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From Dow Jones:

WASHINGTON (Dow Jones)–The U.S. House of Representatives on Wednesday approved a short-term $290 billion extension in the nation’s debt ceiling, delaying a decision until February about a larger increase in the borrowing cap.

The vote comes less than a week after House Majority Leader Steny Hoyer (D., Md.) said he intended to seek a $1.8 trillion increase in the ceiling to support federal government borrowing through 2010.

A decision was made to seek the more modest increase after it became clear the larger increase may have failed to win support in the Senate.

The Senate must still take up the two month increase, which it is expected to do next week.

House lawmakers voted by a razor thing margin of 218-214 to pass the borrowing increase. On most major pieces of legislation, 218 votes are required for approval in the House.

Not a single Republican lawmaker voted to support the hike. They argued that increasing the debt ceiling was giving the Democratic majority and the Obama administration a license to spend more money.

The increase in the debt limit raises the total debt the federal government can hold to $12.394 billion from $12.104 billion.

Treasury officials have warned the current cap will shortly be hit, requiring the ceiling to be increased.

Increasing the debt ceiling is largely symbolic as the public debt is the accumulation of past deficits, or money already spent.

But were the U.S. to breach its debt limit, it would default on its obligations, potentially lose its prized top-shelf credit rating and have to pay significantly higher interest to its creditors

Such a scenario, albeit an extremely unlikely one, would have tremendous ramifications for the wider financial markets.

The federal budget deficit reached historic levels of $1.4 trillion in fiscal 2009. Through the first two months of fiscal 2010, the government is on pace to surpass that level.

No sooner did Jeff Merkley announce his opposition to Bernanke ahead of tomorrow’s reconfirmation farce/hearing, than key Republican Senator John McCain said that he was leaning against voting for the the Chairman. McCain said he would favor either former Fed Chief (and apparently only sane economist in the Administration) Paul Volcker, or ex-Treasury official, and creator of negative implied interest rates, John Taylor.

Some more from Dow Jones:

McCain joins at least two other Republicans who plan to oppose Bernanke’s renomination. Sen. Bernie Sanders (I., Vt.) has also said he opposes Bernanke’s renomination.Despite this, Bernanke is widely expected to be approved by the Senate for a second term. The Senate Banking Committee is scheduled to hold a confirmation vote on Bernanke Thursday morning.A spokeswoman for the panel said there is no way for a member to delay Thursday’s vote. Other Senate committees, like the Judiciary Committee, allow members to delay a vote by a week.

The logical political implications of this move are material: should Democrats be unable to maintain their majority hold after the upcoming mid-term elections, the populist tide against the Fed will be a substantial pent up force in 2011. How that would shape the org chart of the Fed subsequently is still unknown but it likely would not be in favor of the Man of the Year.

Tomorrow at 10 am the House Oversight Committee will hold a hearing with SEC’s Robert Khuzami (oddly Mary Schapiro, together with Chris Cox, had been scheduled to appear initially, however “in a series of last minute negotiations, members settled on Khuzami”) to discuss what the SEC has already found to be a criminal transaction (and attempted to promptly bury under the rug if only if it weren’t for one Judge Jef Rakoff). Details of the hearing below:

Washington, DC – House Oversight and Government Reform Committee
Chairman Edolphus “Ed” Towns (D-NY) and Domestic Policy Subcommittee
Chairman Dennis Kucinich (D-OH) will convene a joint hearing entitled:
“Bank of America and Merrill Lynch: How Did a Private Deal Turn Into a
Federal Bailout?  Part V?”  The hearing will examine the events
surrounding Bank of America’s acquisition of Merrill Lynch and its
receipt of Federal financial assistance. 

The hearing will
take place at 10:00 a.m. on Friday, December 11, 2009 in room 2154
Rayburn House Office Building.  A webcast of the hearing will be
available on the Committee’s website: http://oversight.house.gov.

