1. Can China Control the "Side-Effects" of its Stimulus-Led Growth? Let’s Look at the Facts - Explains the potential fallout of the excessive fiscal stimulus in China. While not European, it is quite likely to kick off the daisy chain effect.
2.  The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.
3. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect
4. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. - attempts to illustrate the highly interdependent weaknesses in Europe’s sovereign nations can effect even the perceived "stronger" nations.
5. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

Austria, Belgium and Sweden, while apparently healthy from a cursory perspective, have between one quarter to one half of their GDPs exposed to central and eastern European countries facing a full blown Depression!

Click to Enlarge… 

These exposed countries are surrounded by much larger (GDP-wise and geo-politically) countries who have severe structural fiscal deficiencies and excessive debt as a proportion to their GDPs, not to mention being highly "OVERBANKED" (a term that I have coined).  

So as to quiet those pundits who feel I am being sensationalist, let’s take this step by step.

Depression (Wikipedia): In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen as part of a normal business cycle.

Considered a rare and extreme form of recession, a depression is characterized by its length, and by abnormal increases in unemployment, falls in the availability of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation, financial crisis and bank failures are also common elements of a depression.

There is no widely agreed definition for a depression, though some have been proposed. In the United States the National Bureau of Economic Research determines contractions and expansions in the business cycle, but does not declare depressions.^[1] Generally, periods labeled depressions are marked by a substantial and sustained shortfall of the ability to purchase goods relative to the amount that could be produced using current resources and technology (potential output).^[2] Another proposed definition of depression includes two general rules: 1) a decline in real GDP exceeding 10%, or 2) a recession lasting 2 or more years.[3][4]

Before we go on, let’s graphically illustrate what a depression would look like in this modern day and age…

 
A depression is characterized by its length, and by abnormal
increases in unemployment.

Price deflation, financial
crisis and bank failures are
also common elements of a depression.  

A depression is characterized by … shrinking output and investment
… reduced amounts of trade and commerce.

… as well as highly volatile relative currency value fluctuations,
mostly devaluations.

A former premier has called for a 30% devaluation and a
sitting minister said in June that there should be a "debate."
Meanwhile, chief executive of SEB, Sweden’s number two bank, says total
loan losses would ultimately be little different if the Baltics stayed
the course or devalued now – though rapid devaluation might be tougher
to deal with. (Lex/FT.com) 

The global slowdown coupled with the unprecedented financial crisis has
uncovered significant vulnerabilities that can currently be witnessed in
the Central and Eastern Europe in the form of structural imbalances and
growing foreign indebtedness. Not surprisingly, the region, which until
a couple of years back was forecasted to be one of the most profitable
investment avenues, now stands out as the hardest hit with many
countries such as Hungary, the Ukraine, Latvia, and Romania forced to
seek IMF and foreign aid and bail-outs. Heavy reliance on exports and
foreign capital (especially from Western Europe), which fed the economic
growth in the pre-crisis period, has backfired when peak global demand
dried up and the liquidity crunch hit the global financial system.

Countries in this region are highly dependent on foreign trade, with
exports accounting for more than 50% of GDP for many countries. Sharp
declines in exports have triggered a series of internal predicaments
including rampant and rising unemployment as well as declines in
domestic demand that exacerbate trade account imbalances through
declines in imports. However, the problems for these countries have been
aggravated by huge foreign indebtedness and the resultant interest and
income payments that put additional pressure on the balance of payments.
While currency depreciation could have provided some much needed
respite (although that can be seriously debated), for countries like
Latvia, Estonia, Lithuania, Bulgaria and Ukraine which have a fixed
currency peg to Euro, the option is not available. As a result, Latvia,
Lithuania and Estonia have witnessed double digit negative real growth
in GDP and are witnessing structural issues of deflationary pressures
(owing to price and wage cuts) and very high unemployment levels. Click
any graphic to enlarge…

Source: IMF, European Commission

Notably, except for Hungary with a public debt-to-GDP of nearly
80%, government debt is within manageable limits for most of the
countries in the region. This is most likely due to the fact that these
countries did not have an overdeveloped banking system that required
bailing out.

This relative benefit was not without its costs, though. Without heavily
developed banking sectors of their own, these countries turned towards
outside banking institutions for their financing needs. The major
financial risk, therefore, surrounding this region is the high foreign
debt to private sector. Foreign banks (mainly western European banks)
play a major role in the CEE region and account for approximately 60-80%
of total bank assets in most CEE countries. While significant leverage
was built up through massive foreign lending to the private sector in
this region during the pre-crisis period, the same has now become a
major source of external imbalance and financial risk. Claims of the
foreign banks exceed 100% of GDP for countries like Estonia, Latvia,
Lithuania, Hungary and Croatia. Loans denominated in foreign currency
amount to nearly 90% of the total lending in Latvia, 85% in Estonia and
65% in Lithuania. While on one hand, the high reliance on foreign
lending puts a lot of pressure on the current account balance and
balance of payments, the increased financial risk of a pull back of
foreign capital can seriously jeopardize growth in these countries.
Deleveraging and de-risking by the foreign banks through reducing their
exposure to these countries as well as curtailing lending will certainly
hamper the prospects of recovery for these sovereign entities. The
simultaneous PIIGS crisis in Western Europe adds to the pressures on
Western European banking sector, providing an added impetus to hasten
the de-risking process.

Further, for countries like Estonia, Latvia, Lithuania, Bulgaria and
Ukraine which have a fixed currency peg, high foreign debt restricts the
possibility of devaluation of currency as the devaluation will lead to
increased debt and interest burdens and shall add to the pending and
inevitable slate of defaults. Thus, these countries are deferring the
devaluation of their currency and are following the painful internal
adjustment process of contraction in domestic demand to counter the high
current account imbalances. This is, in turn, impacting the loan
performance leading to the inevitable increase in defaults. Research by
Danske Bank in early 2009 estimates that under an adverse scenario, loan
losses can reach 30% in Baltic countries (Estonia, Latvia, Lithuania),
Bulgaria, Ukraine and Romania while loan losses in other CEE countries
will range between 10-20%.

It should be made clear that the current PIIGS/Greece developments
have caused the Euro to slide aggressively anyway, thereby applying the
unwanted currency devaluation to the distressed CEE countries. From an
academic perspective it appears as if the outstanding (non-euro
denominated) debt service just got that much more difficult.  

Source: Bank for international settlements, IMF

Austria, Sweden and Belgium stand out at the top the list of western
European countries having relatively outsized exposure to CEE nations.
Total CEE exposure of the banks in Austria stands at 53.4% of the GDP of
Austria while it is 22.8% and 20.4% for Swedish banks and Belgium
banks, respectively. Major Austrian and Swedish banks have high exposure
to high risk countries like Croatia, Hungary, Romania and Ukraine and
Baltic countries (Estonia, Latvia, Lithuania).

