fil...20To%20Come.pdf

LaoPo

[midas]

If you ever wondered why the U.S. Securities and Exchange Commission have

prosecuted so few banksters and fraudsters like Bernie Madoff.....................its because

they just dont have enough time in their busy schedule...........

SEC workers investigated for porn-surfing

The work computer of one regional supervisor for the U.S. Securities and Exchange Commission showed more than 1,800 attempts to look up pornography in a 17-day span: "It was kind of distraction per se," he later told investigators.

But he wasn't alone. More than two dozen SEC employees and contractors were caught viewing pornography on their government computers, according to records obtained through the Freedom of Information Act and other public documents.

In response to the open records request by The Washington Times, the inspector general's office provided more than 150 pages of records and transcripts on the investigations, but declined to identify the employees involved. The office noted that disclosure of the employees' names "could conceivably subject them to harassment and annoyance in the conduct of their official duties and private lives."

http://www.washingtontimes.com/news/2010/f...-at-work/print/

[LaoPo]

Homepage of the Huffington Post; article below by The New York Times

http://www.huffingtonpost.com/

TIPPING POINT: 5.1 Million Homes Projected To Be Worth Less Than 75% Of Mortgage By June.

Research: 75% Value Loss Is When Homeowners Think Of Walking Away

February 3, 2010

No Help in Sight, More Homeowners Walk Away

By DAVID STREITFELD

In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.

“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

After three years of plunging real estate values, after the bailouts of the bankers and the revival of their million-dollar bonuses, after the Obama administration’s loan modification plan raised the expectations of many but satisfied only a few, a large group of distressed homeowners is wondering the same thing.

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

In a situation without precedent in the modern era, millions of Americans are in this bleak position. Whether, or how, to help them is one of the biggest questions the Obama administration confronts as it seeks a housing policy that would contribute to the economic recovery.

“We haven’t yet found a way of dealing with this that would, we think, be practical on a large scale,” the assistant Treasury secretary for financial stability, Herbert M. Allison Jr., said in a recent briefing.

The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.

“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”

Suggestions that people would be wise to renege on their home loans are at least a couple of years old, but they are turning into a full-throated barrage. Bloggers were quick to note recently that landlords of an 11,000-unit residential complex in Manhattan showed no hesitation, or shame, in walking away from their deeply underwater investment.

“Since the beginning of December, I’ve advised 60 people to walk away,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope. They don’t qualify for modifications, and being on the hamster wheel of paying for a property that is not worth it gets so old.”

Mr. Walsh is taking his own advice, recently defaulting on a rental property he owns. “The sun will come up tomorrow,” he said.

The difference between letting your house go to foreclosure because you are out of money and purposefully defaulting on a mortgage to save money can be murky. But a growing body of research indicates that significant numbers of borrowers are declining to live under what some waggishly call “house arrest.”

Using credit bureau data, consultants at Oliver Wyman calculated how many borrowers went straight from being current on their mortgage to default, rather than making spotty payments. They also weeded out owners having trouble paying other bills. Their estimate was that about 17 percent of owners defaulting in 2008, or 588,000 people, chose that option as a strategic calculation.

Some experts argue that walking away from mortgages is more discussed than done. People hate moving; their children attend the neighborhood school; they do not want to think of themselves as skipping out on a debt. Doubters cite a Federal Reserve study using historical data from Massachusetts that concludes there were relatively few walk-aways during the 1991 bust.

The United States Treasury falls into the skeptical camp.

“The overwhelming bulk of people who have negative equity stay in their homes and keep paying,” said Michael S. Barr, assistant Treasury secretary for financial institutions.

It would cost about $745 billion, slightly more than the size of the original 2008 bank bailout, to restore all underwater borrowers to the point where they were breaking even, according to First American.

Using government money to do that would be seen as unfair by many taxpayers, Mr. Barr said. On the other hand, doing nothing about underwater mortgages could encourage more walk-aways, dealing another blow to a fragile economy.

“It’s not an easy area,” he said.

Walking away — also called “jingle mail,” because of the notion that homeowners just mail their keys to the bank, setting off foreclosure proceedings — began in the Southwest during the 1980s oil collapse, though it has never been clear how widespread it was.

In the current bust, lenders first noticed something strange after real estate prices had fallen about 10 percent.

An executive with Wachovia, one of the country’s biggest and most aggressive lenders, said during a conference call in January 2008 that the bank was bewildered by customers who had “the capacity to pay, but have basically just decided not to.” (Wachovia failed nine months later and was bought by Wells Fargo. )

With prices now down by about 30 percent, underwater borrowers fall into two groups. Some have owned their homes for many years and got in trouble because they used the house as a cash machine. Others, like Mr. Koellmann in Miami Beach, made only one mistake: they bought as the boom was cresting.

It was April 2006, a moment when the perpetual rise of real estate was considered practically a law of physics. Mr. Koellmann was 23, a management consultant new to Miami.

Financially cautious by nature, he bought a small, plain one-bedroom apartment for $215,000, much less than his agent told him he could afford. He put down 20 percent and received a fixed-rate loan from Countrywide Financial.

Not quite four years later, apartments in the building are selling in foreclosure for $90,000.