As for the actual hearing, Dow Jones presents this advance look of how Dennis Kucinich will approach the interrogation:

[Kucinich] plans to present Khuzami with a financial forecast
that had been prepared by Merrill Lynch a few weeks ahead of the December 2008
shareholder vote on the merger, according to subcommittee documents obtained
by Dow Jones.
The forecast omits projected losses from Merrill Lynch’s illiquid assets for
the month of December and underestimates by almost half the roughly $15
billion after-tax fourth quarter loss, the documents say.
Based on the subcommittee’s investigations, Kucinich says he believes Bank
of America executives were aware of the red flags raised by Merrill Lynch’s
forecast. But that didn’t stop them from presenting the document to their
lawyers at Wachtell, Lipton, Rosen & Katz.

Kucinich says Bank of America’s decision not to investigate the Merrill
Lynch document and notify shareholders of any change in expectations amounts
to “an egregious violation of securities laws.”

Referring specifically to the Merrill Lynch forecast, [BofA spokesman Lawrence] Di Rita said, “The
matter of Merrill’s projected fourth-quarter 2008 losses was considered
carefully and the decisions were made in good faith at a time of unprecedented
economic and market upheaval.”

And while committtee chairman Edolphus Towns is allegedly satisfied with BofA’s behavior in the last year, “since it paid the last of its $45 billion debt to taxpayers” even though it does not have the ready sources for this outflow, and even though the deal was merely a front to allow BofA traders to scalp exorbitant bonuses one last time before everything collapses, Judge Rakoff may not share Towns’ utter lack of interest with due process and punsihment of criminal behavior, especially where said criminal behavior has already been proven.

The economy is so hot, that democrats in Congress are now moving with yet another stimulus package, this one for $170 billion, targeting bankrupt states and formerly surging unemployment (Obama has some TV appearances today; the BLS will be back to its previously scheduled job collapse next month). In other news, Japan did approximately 10 such small scale bailouts even as its market proceeded to keep probing new lows over the last two decades, and as reinvested 3x its annual GDP in comparable such one-time boosts to the economy without doing anything to prevent its current deflationary collapse.

From Dow Jones:

Congressional Democrats are moving ahead with a roughly $170 billion package to spur jobs growth and boost emergency  assistance to the unemployed, Democratic congressional aides say.

The two separate bills are taking shape amid an improving jobs picture, but with unemployment still at 10%. U.S. President Barack Obama will deliver a speech Tuesday at the Brookings Institution where he intends to lay out his own ideas for a narrowly targeted jobs bill, which will overlap with  Congress’s intentions but won’t be identical.

Both the administration and Congress will almost certainly pay for part of their program with some of the $115 billion that bailed out banks have repaid to the Treasury Department.

Some more details on Krugman’s wet dream:

The legislation will likely be split in two. The first part, at around $110 billion, would be considered emergency spending. It would again extend unemployment insurance, food stamp increases and a provision in the stimulus bill that subsidizes private-health insurance for the unemployed. This portion will likely be attached to a giant spending bill this month to fund the federal government, and will be added to the already huge U.S. budget deficit.

A second “jobs” bill would cost up to $70 billion, funded by the bank bailout. It would include more money for highway and bridge building, school construction and repair, and water and sewer projects. A second component would be direct aid to state governments cutting back services and raising taxes, moves that are hurting the economic recovery.

Finally, some repaid bailout funds will be lent back to small businesses directly from the Treasury.

Of course, nobody will have the brilliant idea of actually using TARP repayments (before they are needed to bail out the banking system again some time in late 2010) to actually pay back some of the debt which as of a few months ago has been classified as “unmanageable” by everyone including Mr. Bernanke. But why care about the sovereign default in 4-6 years when there are mid-term elections to be worried about. At least in the meantime, the abovementioned Fed Chairman can teach us all we need to know about Fiscal responsibility, courtesy of a completely “apolitical” and transparent Federal Reserve.

US consumers keeps on purchasing Kindles on credit cards which they apparently have no intention of every paying off.  The most recent Fitch report disclosed that October delinquencies have continued their steady climb, and together with charge-offs, are at near record highs: “Consumer credit quality remains under significant strain as a result of the  persistent weakness in the labor markets,” noted managing director Michael Dean. The Labor Department will report unemployment data Friday; the jobless rate is expected to hold steady at 10.2%, the highest level in decades, while the decline in payrolls is seen mitigating from the previous month.

Dow Jones reports:

All types of consumer lending have worsened the past several years, with borrowers falling increasingly behind and lenders writing off many billions of dollars of owed loans.