My next and final post on the Pan-European Sovereign debt crisis will
attempt to tie all of the pieces together along with middle-eastern and
Asian risks to illustrate a road map of the various stress points in
global sovereign debt and related bank exposure.While I am not saying
any particular country will bring about the end of the world as we know
it, there are simply too many risks and contingent crashes waiting to
happen, all inter-connected, levered and amplified across dozens of
borders and financial systems to simply assume that not one country will
falter. That faltering could very well be the first domino to fall
among many… 

 Interested parties can feel free to contact me by phone
or email.

Related video content:

More on Europe

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

1. Can China Control the "Side-Effects" of its Stimulus-Led Growth? Let’s Look at the Facts - Explains the potential fallout of the excessive fiscal stimulus in China. While not European, it is quite likely to kick off the daisy chain effect.
2.  The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.
3. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect
4. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. - attempts to illustrate the highly interdependent weaknesses in Europe’s sovereign nations can effect even the perceived "stronger" nations.
5. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

Austria, Belgium and Sweden, while apparently healthy from a cursory perspective, have between one quarter to one half of their GDPs exposed to central and eastern European countries facing a full blown Depression!

Click to Enlarge… 

These exposed countries are surrounded by much larger (GDP-wise and geo-politically) countries who have severe structural fiscal deficiencies and excessive debt as a proportion to their GDPs, not to mention being highly "OVERBANKED" (a term that I have coined).  

So as to quiet those pundits who feel I am being sensationalist, let’s take this step by step.

Depression (Wikipedia): In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen as part of a normal business cycle.

Considered a rare and extreme form of recession, a depression is characterized by its length, and by abnormal increases in unemployment, falls in the availability of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation, financial crisis and bank failures are also common elements of a depression.

There is no widely agreed definition for a depression, though some have been proposed. In the United States the National Bureau of Economic Research determines contractions and expansions in the business cycle, but does not declare depressions.^[1] Generally, periods labeled depressions are marked by a substantial and sustained shortfall of the ability to purchase goods relative to the amount that could be produced using current resources and technology (potential output).^[2] Another proposed definition of depression includes two general rules: 1) a decline in real GDP exceeding 10%, or 2) a recession lasting 2 or more years.[3][4]

Before we go on, let’s graphically illustrate what a depression would look like in this modern day and age…

 
A depression is characterized by its length, and by abnormal
increases in unemployment.

Price deflation, financial
crisis and bank failures are
also common elements of a depression.  

A depression is characterized by … shrinking output and investment
… reduced amounts of trade and commerce.

… as well as highly volatile relative currency value fluctuations,
mostly devaluations.

A former premier has called for a 30% devaluation and a
sitting minister said in June that there should be a "debate."
Meanwhile, chief executive of SEB, Sweden’s number two bank, says total
loan losses would ultimately be little different if the Baltics stayed
the course or devalued now – though rapid devaluation might be tougher
to deal with. (Lex/FT.com) 

The global slowdown coupled with the unprecedented financial crisis has
uncovered significant vulnerabilities that can currently be witnessed in
the Central and Eastern Europe in the form of structural imbalances and
growing foreign indebtedness. Not surprisingly, the region, which until
a couple of years back was forecasted to be one of the most profitable
investment avenues, now stands out as the hardest hit with many
countries such as Hungary, the Ukraine, Latvia, and Romania forced to
seek IMF and foreign aid and bail-outs. Heavy reliance on exports and
foreign capital (especially from Western Europe), which fed the economic
growth in the pre-crisis period, has backfired when peak global demand
dried up and the liquidity crunch hit the global financial system.

Countries in this region are highly dependent on foreign trade, with
exports accounting for more than 50% of GDP for many countries. Sharp
declines in exports have triggered a series of internal predicaments
including rampant and rising unemployment as well as declines in
domestic demand that exacerbate trade account imbalances through
declines in imports. However, the problems for these countries have been
aggravated by huge foreign indebtedness and the resultant interest and
income payments that put additional pressure on the balance of payments.
While currency depreciation could have provided some much needed
respite (although that can be seriously debated), for countries like
Latvia, Estonia, Lithuania, Bulgaria and Ukraine which have a fixed
currency peg to Euro, the option is not available. As a result, Latvia,
Lithuania and Estonia have witnessed double digit negative real growth
in GDP and are witnessing structural issues of deflationary pressures
(owing to price and wage cuts) and very high unemployment levels. Click
any graphic to enlarge…

Source: IMF, European Commission

Notably, except for Hungary with a public debt-to-GDP of nearly
80%, government debt is within manageable limits for most of the
countries in the region. This is most likely due to the fact that these
countries did not have an overdeveloped banking system that required
bailing out.

This relative benefit was not without its costs, though. Without heavily
developed banking sectors of their own, these countries turned towards
outside banking institutions for their financing needs. The major
financial risk, therefore, surrounding this region is the high foreign
debt to private sector. Foreign banks (mainly western European banks)
play a major role in the CEE region and account for approximately 60-80%
of total bank assets in most CEE countries. While significant leverage
was built up through massive foreign lending to the private sector in
this region during the pre-crisis period, the same has now become a
major source of external imbalance and financial risk. Claims of the
foreign banks exceed 100% of GDP for countries like Estonia, Latvia,
Lithuania, Hungary and Croatia. Loans denominated in foreign currency
amount to nearly 90% of the total lending in Latvia, 85% in Estonia and
65% in Lithuania. While on one hand, the high reliance on foreign
lending puts a lot of pressure on the current account balance and
balance of payments, the increased financial risk of a pull back of
foreign capital can seriously jeopardize growth in these countries.
Deleveraging and de-risking by the foreign banks through reducing their
exposure to these countries as well as curtailing lending will certainly
hamper the prospects of recovery for these sovereign entities. The
simultaneous PIIGS crisis in Western Europe adds to the pressures on
Western European banking sector, providing an added impetus to hasten
the de-risking process.

Further, for countries like Estonia, Latvia, Lithuania, Bulgaria and
Ukraine which have a fixed currency peg, high foreign debt restricts the
possibility of devaluation of currency as the devaluation will lead to
increased debt and interest burdens and shall add to the pending and
inevitable slate of defaults. Thus, these countries are deferring the
devaluation of their currency and are following the painful internal
adjustment process of contraction in domestic demand to counter the high
current account imbalances. This is, in turn, impacting the loan
performance leading to the inevitable increase in defaults. Research by
Danske Bank in early 2009 estimates that under an adverse scenario, loan
losses can reach 30% in Baltic countries (Estonia, Latvia, Lithuania),
Bulgaria, Ukraine and Romania while loan losses in other CEE countries
will range between 10-20%.

It should be made clear that the current PIIGS/Greece developments
have caused the Euro to slide aggressively anyway, thereby applying the
unwanted currency devaluation to the distressed CEE countries. From an
academic perspective it appears as if the outstanding (non-euro
denominated) debt service just got that much more difficult.  

