FXstreet.com (Córdoba) – The Pound is recovering at a slow pace against the Dollar. GBP/USD is now back above 1.6150 after falling below 1.6100 to 1.6093 reaching a fresh 3-week low. Despite the recent recovery, the pair is still down more than 0.75% from today’s opening price.

The European Central Bank left its benchmark interest rate unchanged at 1 percent as it waits to see whether a massive infusion of credit into the banking system will help the euro zone’s struggling economy.

Markets and analysts will be looking to Thursday’s remarks by bank President Jean-Claude Trichet about the ECB’s $623 billion in 12-month loans offered to banks last week, its biggest ever, and what it augurs for the 16-nation euro zone in a bid to try to keep cash flowing to, from and between banks. Read more…

The Federal Reserve should break with past policy and try to identify and deflate asset bubbles before they can damage the U.S. economy, New York Federal Reserve President William C. Dudley said.

While interest-rate policy may not be the appropriate tool for popping bubbles, Fed officials have “other instruments in their toolbox,” Dudley notes in the text of a speech scheduled for July 26 at the Bank for International Settlements in Basel, Switzerland. The New York Fed released his remarks yesterday. Read more…

Israel’s cabinet approved a draft of a law on Sunday that would overhaul monetary policy and other decision-making by the Bank of Israel, the finance ministry said.

The law was submitted by Prime Minister Benjamin Netanyahu and Finance Minister Yuval Steinitz.

It has been in the works since Netanyahu was prime minister the first time, in the 1990s, and is aimed at strengthening the central bank’s independence. Read more…

Sri Lanka’s central bank chief said Saturday that the island could live without a major IMF bailout that had been delayed by the final stages of the government’s fight with Tamil Tiger rebels.

The government had requested the 1.9-billion-dollar loan in March to help stave off its first balance of payments deficit in four years after foreign currency reserves fell to around six weeks’ worth of imports.

The loan was delayed under political pressure from the United States, Britain and other countries who felt the government was not doing enough to avoid civilian casualties as it closed in on the remnants of the once-powerful Tamil Tiger army. Read more…

THE PHILIPPINES may be next in a growing number of countries that have lessened their use of the US dollar, which has lost its luster as the world’s most reliable currency, the central bank said.

While it may not replace the US dollar, the Chinese yuan may soon share prominence on the global stage as more countries diversify their currency holdings to shield themselves from the volatility similar to that exhibited by the greenback at the height of the subprime-mortgage-turned-global economic crisis. Read more…

Russia and India said the world economy is too reliant on the U.S. dollar and called for changes in how $6.5 trillion in currency reserves are managed, as Group of Eight leaders prepare to meet this week.

“The dollar system or the system based on the dollar and euro have shown that they are flawed,” Russian President Dmitry Medvedev said in an interview with Corriere della Sera, repeating his proposal for a new international reserve currency. Read more…

Saudi Arabia would turn a blind eye to Israeli warplanes flying over the kingdom in any raid on Iran’s nuclear sites, The Sunday Times said in a report denied by Israel.

Citing diplomatic sources, it said the head of Israel’s Mossad intelligence service had assured Israeli Prime Minister Benjamin Netanyahu that Saudi Arabia has tacitly agreed to the use of its airspace. Read more…

Vice President Joe Biden says the U.S. will not stand in Israel’s way if Israel believes military action is needed to eliminate Iran’s nuclear threat.

Biden says the U.S. “cannot dictate to another sovereign nation what they can and cannot do.” Read more…

In Rolling Stone Issue 1082-83, Matt Taibbi takes on “the Wall Street Bubble Mafia” — investment bank Goldman Sachs. The piece has generated controversy, with Goldman Sachs firing back that Taibbi’s piece is “an hysterical compilation of conspiracy theories” and a spokesman adding, “We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance in being a force for good.”