Fitch’s credit-card performance indexes show late payments rising to their highest levels in five months and indicate higher charge-offs in the months to come.

Fitch’s index on delinquencies of at least 60 days rose to 4.41% from 4.22% in September. Late-stage delinquencies are now 31% higher than year-earlier levels and just below the record high of 4.45% in June. Delinquencies of at least 30 days rose as well.

As Zero Hedge pointed out, and as Meredith Whitney has voiced her concernes about, the biggest threat to the economic going into 2010 may be that not only are banks dropping reducing overall credit availability, but that ongoing credit contraction to the tune of almost $2 trillion over the next several years will mean existing credit limits are tapped out as existing ones become increasingly maxed out.

This will likely further entrench the consumer into an accelerated deleveraging mindset, and no matter what the incremental liquidity from the Fed is, the deflationary pressures will likely continue. Which means that markets will continue in full melt-up mode to compensate for real economic losses, which benefit exlusively the top percentile of the US population as the middle and lower classes continue experiencing the brunt of the credit contraction. At some point the economic reality is sure to catch up with the market surreality. That will be the point when all the flawed market policies by the Administration and Bernanke become exposed for the clothesless emperors they are.

By Economic Forecasts & Opinions

Stock markets around the world cracked on Friday with the Dow Jones industrial average down more than 150 points (Fig. 1), and commodities plunging as Dubai debt woes unnerved investors, and sent tremors of uncertainty throughout all markets.

The crisis flared after Dubai, a part of the United Arab Emirates (UAE) federation, asked to delay interest payment for six months on $60 billion of debt issued by the state-run conglomerate Dubai World and its main property unit Nakheel.

Concerns that a government-backed investment company risked default ripped through world markets. Investors read it as a sign of yet another sovereign implosion after Iceland and Ireland, and recoiled from risk and piled into dollars.

Las Vegas on Steroids

Dubai World has served as Dubai’s main driver of growth, operating ports, transportation groups, spearheading real-estate & infrastructure projects both at home and abroad. Its real-estate subsidiary Nakheel built Dubai’s iconic palm-tree-shaped island, packed with luxury villas and hotels, many still under construction. Real estate and construction accounts for about 23% of Dubai’s GDP.

With little oil, Dubai financed much of this rapid real estate development with debt. After incurring its estimated $80-$90 billion of debt in a four-year construction boom to transform its economy into a regional financial and tourism hub, Dubai suffered the world’s steepest property slump in the first global recession since World War II.

Deutsche Bank estimates that Dubai’s property prices, both commercial and residential, have halved since August last year, and could fall a further 15-20% this year.

U.S. Banks Less Exposed

Most analysts believe U.S. banks are probably less exposed than European rivals to a potential debt default by Dubai World, but a lack of transparency and the interconnection of the modern financial system make it difficult to know which institutions are ultimately exposed.

Dubai World’s largest creditors are reportedly domestic banks in Dubai and Abu Dhabi. MarketWatch noted data from the Bank for International Settlements which put cross-border banking exposure for the UAE as a whole at $123 billion at the end of June. Of that total, European banks hold 72%, with the United States and Japan only holding 9% and 7% of the exposure, respectively. The United Kingdom is by far the biggest creditor with a share of 41%.

Reminder of Other Risks

On a global scale, Dubai World’s debt problem seems relatively minor, but it illustrates the impact from one tiny country in an increasingly interconnected world. The Dubai news also cast doubt over the strength of the U.S. economic recovery, and the prospects for a bottoming of property prices.

Commercial Real Estate

As pointed out in my previous article that the commercial real estate sector posed a much greater threat than the over-hyped “mother of all carry trades.”  The Dubai debt crisis further reinforces this viewpoint.

The potential for contagion from Dubai’s debt woes could further unhinge an already fragile U.S. commercial real estate sector, whose values have already fallen 42.9% from their 2007 peak, close to the lowest since 2002, according to Moody’s. (Fig. 2) The latest Moody’s projection is for prices to bottom at 45-55% below their peak, but could drop as much as 65% from their peak in a “stress case”.