Source: Bank for international settlements, IMF

Austria, Sweden and Belgium stand out at the top the list of western
European countries having relatively outsized exposure to CEE nations.
Total CEE exposure of the banks in Austria stands at 53.4% of the GDP of
Austria while it is 22.8% and 20.4% for Swedish banks and Belgium
banks, respectively. Major Austrian and Swedish banks have high exposure
to high risk countries like Croatia, Hungary, Romania and Ukraine and
Baltic countries (Estonia, Latvia, Lithuania).

My next and final post on the Pan-European Sovereign debt crisis will
attempt to tie all of the pieces together along with middle-eastern and
Asian risks to illustrate a road map of the various stress points in
global sovereign debt and related bank exposure.While I am not saying
any particular country will bring about the end of the world as we know
it, there are simply too many risks and contingent crashes waiting to
happen, all inter-connected, levered and amplified across dozens of
borders and financial systems to simply assume that not one country will
falter. That faltering could very well be the first domino to fall
among many… 

 Interested parties can feel free to contact me by phone
or email.

Related video content:

More on Europe

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Charles Ponzi (March 3, 1882 – January 18, 1949) was
an Italian swindler, who is
considered one of the greatest swindlers in American history. His
aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo.
The term "Ponzi scheme"
is a widely known description of any scam that pays early investors
returns from the investments of later investors. He promised clients a
50% profit within 45 days, or 100% profit within 90 days, by buying
discounted postal
reply coupons in other countries and redeeming them at face value in
the United States as a form ofarbitrage.^[1][2] Ponzi
was probably inspired by the scheme of William F. Miller, a Brooklyn
bookkeeper who in 1899 used the same scheme to take in $1
million.^[3]

I
think I’ll call it the Pan-European Ponzi. Conspiracy theorists are
going to love this post.

Like Italy (see below), Portugal has also been known for years to take advantage of derivatives contracts to dress up its budget numbers in the late 1990s. In a recent press article (Debt Deals Haunt Europe) Deutsche Bank’s spokesman Roland Weichert commented that the bank has executed currency swaps on behalf of Portugal between 1998 and 2003. He also said that Deutsche Bank’s business with Portugal included "completely normal currency swaps" and other business activity, which he declined to discuss in detail. He also added that the currency swaps on behalf of Portugal were within the "framework of sovereign-debt management," and the trades weren’t intended to hide Portugal’s national debt position (yeah okay!).

Though the Portuguese finance ministry declined to comment on whether Portugal has used currency swaps such as those used by Greece, it said Portugal only uses financial instruments that comply with European Union rules. Thus, if the use of these instruments complied with European Union rules, then there is nothing wrong with them, right??!! The word "if" is probably one of the most abused words in the English language. As my lawyer use to tell me as I once abused the word, "If Grandma had balls, she’d be Grandpa, wouldn’t she?"

The French 

In 1997, the French government received an upfront payment of £4.7 billion ($7.1 billion) for assuming the pension liabilities for France Telecom workers in return. This quick cash injection helped bring down France’s deficit, helping the country to meet the pre-condition to join the Euro zone. You may reference the Laurent_Paul_and Christophe_Schalck_study for a background on the deal. I don’t necessarily concur with their conclusions, but it does provide some info

For the record and according to the doc referenced above, according to the State balance sheet for 2006, total pension liabilities of civil servants have been estimated at 941 billion €, i.e. 53% of annual GDP in France.  An attempt to reform all special schemes in 1995 collapsed because of severe strikes on the railways. Sounds awfully Hellenic in nature, doesn’t it??? I, for one, believe that Greece is getting a bad rap, and not becaue it is being falsely accused but because it is just a lot sloppier at covering up its shenanigans than its European neighbors.

Now, back to France. A transaction similar to the France Telecomm deal took place in 2006 with La Poste which still employs 200,000 civil servants, but is now facing the same evolution as France Telecom in 1997. But an important difference with France Telecom is the obvious insufficiency of the lump sum paid by the postal company (2 billion €) compared to the amount of pension liabilities transferred (70 billion € at the end of 2006). This low amount is explained by the weak financial position of the company. Thus, the balance of the transaction is guaranteed by 1) additional contributions by the postal company which will be paid until 2010, the scheduled year of the complete liberalization of the
postal services; and 2) the annual contribution by the State Budget the amount of which should progressively increase, from 0.5 billion € in 2006 to 2 billion € in 2020. 

Click to enlarge

As you can see, the French government has accepted 301 billion euros of pension liabilities for 16.2 billion dollars of upfont payments. Who want’s to bet if these liabilities are drastically underfunded? Either cut Greece some slack or jump into France’s ass. We shouldn’t have it both ways!

As public entities replace the public company for the payment of pensions and the collection of contributions, the tax burden can be increased significantly: around 0.1% of GDP each for the EDF-GDF, France Telecom and La Poste transactions. Overall, transfers of pension liabilities
implemented since 1997 have supposedly increased the French tax burden by 0.3% of GDP.

Is France the only one doing this? You know the answer to that question.

The Greeks (again)…

According to people familiar with the matter interviewed by China Securities Journal, Goldman Sachs Group Inc. did as many as 12 swaps for Greece from 1998 to 2001, while Credit Suisse was also involved with Athens, crafting a currency swap for Greece in the same time frame.

Under its "off-market" swap in 2001, Goldman agreed to convert yen and dollars into euros at an artificially favorable rate in the future. This helped Greece to use that "low favorable rate" when it recorded its debt in the European accounts-pushing down the country’s reported debt load.

Moreover, in exchange for the good deal on rates, Greece had to pay Goldman (the amount wasn’t revealed). And since the payment would count against Greece’s deficit, Goldman and Greece came up with another twist: Goldman effectively loaned Greece the money for the payment, and Greece repaid that loan over time. And the two sides structured the loan as another kind of swap. So, the deal didn’t add to Greece’s debt under EU rules. Consequently, Greece’s total debt as a percentage of GDP fell from 105.3% to 103.7%, and its 2001 deficit was reduced by a tenth of a percentage point in GDP terms, according to people close to Goldman.

Another action that smacks of Hellenic manipulation, at least to the staff of BoomBustBlog:  for years it apparently and simply omitted large portions of its military-equipment spending from its deficit calculations. Though, European regulators eventually prevailed on Greece to count everything and as a result, in 2004, there was a massive revision of Greek deficit figures from 2000 (a budget deficit of 2.0% of GDP in 2000 to beyond the 3% deficit limit in 2004), by then Greece had already gained entrance to the euro. As in my trying to prepare for the coming sovereign debt crisis, timing is everything, isn’t it???

The Italians

As discussed in a recent ZeroHedge article, a 1996 Italian currency swap, arranged by J.P. Morgan, allowed Italy to receive large payments upfront that helped keep its deficit in line, with the downside of greater payments later.

In addition, to curbing their current deficits, countries are now using these swap agreements to push off their loan liabilities (related to swap agreements) to a later date through securitization, and Greece is one such example. 