Taibbi shot back: “Goldman has its alumni pushing its views from the pulpit of the U.S. Treasury, the NYSE, the World Bank, and numerous other important posts; it also has former players fronting major TV shows. They have the ear of the president if they want it.” Here, now, are excerpts from Matt Taibbi’s piece and video of Taibbi exploring the key issues. Read more…

Over the past two weeks many banks issued press releases and opened up the PR spigot to indicate just how stable they all are now that a few have managed to pay down their TARP commitments. This of course, is nothing but a complete farce, and simply yet another chapter in the “consumer confidence” game played by the administration and its financial underlings. In order to see just how much the banking system depends on the continued unlimited wallet of taxpayers and Geithner’s printing presses, and how much certain law firms continue to depend on the somewhat less limited wallet of Wall Street, I present an October 31, 2008 letter recently obtained by Zero Hedge, in which Sullivan & Cromwell, Wall Street’s #2 favorite law firm (or is that #1: I am sure Wachtell Lipton would have a few choice words with regard to that particular league table rating, although it may be hard pressed to match S&C’s $241,975 in donations to the Democratic National Convention), goes to town to make sure that its well-deserving clients including Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JP Morgan Chase, Merrill Lynch, Morgan Stanley, State Street and Wells Fargo get to not only have the taxpayers’ cake (in perpetuity), but eat more and more of it each day. Before I get into the meat of the letter, it just has to be a complete coincidence, that these are exactly the same 9 firms that a mere 2 weeks prior to this letter was sent out had a rather direct head to head with the President’s Working Group, during which each one was apportioned $x billion in TARP after exactly zero due diligence, in order to plug the dike of complete financial collapse with almost a hundred billion fingers of taxpayer dollars. But, as they say, once you’ve had a taste of the free buffet, you only want more and more and more. True to form: the banks promptly showed up for another serving, and Sullivan & Cromwell was gladly there to charge taxpayers at the preferential rate of almost a thousand taxpayer dollars an hour, compliments of one H. Rodgin Cohen (more on him later).

Now it is no secret that when it comes to taxpayer guarantees and subsidies, the TARP is and has always been mere window dressing: as a backstop tranche, it only has to do with equity values, which as any rational observer of the financial system (this list of course excludes the likes of Dick Bove) knows full well, are at best equal to zero if all the FAS 115, 157, Level 3, Mark To Magic and other accounting sleight of hand gimmicks were to be removed.

The math is simple: bank assets have to equal bank liabilities + equity. The liabilities are there (and growing), yet the assets shrink every single day backstopped by such solid collateral as emptying midtown office space CMBS, bankrupt hotel and Harlem multi apartment whole loans, and 2nd liens in Ukrainian and Argentinean bison farms. If equities were marked appropriately, shareholders would likely have to be paid to own a share of Citi or BofA.

Then again, caught in a massively engineered short squeeze over the past 3 months, financial stocks ended up bottlerocketing straight up, not on fundamentals, or even on charts, but merely on two large stock loan issuers (themselves participants in the list of nine mentioned above) making it not only impossible to short fin stocks, but forcing anyone currently short to cover. And while TARP manipulation serves at best to fool some outlying marginal retail investors into a false sense of calm, the TLGP is where the real action is. And as of May, there was a lot of action: $345 billion worth of.

One last background item worth pointing out is that recently the FDIC realized its Deposit Insurance Fund was on the verge of depletion, sucked dry by those very banks that seem to fall like dominoes every Friday (or lately Thursday, with the total YTD now passing an unprecedented run rate of over 100 for the year). Recall that the FDIC’s primary responsibility is to make sure that come hell or high water, deposits are secured and insured. Well: surprise, they aren’t, which is why in March Sheila Bair announced several emergency steps to restore the rapidly dwindling reserves of the FDIC, most notably having to do with charging incremental assessments to both depository institutions and bank holding companies (well that, and also tapping a huge line of credit directly with the Treasury in case Citi were to finally admit that it is nationalized in all but name).

Enter H. Rodgin Cohen and Sullivan & Cromwell, on behalf of the Ben’s Big 9 Bailout Beneficiaries (BB9BB). The letter sent to the FDIC pretty much made it clear that banks want not only to gestate in the warm cocoon provided by taxpayers’ dollar bill plastered abdomens, but to have immediate recourse to essentially unlimited FDIC funding at practically no cost to them for ever and ever.

Some of the key demands made by the BB9BB – S&C cartel include:

1. The FDIC guarantee should be an unconditional guarantee of timely payments of principal and interest when due backed by the full faith and credit of the U.S. government.

Goodness, we wouldn’t want to have conditions when providing the entire American financial systems with a taxpayer-funded blank check now would we. A blank check with even one footnote of small print is inappropriate when dealing with the instigators of the biggest financial catastrophe since the Depression. So no fine print please. Done and Done.

2. Because the FDIC’s guarantee expires on June 30, 2012, there should be an
acceleration provision to June 30, 2012 in the event of default for guaranteed debt that matures after that date.