As commercial property values fall, debt defaults rise. The $3.4 trillion outstanding in debt backed by commercial real estate poses a real threat to the recovery. Trepp LLC reported that last month, delinquencies on U.S. commercial real estate loans that were packaged into commercial mortgage-backed securities reached 4.8%, more than six times the year earlier level. Hotel loans, at 8.7% distressed, have begun falling into delinquency faster than any other kind of commercial real estate debt.

Write-downs and losses at banks around the world have risen to more than $1.7 trillion since 2007 as the credit crisis undermined the value of assets owned by financial institutions, according to data compiled by Bloomberg. Any further deleveraging and the resulting credit tightening from commercial real estate would impede the financial sector and probably derail the U.S. economy sending it into another recession. 

Housing Market Mortgage Crisis

So far, the appearance of recovery in the housing sector is being driven primarily by reduced prices combined with federal programs to lower mortgage rates with the goal of bringing more buyers into the market.

Based on a study released by Zillow.com, the foreclosure crisis has moved beyond subprime mortgages and into the prime mortgage market. (Fig. 3) While subprime borrowers are still a factor in the current foreclosure epidemic, it’s becoming increasingly apparent that the weak labor market is the driving force behind the mortgage crisis we face today.

According to the Mortgage Bankers Association, one in seven U.S. home loans was past due or in foreclosure as of Sept. 30, putting that quarterly delinquency measure at its highest level since the report’s inception, 1972, and up from one in ten at the beginning of the year.

The continued surge in delinquencies suggests that a recovery in the housing market could be hindered by the weak job market as well as by further fallout from the easy money and loose lending practices of the past. The foreclosures and delinquencies are expected to keep rising well into 2010, not leveling off until the unemployment rate starts to moderate.

In a study by First American CoreLogic found that one in four of all U.S. mortgage-borrowers owe more than the value of their properties in the 3rd quarter. And many experts didn’t expect U.S. home prices to hit bottom until early 2011, perhaps falling another 5-10%, as more foreclosures get pushed onto the market.

Negative equity is another outstanding risk hanging over the mortgage market.

Dubai Is No Lehman

The circumstances behind Dubai’s moves are murky, making it hard to gauge the exact risk to the pertaining bonds and Dubai’s own general creditworthiness. UBS cautioned that Dubai’s overall debt “might be higher than the generally assumed $80 billion to $90 billion, due to potential off-balance sheet liabilities. These could include unlimited and unquantifiable amount of credit default swaps (CDS) and other derivatives against the underlying assets, and once unraveled, could potentially erupt into a subprime-like crisis.

The current expectation; however, is that there’s a good chance that Dubai’s problems will probably prove a local issue. Most likely, Dubai, or its neighboring emirate, Abu Dhabi, won’t risk tarnishing their images and reputation further, and will come up with a reasonable resolution.

Even if Dubai goes into sovereign default, the amount is probably not enough on its own to threaten the financial system since any actual losses would be a fraction of the total. So, the problems in Dubai are unlikely to be as serious as last year’s Lehman Brothers collapse, nor is it a reflection on the ability of emerging markets to lead a global economic recovery.

Rational Expectations?

But Dubai could well spur a broader crisis of investor confidence in overly leveraged economies as market confidence world-wide is still fragile from the severity of the financial crisis.  The debts of many emerging markets have risen even further as the countries governments have fought the ravages of the global recession by issuing more stimulus debt to fill the gap voided by private investment.

The spread of credit-default swaps on developing-nation’s bonds jumped 14 basis points after the Dubai news broke, the most in a month, to 3.24 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index. There is also a clear sign of potential contagion effects of global risk aversion on basically all risky assets, with the dollar and yen being the prime beneficiaries.

Rational expectations or not, for now, the Dubai crisis is simply a reminder that the severe global recession has relegated much debt to near junk status, and there still remains a high degree of uncertainty as to the percentage recoverable on all outstanding debt which is going to be coming due over the next 5 years.

Despite some seminal signs of green shoots in the news headlines during this 9 month liquidity driven rally in many asset classes around the globe, we should be reminded that all that glitters is not gold, and that the global economic recovery is still on shaky ground.

#  “I know the odds are against me, but if there’s a win I’m gonna find it!”  ~Goku  #

Economic Forecasts & Opinions