Under the 2001 deal brokered by Goldman, Greece swapped dollar- and yen-denominated debt for Euros at below-market exchange rates. The result was that the country got paid €1 billion ($1.35 billion) upfront on the swap in exchange for an obligation to buy the swaps back later. In 2005, this obligation was in turn securitized as part of a 20-year debt issue, further pushing off the day of reckoning.

Moreover, one of the key reasons why such manipulations continued is the apparent ignorance of the EU’s Eurostat, which knew enough about these deals to tighten the rules governing their accounting-albeit only after they had served their purpose – the Ponzi! When Italy’s then-Prime Minister Romano Prodi miraculously achieved a four-percentage-point improvement in Italy’s budget deficit in time to usher the country into the common currency, Italy’s use of accounting gimmicks was widely discussed, and then promptly ignored. As at that time, everyone was only too eager to look the other way in the drive to get the single currency up and running.

It wasn’t until 2008-a decade after the deals became popular-that Eurostat was able to revise its rules to push countries to include swaps in their debt and deficit calculations. Still, till date too little is known about countries’ continued exposure to the deals that are already out there.

Overall, though there is less evidence to support that there are more such swap deals that happened during the late 90’s till early part of this decade, the data below showing a sharp decline in interest payments as a percentage of GDP particularly for Belgium (apart from Greece and Italy), hints that there are considerably more of these deals to be discovred. The questions is, will they be discovered before or after the respective sovereign issues record debt to the suckers sovereign fxed income investors.

Notice the extremely supercalifragilisticexpealidocious reductions Belgium, Greece and Italy have made in their interest payments from 1993 to 2000 in this graphic made pre-2000. If one didn’t know better, one would have thought theses countries actually used magic to make such reductions. Hell, Italy practicaly cut their debt service (projected, of course) in half. It really makes one wonder. I’m just saying…

According to DERIVATIVES AND PUBLIC DEBT MANAGEMENT by Gustavo Piga, "The political stakes of the 1997 budget package were enormous. Therefore, it was no surprise that many countries were accused of ‘creative window-dressing’ in their budget through the use of accounting tricks to reach the desired goal. One contentious item was interest expenditure, which is the interest expense that governments sustain to finance their deficit and roll over their debt. Interest expenditure represents a high percentage of public spending and GDP in the European Union. It is highly variable over time, especially when compared to other components of the budget. Because of its relevance and because it is subject only to minimal scrutiny during budget law discussions (and many times even after its realization during the fiscal year), interest expenditure is an ideal target for reaching fiscal stabilization goals without incurring excessive political protest or opposition".

Oh, do you mean like this??? 

More on Europe

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Charles Ponzi (March 3, 1882 – January 18, 1949) was
an Italian swindler, who is
considered one of the greatest swindlers in American history. His
aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo.
The term "Ponzi scheme"
is a widely known description of any scam that pays early investors
returns from the investments of later investors. He promised clients a
50% profit within 45 days, or 100% profit within 90 days, by buying
discounted postal
reply coupons in other countries and redeeming them at face value in
the United States as a form ofarbitrage.^[1][2] Ponzi
was probably inspired by the scheme of William F. Miller, a Brooklyn
bookkeeper who in 1899 used the same scheme to take in $1
million.^[3]

I
think I’ll call it the Pan-European Ponzi. Conspiracy theorists are
going to love this post.

Like Italy (see below), Portugal has also been known for years to take advantage of derivatives contracts to dress up its budget numbers in the late 1990s. In a recent press article (Debt Deals Haunt Europe) Deutsche Bank’s spokesman Roland Weichert commented that the bank has executed currency swaps on behalf of Portugal between 1998 and 2003. He also said that Deutsche Bank’s business with Portugal included "completely normal currency swaps" and other business activity, which he declined to discuss in detail. He also added that the currency swaps on behalf of Portugal were within the "framework of sovereign-debt management," and the trades weren’t intended to hide Portugal’s national debt position (yeah okay!).

Though the Portuguese finance ministry declined to comment on whether Portugal has used currency swaps such as those used by Greece, it said Portugal only uses financial instruments that comply with European Union rules. Thus, if the use of these instruments complied with European Union rules, then there is nothing wrong with them, right??!! The word "if" is probably one of the most abused words in the English language. As my lawyer use to tell me as I once abused the word, "If Grandma had balls, she’d be Grandpa, wouldn’t she?"

The French 

In 1997, the French government received an upfront payment of £4.7 billion ($7.1 billion) for assuming the pension liabilities for France Telecom workers in return. This quick cash injection helped bring down France’s deficit, helping the country to meet the pre-condition to join the Euro zone. You may reference the Laurent_Paul_and Christophe_Schalck_study for a background on the deal. I don’t necessarily concur with their conclusions, but it does provide some info

For the record and according to the doc referenced above, according to the State balance sheet for 2006, total pension liabilities of civil servants have been estimated at 941 billion €, i.e. 53% of annual GDP in France.  An attempt to reform all special schemes in 1995 collapsed because of severe strikes on the railways. Sounds awfully Hellenic in nature, doesn’t it??? I, for one, believe that Greece is getting a bad rap, and not becaue it is being falsely accused but because it is just a lot sloppier at covering up its shenanigans than its European neighbors.

Now, back to France. A transaction similar to the France Telecomm deal took place in 2006 with La Poste which still employs 200,000 civil servants, but is now facing the same evolution as France Telecom in 1997. But an important difference with France Telecom is the obvious insufficiency of the lump sum paid by the postal company (2 billion €) compared to the amount of pension liabilities transferred (70 billion € at the end of 2006). This low amount is explained by the weak financial position of the company. Thus, the balance of the transaction is guaranteed by 1) additional contributions by the postal company which will be paid until 2010, the scheduled year of the complete liberalization of the
postal services; and 2) the annual contribution by the State Budget the amount of which should progressively increase, from 0.5 billion € in 2006 to 2 billion € in 2020. 

Click to enlarge

As you can see, the French government has accepted 301 billion euros of pension liabilities for 16.2 billion dollars of upfont payments. Who want’s to bet if these liabilities are drastically underfunded? Either cut Greece some slack or jump into France’s ass. We shouldn’t have it both ways!

As public entities replace the public company for the payment of pensions and the collection of contributions, the tax burden can be increased significantly: around 0.1% of GDP each for the EDF-GDF, France Telecom and La Poste transactions. Overall, transfers of pension liabilities
implemented since 1997 have supposedly increased the French tax burden by 0.3% of GDP.

Is France the only one doing this? You know the answer to that question.

The Greeks (again)…

According to people familiar with the matter interviewed by China Securities Journal, Goldman Sachs Group Inc. did as many as 12 swaps for Greece from 1998 to 2001, while Credit Suisse was also involved with Athens, crafting a currency swap for Greece in the same time frame.

Under its "off-market" swap in 2001, Goldman agreed to convert yen and dollars into euros at an artificially favorable rate in the future. This helped Greece to use that "low favorable rate" when it recorded its debt in the European accounts-pushing down the country’s reported debt load.