“There is no financial sense in staying,” Mr. Koellmann said. With the $1,500 he is paying each month for his mortgage, taxes and insurance, he could rent a nicer place on the beach, one with a gym, security and valet parking.

Walking away, he knows, is not without peril. At minimum, it would ruin his credit score. Mr. Koellmann would like to attend graduate school. If an admission dean sees a dismal credit record, would that count against him? How about a new employer?

Most of all, though, he struggles with the ethical question.

“I took a loan on an asset that I didn’t see was overvalued,” he said. “As much as I would like my bank to pay for that mistake, why should it?”

That is an attitude Wall Street would like to encourage. David Rosenberg, the chief economist of the investment firm Gluskin Sheff, wrote recently that borrowers were not victims. They “signed contracts, and as adults should also be held accountable,” he wrote.

Of course, this is not necessarily how Wall Street itself behaves, as demonstrated by the case of Stuyvesant Town and Peter Cooper Village. An investment group led by the real estate giant Tishman Speyer recently defaulted on $4.4 billion in debt that it had used to buy the two apartment developments in Manhattan, handing the properties back to the lenders.

Moreover, during the boom, it was the banks that helped drive prices to unrealistic levels by lowering credit standards and unleashing a wave of speculative housing demand.

Mr. Koellmann applied last fall to Bank of America for a modification, noting that his income had slipped. But the lender came back a few weeks ago with a plan that added more restrictive terms while keeping the payments about the same.

“That may have been the last straw,” Mr. Koellmann said.

Guy D. Cecala, publisher of Inside Mortgage Finance magazine, says he does not hear much sympathy from lenders for their underwater customers.

“The banks tell me that a lot of people who are complaining were the ones who refinanced and took all the equity out any time there was any appreciation,” he said. “The banks are damned if they will help.”

Joe Figliola has heard that message. He bought his house in Elgin, Ill., in 2004, then refinanced twice to get better terms. He pulled out a little money both times to cover the closing costs and other expenses. Now his place is underwater while his salary as circulation manager for the local newspaper has been cut.

“It doesn’t seem right that I can rent a place somewhere for half of what I’m paying,” he said. “I told my bank, ‘Just take a little bite out of what I owe. That would ease me up. Isn’t that why the president gave you all this money?’ ”

Bank of America did not agree, so Mr. Figliola, who is 48, sees no recourse other than walking away. “I don’t believe this is the right thing to do,” he said, “but I’ve got to survive.”

http://www.nytimes.com/2010/02/03/business/03walk.html

LaoPo

[midas]

To be honest I am most concerned about Spain. What you have to realize about a single currency is that the public sector finances are at the core to its stability. Ultimately Euroland is one big private sector.

Spain's problems basically are in the private sector, namely too much lending into a bubble property economy - in addition, I suspect, given they havent been recapitalized, that there is a problem in the banking sector.

Serious look at Greece it is a basket case. Spain is damaged but not beyond repair.

You are correct Abrak

Spain Is On The Brink Of Financial Collapse Because Nobody Pays Taxes

Spain threatens the strength of the euro currency union far more than Greece, given the much larger economy. And it turns out that, just like Greece, Spain has a horrendous tax-dodging problem. Which means lost tax revenue the Government has to borrow money for.

http://blog.macroaxis.com/2010/02/03/spain...ody-pays-taxes/

[midas]

If USA could put a man on the moon, why can't they get this right ?

824,000 Will Disappear On February 5; BLS Admits Flawed Model But Plans No Changes

Last October the BLS announced it would revise historical payrolls lower by 824,000 on February 5 (this Friday's NFP release). While this number will not impact the actual January NFP report (a loss of nearly one million jobs in a month would probably even take out the persistent SPY algo that has been hugging the bid for the past 10 months), it will be prorated across all months in the 2008-2009 reporting period. The reason for this adjustment has to do with a huge glitch in the birth-death model, which is exactly the same problem that the rating agencies faced when housing prices plummeted: the birth/death model assumes, in the long-run, jobs are created, not destroyed. Any period of excess volatility in the stock market therefore translates into major prior downward revisions to already disclosed payrolls. And while we know what the current revision will be, the scarier prospect is that the next historical adjustment, due out in early 2011, will be even larger, at least 990,000. This means that the government has overrepresented running payroll data by over 1.8 million jobs over the past 20 months.

http://globaleconomicanalysis.blogspot.com...uary-5-bls.html

[midas]

To be honest I am most concerned about Spain. What you have to realize about a single currency is that the public sector finances are at the core to its stability. Ultimately Euroland is one big private sector.

Spain's problems basically are in the private sector, namely too much lending into a bubble property economy - in addition, I suspect, given they havent been recapitalized, that there is a problem in the banking sector.

Serious look at Greece it is a basket case. Spain is damaged but not beyond repair.

You are correct Abrak

Spain Is On The Brink Of Financial Collapse Because Nobody Pays Taxes

Spain threatens the strength of the euro currency union far more than Greece, given the much larger economy. And it turns out that, just like Greece, Spain has a horrendous tax-dodging problem. Which means lost tax revenue the Government has to borrow money for.

http://blog.macroaxis.com/2010/02/03/spain...ody-pays-taxes/

Portugal also

Portugal Leads Surge in Government Debt Risk to Record High

http://www.businessweek.com/news/2010-02-0...ecord-high.html

[Naam]