Moreover, in exchange for the good deal on rates, Greece had to pay Goldman (the amount wasn’t revealed). And since the payment would count against Greece’s deficit, Goldman and Greece came up with another twist: Goldman effectively loaned Greece the money for the payment, and Greece repaid that loan over time. And the two sides structured the loan as another kind of swap. So, the deal didn’t add to Greece’s debt under EU rules. Consequently, Greece’s total debt as a percentage of GDP fell from 105.3% to 103.7%, and its 2001 deficit was reduced by a tenth of a percentage point in GDP terms, according to people close to Goldman.

Another action that smacks of Hellenic manipulation, at least to the staff of BoomBustBlog:  for years it apparently and simply omitted large portions of its military-equipment spending from its deficit calculations. Though, European regulators eventually prevailed on Greece to count everything and as a result, in 2004, there was a massive revision of Greek deficit figures from 2000 (a budget deficit of 2.0% of GDP in 2000 to beyond the 3% deficit limit in 2004), by then Greece had already gained entrance to the euro. As in my trying to prepare for the coming sovereign debt crisis, timing is everything, isn’t it???

The Italians

As discussed in a recent ZeroHedge article, a 1996 Italian currency swap, arranged by J.P. Morgan, allowed Italy to receive large payments upfront that helped keep its deficit in line, with the downside of greater payments later.

In addition, to curbing their current deficits, countries are now using these swap agreements to push off their loan liabilities (related to swap agreements) to a later date through securitization, and Greece is one such example. 

Under the 2001 deal brokered by Goldman, Greece swapped dollar- and yen-denominated debt for Euros at below-market exchange rates. The result was that the country got paid €1 billion ($1.35 billion) upfront on the swap in exchange for an obligation to buy the swaps back later. In 2005, this obligation was in turn securitized as part of a 20-year debt issue, further pushing off the day of reckoning.

Moreover, one of the key reasons why such manipulations continued is the apparent ignorance of the EU’s Eurostat, which knew enough about these deals to tighten the rules governing their accounting-albeit only after they had served their purpose – the Ponzi! When Italy’s then-Prime Minister Romano Prodi miraculously achieved a four-percentage-point improvement in Italy’s budget deficit in time to usher the country into the common currency, Italy’s use of accounting gimmicks was widely discussed, and then promptly ignored. As at that time, everyone was only too eager to look the other way in the drive to get the single currency up and running.

It wasn’t until 2008-a decade after the deals became popular-that Eurostat was able to revise its rules to push countries to include swaps in their debt and deficit calculations. Still, till date too little is known about countries’ continued exposure to the deals that are already out there.

Overall, though there is less evidence to support that there are more such swap deals that happened during the late 90’s till early part of this decade, the data below showing a sharp decline in interest payments as a percentage of GDP particularly for Belgium (apart from Greece and Italy), hints that there are considerably more of these deals to be discovred. The questions is, will they be discovered before or after the respective sovereign issues record debt to the suckers sovereign fxed income investors.

Notice the extremely supercalifragilisticexpealidocious reductions Belgium, Greece and Italy have made in their interest payments from 1993 to 2000 in this graphic made pre-2000. If one didn’t know better, one would have thought theses countries actually used magic to make such reductions. Hell, Italy practicaly cut their debt service (projected, of course) in half. It really makes one wonder. I’m just saying…

According to DERIVATIVES AND PUBLIC DEBT MANAGEMENT by Gustavo Piga, "The political stakes of the 1997 budget package were enormous. Therefore, it was no surprise that many countries were accused of ‘creative window-dressing’ in their budget through the use of accounting tricks to reach the desired goal. One contentious item was interest expenditure, which is the interest expense that governments sustain to finance their deficit and roll over their debt. Interest expenditure represents a high percentage of public spending and GDP in the European Union. It is highly variable over time, especially when compared to other components of the budget. Because of its relevance and because it is subject only to minimal scrutiny during budget law discussions (and many times even after its realization during the fiscal year), interest expenditure is an ideal target for reaching fiscal stabilization goals without incurring excessive political protest or opposition".

Oh, do you mean like this??? 

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Rather, it seems Weir may have been left off the team because he is “not family friendly.” As GLAAD notes, such a claim “would be a clear jab at his perceived sexual orientation.” The blog post continues:

Weir is extremely involved with his family. He is putting his younger brother through college, and supports the family financially because his father’s disability prohibits him from working. Weir’s dedication to his family can be clearly documented in the Sundance series, Be Good Johnny Weir, which follows him and his family and friends through his life and career as a championship skater.

Weir said that he will skip the ISU World Figure Skating Championships in Torino to “rework his technique,” but a source tells GLAAD that Stars on Ice “refused to allow” him to participate in its tour.

The Stars on Ice incident is not the first time in recent weeks that Weir has been forced to endure such criticism. During the Vancouver Olympics, Australian and Canadian commentators said what were widely considered inappropriate comments, which Weir responded to in a calm and mature fashion.

An online petition urges Stars on Ice to invite Weir to its tour.

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A few commenters on syndicated sites appeared to have really underestimated the significance of this development. In the article, it is alleged that Freddie and Fannie are forcing banks to eat up to $30 billion in soured mortgages under the warranties and representations clauses of the sales contract. To highlight the significance of this development, let me remind all that Fannie and Freddie are benchmarks for mortgage lending in the US.

(Bloomberg) — Taxpayer losses from supporting
Fannie
Mae and Freddie
Mac will top $400 billion, according to
Peter Wallison,
a former general counsel at the Treasury who is
now a fellow at the American Enterprise Institute.

“The situation is they are losing gobs of money, up to
$400 billion in mortgages,” Wallison said in a Bloomberg
Television interview. The Treasury Department recognized last
week that losses will be more than $400 billion when it raised
its limit on federal support for the two government-sponsored
enterprises, he said.

 The U.S. seized the two mortgage financiers in 2008 as the
government struggled to prevent a meltdown of the financial
system. The debt of Fannie Mae, Freddie Mac and the Federal Home
Loan Banks grew an average of $184 billion annually from 1998 to
2008, helping fuel a bubble that drove home prices up by 107
percent between 2000 and mid-2006, according to the S&P/Case-
Shiller home-price index.

The Treasury said on Dec. 24 it would provide an unlimited
amount of assistance to the companies as needed for the next
three years to alleviate market concern that the government
lifeline for Fannie Mae and Freddie Mac, the largest source of
money for U.S. home loans, could lapse or be exhausted.

Lax regulation of Fannie Mae and Freddie Mac led to the
mortgage companies taking on too many risky loans, Wallison
said.

“It turns out it was impossible to regulate them,” he
said. “They were too powerful.” He said no one knows how much
will be needed to keep the companies solvent.

With this in mind, I want to parse the logic behind my posting the
Fanie/Freddie issue in the first place. This is not
about Fannie and Freddie, this is about all investors
they have sold MBS and mortgages to as well as all insurers they have
bought insurance from. The monolines are putting bad loans back to
originators too. The admins of loan pools, CDO’s etc. also wish to
minimize their losses. If the banks had to eat
a 50% loss of all of the bad loans they have sold (which is at least a
third of all of the loans sold from ‘05 to ‘08) then we are talking
significant numbers. The loss rate on subprime mortgages is nearly 50%
now. 

Bloomberg
: Real estate loans at U.S. banks that are at least 90 days
overdue or that are expected to default almost doubled in 12
months to 7.1 percent, according to December FDIC data.
Non-
performing loans for construction and development rose to 16
percent from 8.6 percent. 

…The sale of loans from failed banks in 2009 brought on
average 43 percent of their book value, according to an FDIC
summary. Non-performing loans, those on which the borrower has
defaulted or there is little prospect of repayment, were sold
for 26
percent of their book value on average.

In the meantime, the collateral behind these loans are still trending
downward in value after many hundreds of billions of US tax dollars
thrown at the situation! For residential values, see
It’s Official: The US Housing Downturn Has Resumed in Earnest, –  
If Anybody Bothered to Take a Close Look at the Latest Housing
Numbers… and "A
Fundamantal
Investor’s Peek into the Alt-A and Subprime Market".
For commercial property values, see  CRE 2010 Overview 2009-12-16 07:52:36 2.85 Mb.

Of course, this data invalidates the findings of the government SCAP
stress tests for US banks (see links towards the bottom of this post). 

Now, on to the latest data available for Alt-A and subprime mortgage
performance.

 
The Facts as reported by the FDIC and the NY Federal Reserve Bank
(their numbers, not mine)

• Foreclosures on First Lien Mortgages increased from 11.5% as of 31st
  October 2009 to 11.74% as of 31st January, 2010.
• Mortgage charge-off rates on Prime loans and Alt-A loans increased by
  25bps and 21bps to 7.66% and 12.23% respectively over the same period.
• Delinquency rates for first lien mortgages on the other hand
  decreased by 7bps to 5.6%, for the quarter ended December 31,
  2009.
• While Net Charge-off rates for Alt-A loans increased by 2.12% points
  q-o-q to 30.49% as on 31st Dec 2009, delinquency rates dropped by
  27bps over the same period to 12.1%.
• In the case of Subprime loans, Net Charge off rates and Foreclosure
  rates, both rose to 44.6% and 15.6% respectively during 4Q09, compared
  to 42.9% and 15.4% during 3Q09.
• Delinquency rates declined from 26.4% in 3Q09 to 25.3% in 4Q09.
• Net charge off rates for HELOCs rose 13bps to 3.34% during 4Q09 while
  delinquency rates had a negligible decline.
• Net charge-off rates and delinquency rates for Business Loans (C&I
  loans) marginally declined during 4Q09 remaining more or less constant
  at 2.5% and 4.5% respectively.

  Delinquency rates under CRE loans remained steady during 4Q09 at 8.8%
  when compared with 3Q09. While delinquency rates for multifamily
  loans did not show any drastic changes in 4Q09, net charge-off rates
  under construction loans increased considerably from 6.3% in 3Q09 to
  8.4% in 4Q09

  Credit cards had a better quarter with net charge off rates and
  delinquency rates showing marginal improvements in 4Q09. Net charge off
  rates declined from 10.2% in 3Q09 to 9.5% in 4Q09, while delinquency
  rates declined from 6.6% to 6.4% over the same period.

• Other consumer loans showed a healthier 2.7% net charge off rate in 4Q09 as against 3.2% in the previous quarter. Delinquency rate in this segment also improved marginally, declining by 19 bps to 3.5% in 4Q09.
• Net charge-off rates and delinquency rates for Other loans marginally increased. While net charge off rates increased from 1.7% in 3Q09 to 1.8% in 4Q09, Delinquency rates remained constant at 1.1% over 4Q09.

 This is all against a backdrop of what was increasing home prices in many (if not most) MSAs for the quarters in question, which is a definitively positive development for it was the drop in home prices that precipitated much of the financial malaise of the last few years. Click any graph below to enlarge.

The direction of home prices has a very high correlation with foreclosures and delinquency rates (as well as unemployment), not to mention the trillion dollars or so of direct and indirect fiscal and monetary stimulus. While the delinquency data definitely shows a positive uptrend, when taken in light of what it took to get it and its correlation to home prices and employment (must read Are
the Effects of Unemployment About To Shoot Through the Roof?), I believe we are definitely in a wait and see scenario with a potentially negative outlook.

In analyzing the performance of Alt-A and subprime loans, it is
best to look at things against the backdrop of housing prices for the
comparable period.  As you can see, the trend for pricing is
down for both the last quarter and December of 2009, and from my anecdotal research and
extrapolation from the data sets will be down Q1-2010 as well as for
some time after that. Thus, it is fair to say that the collateral behind
these loans will continue to be challenged. As a result of this in combination with stubbornly high unemployment, there will probably be a decent amount of pressure on delinquencies. Things have not gotten better from a fundamental or macroeconomic perspective, thus at this point I do not see a sustainable upward trend. As I stated earlier, we are in a wait and see mode. 

As you can see, the residential housing uptrend is now apparently over, and we are resuming the downward decent.

Let’s look at the improvement in delinquencies and losses as compared to home prices in the grand scheme of things, a birds-eye view so to speak…

Now, hopefully all can see what I mean in terms of the recent downtick in 30 delinquencies.

Loss Severity and Potential Loss Severity According to the Most Recent Data Points

Alt-A Loans

• Total loan value of Alt A loans declined from $615 bn in 3Q09 to $590 bn in 4Q09, maintaining an average FICO score of 705 in both quarters.
• In 4Q09, nearly 43% of Alt A loans had least one late payment over the past year, while 3Q09 had nearly 40.7% of such loans. In Florida nearly 57.2% of Alt-A loans had at least one late payment over the past year in 4Q09 followed by Nevada with 53.9% and California with 48.7%. The percentages were comparatively lower in 3Q09 at 54.5%, 50.9% and 46.5% respectively.
• Nearly 8.2% of Alt A loans were 30-89 days past due during 4Q09, marginally higher when compared to 8.1% in 3Q09. During 4Q09, Rhode Island and West Virginia witnessed the highest delinquencies with 11.1% and 10.6% of loans 30-89 days past due, respectively.
  Alt A loans 90+ days past due increased to 12.1% of total loans in 4Q09 compared to 10.1% in 3Q09. Nevada and California had the highest 90+ days loans past due at 18.4% and 16.9% of total loans, respectively in 4Q09. 
• Total Alt A loans past due stood at 16.3% of total loans as of December 31, 2009 (30-89 days past due loans and 90+ days past due loans) compared to 14.6% as of September 30, 2009. Additionally, in 4Q09, 11.5% of Alt-A loans were under foreclosure, marginally higher than 3Q09 share of 11.1%. Share of REO loans were 3.0% in 4Q09, compared to 3.2% in 3Q09. There was an increase in the share of “Alt-A loans in risk of default based on pro-rata share” (based on weighted average foreclosure / past due loans and REO loans for each state with weights based on average loan outstanding at each state) from 34.3% in 3Q09 to 36.6% in 4Q09. 
• As of December 31, 2009, approximately 43.3% (43.0% as of September 30, 2009) of Alt-A loan outstanding originated on or before 2005 while 35.0% (35.2% as of September 30, 2009) and 21.7% (21.8% as of September 30, 2009) of loans were originated during 2006 and 2007, respectively.  With S&P Case Shiller declining by nearly 17% , 28% and 28% since 2005, 2006 and 2007, respectively, most of these loans are still underwater and there has not been much improvement in view of the fact that average LTV at origination for Alt-A loans has been constant at 81% in 4Q09 as well. To estimate current LTV for Alt-A loans we have used housing price decline for each of these states (based on S&P Case Shiller Index with weights based on percentage of loan origination for each year) and LTV at origination to determine current LTV. As seen from the table below current LTV for Alt A loans in U.S is at 111.5% with California and Florida (which together account for 53% of Alt-A loans) having one of the highest LTV ratio at 115% and 126%, respectively. LTV for Alt A loans remained more or less constant compared to 3Q09.
• Note: The "total" line is
  actually a simple average.

Subprime Loans

• Compared to 3Q09 when almost 66% of subprime loans had least one late payment over the past one year, 4Q09 fared worse with an increase in the category to 67.1%.
• This is a very interesting tidbit that many probably did not realize. The total value of subprime loans outstanding drifted from $421 bn in 3Q09 to $403 bn in 4Q09 with a constant average FICO score of 616 in both quarters.  California and Florida together constituted nearly 24% and 11% of total subprime loans followed by New York and Illinois. Despite these demographics, in Florida and New Jersey nearly 75.9% and 74.5% of subprime loans had at least one late payment over the past year. It appears as if the California/Florida coastal state combo are no longer the loss leaders in the subprime malaise. It is getting worse, and it is spreading!
• As of December 31, 2009, 15.9% of subprime loans were 30-89 days past due, an improvement from 16.4% recorded as of September 30, 2009 (I sense this mostly due to the acceptance of short sales by the lender, which will end up as losses through the income statement – eventually). Mississippi and North Carolina witnessed the highest delinquencies with 19.7% and 19.5% of loans 30-89 days past due, respectively. Loans 30-89 days past due for California and Florida stood comparatively better at 11.6% and 11.9%, respectively. Again, the malaise is spreading outward and beyond the highly damaged coastal states.
• At the national level, Subprime loans 90+ days past due worsened materially and significantly in 4Q09 at 20.2% compared to 17.7% in 3Q09. Nevada and Massachusetts having the highest 90+ days past due at 27% and 26.5% of total loans, respectively California and Florida were stood at 24.6% and 18.7%, respectively as of December 31, 2009. Again, the malaise is spreading outward and beyond the highly damaged
  coastal states.
• Total loans past due for subprime stood at 34.3% as of December 31, 2009 compared to 32.9% in September 30, 2009. Foreclosed and REO loans stood at 13.9% and 3.7% (the REO numbers are highly suspect due to many reports on the ground indicating that banks are refusng to take back delinquent properties), respectively in 4Q09 as compared to 13.5% and 2.3% in the previous quarter. Overall, in 4Q09, 54.3% of subprime loans are in risk of default based on pro rata share (based on weighted average foreclosure / past due loans and REO loans for each state with weights based on average loan outstanding at each state), a deterioration compared to 3Q09 share of 52.6%.
• As of December 31, 2009, nearly 49.5% of current subprime loan outstanding were originated on / before 2005 while 35.2% and 15.3% of loans were originated during 2006 and 2007, respectively.  These percentages stood 49.2%, 35.5% and 15.2% respectively as of September 30, 2009. With S&P Case Shiller declining by nearly 17% , 28% and 28% since 2005, 2006 and 2007, respectively most of these loans are still underwater and there has not been much improvement in view of the fact that average LTV at origination has been constant at 84% in 4Q09. As seen from the table below, the current LTV for subprime loans is at 111%, with Michigan and Arizona having the highest LTV at 147% and 141%, respectively (again, the malaise is spreading outward and beyond the highly damaged
  coastal states). LTV for Subprime loans remained more or less constant compared to 3Q09, due to the short-lived upward blip in home prices.

Note: The "total" line is actually a simple average.

As can be seen from the chart below (3Q-09), there are still plenty of losses to be taken in these loan categories.

So banks are doing well, after all their stock prices have went up over 100% from last year’s lows, right? You see, I am a fundamental investor, and the fundamentals say many of the banks are nothing but big, black, sinkholes. The stock market has decided to "all of a sudden(ly)" disagree with this assessment. I wonder why?????. Of course FASB has allowed them to absolutely ignore everything in all of the charts you see above.

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The San Francisco-based 9th U.S. Circuit Court of Appeals panel rejected two legal challenges by Sacramento atheist Michael Newdow, who said the references to God are unconstitutional and infringe on his religious beliefs.

The same appeals court caused a national uproar and prompted accusations of judicial activism when it decided in Newdow’s favor in 2002, ruling that the pledge violated the First Amendment prohibition against government endorsement of religion.

President George W. Bush called the 2002 decision “ridiculous,” senators passed a resolution condemning the ruling and Newdow received death threats.

That lawsuit reached the U.S. Supreme Court in 2004, but the high court said Newdow lacked the legal standing to file the suit because he didn’t have custody of his daughter, on whose behalf he brought the case.

So Newdow filed an identical challenge on behalf of other parents who objected to the recitation of the pledge at school. In 2005, a federal judge in Sacramento decided in Newdow’s favor, prompting the appeals court to take up the case again.

Judge Carlos Bea, who was appointed by Bush in 2003, wrote for the majority in Thursday’s 2-1 ruling.

“The Pledge of Allegiance serves to unite our vast nation through the proud recitation of some of the ideals upon which our Republic was founded,” he said.

Bea noted that schools do not require students to recite the pledge, which was amended to include the words “under God” by a 1954 federal law. Members of Congress at the time said they wanted to set the United States apart from “godless communists.”

Judge Stephen Reinhardt, who was part of the three-judge panel that ruled in Newdow’s favor eight years ago, wrote a 123-page dissent to the 60-page majority opinion.

“Under no sound legal analysis adhering to binding Supreme Court precedent could this court uphold state-directed, teacher-led, daily recitation of the ‘under God’ version of the Pledge of Allegiance by children in public schools,” wrote Reinhardt, who was appointed by President Jimmy Carter in 1980.

Newdow, a doctor and attorney who founded a group called the First Atheist Church of True Science, told The Associated Press he would ask the appeals court to rehear the case. If it rejects that request, Newdow said he’ll appeal to the U.S. Supreme Court.

“The whole argument that ‘under God’ wasn’t placed into the pledge for religious purposes is bogus,” Newdow said. “I hope people recognize this is not against God or people who believe in God. It’s about the government not treating people equally on the basis of their lawful religious views.”

Newdow said he isn’t optimistic the Supreme Court will agree to hear the case because the justices will likely be reluctant to hear a case that could invalidate the pledge.

“They don’t want to do what’s politically unpopular,” he said. “The Supreme Court will not hear a case that upholds the Pledge of Allegiance. It’s very unlikely at least.”

Rory Little, a professor at the University of California Hastings College of the Law, agreed. He said the Supreme Court is unlikely to review the case because Thursday’s ruling is the third appellate court decision upholding the pledge.

In addition, Congress passed legislation reaffirming the pledge in 2002, following the 9th Circuit’s ruling that struck it down.

“I think this is the last word on this particular lawsuit,” Little said. “It’s an important ruling.”

In a separate 3-0 ruling Thursday, the appeals court upheld the inscription of the national motto “In God We Trust” on U.S. coins and currency, citing an earlier 9th Circuit panel that ruled the phrase is ceremonial and patriotic and “has nothing whatsover to do with the establishment of religion.”

Greg Katsas, who argued the case on behalf of the U.S. government when the appellate court heard the case in December 2007, said the panel made the right decision Thursday.

“I think these two phrases encapsulate the philosophy on which the nation was founded,” said Katsas, who now works in private practice. “There is a religious aspect to saying “One nation under God,” but it isn’t like a prayer. When someone says the pledge, they’re not praying to God, they’re pledging allegiance to the country, the flag and the ideals of the country.”

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Now, new videos have surfaced from Leach’s time at Texas Tech.

In one video, Leach addresses his team for more than six minutes. His speech is filled with expletives, although his demeanor remains somewhat calm. It’s also unclear if his salty language is even atypical for a college football coach. At one point, Leach says, “Fuck playing close. We lost a goddamn game to the University of Texas and we could have won the motherfucker.”

In the other video, he speaks to his “god squad” players, telling them, “As long as we’re going to have all these prayers out on the field, as long as we’re going to do all this other stuff, I want you to make sure that’s directed towards football.” Scroll down to see.

WATCH (via SportsByBrooks):

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The report by New Orleans Inspector General E.R. Quatrevaux said the flawed contract with MWH Americas Inc. has hurt the city’s recovery, placing blame on both the company and city officials. The city’s slow rebuilding process continues to anger residents, and the uneven recovery was a major issue in the campaign leading up to last month’s mayoral election.

Quatrevaux advised scrapping the deal with the Broomfield, Colo.-based firm in the report, first made public Thursday by The Times-Picayune. The company’s work previously had not garnered much criticism.

“The city has blindly paid MWH’s expenses,” the report said, including “a markup of approximately 23 percent” without knowing if that was appropriate.

The report also said city employees and elected officials may have violated ethics laws by accepting gifts or meals from MWH.

MWH was hired in December 2007 by Mayor Ray Nagin’s administration to manage the massive rebuilding of city infrastructure after the 2005 storm flooded fire and police stations, parks, community centers and roads. As of February, MWH had been paid $29 million for its work and billed the city for $36 million, the report said.

The probe said the city was paying the firm too much considering the amount of progress made, and that the contract, and its escalating costs, “will have profound consequences for the recovery program.”

Hours after Quatrevaux’s criticism was made public, one neighborhood leader lamented the recovery.

“It’s moving at a snail’s pace,” said Dennis Scott, the vice president of the Lakewood East Homeowners Association in eastern New Orleans.

“We have a temporary trailer as a library. We still have a police facility that is a temporary building, and a fire station that is still in a trailer. And there’s definitely no hospital.”

MWH said in a statement it had helped the city complete several challenging projects including a performing arts center. It also said about 600 projects are underway.

“We take our work and the work of our subcontractors very seriously,” the company said.

It added that its fees, which are paid on top of rebuilding costs, would “not reduce money available to the city to build projects.”

The inspector general’s report did not specify an overbilling amount. But it noted that under the contract, MWH could reap 8 percent of the total design and construction costs. Because the city and MWH projected costs as high as $600 million, the contract allowed MWH to bill as much as $48 million.

But the inspector general said those numbers were “unrealistically high” because by late 2007 city officials were only expecting to receive about $315 million in rebuilding funds, from sources that included FEMA and bond sales. Eight percent of $315 million would be about $25 million, or about $11 million less than what MWH has billed the city.

Quatrevaux also said MWH has sought reimbursement for a number of questionable expenses, including $93,289 for telecommunications services; gifts for city employees such as flowers, theater tickers and Christmas presents; a flight from Salt Lake City to Las Vegas “with no apparent connection to New Orleans”; rental of a corporate apartment and MWH business cards and membership in professional organizations.

MWH said some expenses had been incorrectly billed and the city was not charged for other expenses, according to the report. The company reimbursed the city $3,646 for gift and meal expenses, the report said.

Quatrevaux’s report also criticized the city’s process of selecting MWH, saying it didn’t give other firms a fair shot and gave the company excessively favorable contract terms.

City officials did not return messages seeking comment. Nagin, who is term-limited, leaves office in May.

Gary Clark, a professor of politics at Dillard University in New Orleans, said the MWH contract was new evidence of profiteering in the wake of Katrina.

“There is a whole area called disaster capitalism: There are entire groups that accrue wealth through natural disasters. It’s taking place in Haiti, it’s taking place in Chile, and it took place here,” he said.

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While the two nuclear-armed neighbors have taken slow steps toward restarting peace talks, they also have a history of using weapons tests as a form of diplomatic saber-rattling.

The Arabian Sea tests employed aircraft, submarines and ships. It was not immediately clear if the missiles were capable of carrying nuclear warheads.

Both countries regularly test their missile systems, and usually notify each other ahead of such launches in keeping with a diplomatic agreement.

But Friday’s launches were followed by a navy statement saying the tests showed the navy’s commitment to “defending the motherland.” It added: “This strike capability would also send a message of deterrence to anyone harboring nefarious designs against Pakistan.”

Such statements have been rare in recent years, as the two nations have struggled to keep their peace process limping along. Late last month, India and Pakistan held their first official talks since the 2008 Mumbai terrorist attacks, which India blamed on the Pakistan-based militant group Lashkar-e-Taiba.

It was not clear whether the statement was an intentional attempt to stir the diplomatic waters, but similar wording has been used in the past to send warnings to New Delhi.

Other Pakistani officials refused to expand on the navy statement.

India and Pakistan have fought three wars since they gained independence from Britain in 1947.

The two sides began talks aimed at resolving their differences over the Himalayan region of Kashmir and other disputes in 2004. India put the peace process on hold soon after the Mumbai attacks.

Indian officials could not immediately be reached for comment.

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