Wouldn’t want forced short-squeezors, pardon, investors, to somehow think that there is such a think as risk in the banks’ capital structures now, would we. In fact, this whole concept of risk, let’s just do away with it entirely as the market trades merely on rolling buy-ins and follow on equity issuances. Done and Done.

3. If investors regard the guarantee as weak, they will look to institutions’ underlying financial strength, thus lending to a tiered market where weaker institutions have insufficient access to liquidity.

What an abhorrent concept – judging a bank by its fundamental merits: the Horror, the Horror. How would the FDIC possibly allow a financial institution to be judged based on its “underlying financial strength”: don’t they realize that the BB9BB have made it all too clear that we now live in a communist regime where nobody can every fail based on their own “merits” and that everyone will be bailed out in perpetuity. How shallow: H. Rodgin Cohen, please explain to them how the system works. Done and Done.

4. Institutions should have the flexibility to issue senior unsecured debt not guaranteed by the FDIC, regardless of the stated maturity.

Yes Goldman, we realize you want to pay record bonuses even as unemployment hits 11% without starting a mass revolutionary uprising. Duly noted and Done and Done.

5. The Banking Organizations (BB9BB) agree with the FDIC that participating entities should have some mechanism to opt in or out of guarantees on a per issuance basis but believe that this option should not be limited to debt with stated maturities after June 30, 2012. [T]he Banking Organizations believe that this limitation will not achieve the FDIC’s stated objectives [of not raping the taxpayer? of course, the BB9BB would like to interject here].

Hell, just make guarantees perpetual: it is not like the financial system will ever rebound. After all who are we fooling here? Well, aside from CNBC’s primetime TV audience, wink, wink. Nonetheless, we advise readers to read the “cliff maturity” justification on or around June 30, 2012. This coincides nicely with the $1 trillion in CMBS that comes due about the same day. Should prove to be an amusing “day”, “week”, “month”, “end of tenure” for whoever is president then. But who cares: that will occur at a time when the U.S. sovereign debt approaches something with a “quad” and ending in “rillion”, and all the current BB9BB executives (long retired then) will have that 98th, 99th and 100th house in Cannes, Fiji and inside the crater of Mt. Etna. Done and Done.

6. We believe it would be appropriate to exclude public sector clients, banks and other financial institutions from because imposing a 75 basis point on deposit accounts for such institutions would eliminate the yield paid on these products and potentially encourage such institutions to move funds into higher yielding “unguaranteed” products, thus potentially reducing a participating entity’s liquidity sources… Considering the current level of interest rates, the [BB9BB] believe that the 75 bp fee is too high with respect to the Federal Funds, and should be lowered. The high cost of insuring Federal Funds may lead institutions to other secured borrowing sources so that, in lieu of Federal Funds, financial institutions will, in order to mitigate their funding costs, increase their utilization of secured borrowings sources such as the Federal Reserve Discount Window, the Term Auction Facility and the FHLB advance program. Such an outcome would not achieve the FDIC’s goal of improving short-term unsecured inter-bank funding markets [and, again, of not raping the U.S. taxpayer, which is so totally contrary to the lobbying effort contained herewith]

What irony: the BB9BB are demanding for unlimited guaranteed and unguaranteed backstops and someone dares to ask them to pay for it. If this isn’t the most unhinged and inequitable concept the BB9BB have ever heard, then nothing is. H. Rodgin Cohen will set it all straight, and make sure that not only can banks borrow Fed Funds but taxpayers will have to pay them a portion of how much they borrow and at what rate. In fact the bank that recently ended up “borrowing” 7% Fund Funds was actually a lender, and H. Rodgin Cohen made sure that instead of paying 7%, they received that amount of money. Done and Done.

7. Under 370.6(e) there is a 150 basis point penalty fee and enforcement mechanisms for debt that is represented as being “guaranteed by the FDIC” but which exceeds the guaranteed amount. In order to enhance investor confidence in the Debt Guarantee Program, the Banking Organizations propose that investors be expressly allowed to rely on the borrower’s representation with respect to the availability of the guarantee for a particular debt issuance.

You see, FDIC, it is simply unfair for investors and depositors to have an objective and unbiased representation. Especially since the BB9BB have every intention of abusing the guarantee/non-guarantee barrier at every possible occasion. However, this whole 150 bps penalty, well, that’s just too rich for S&C’s billionaire clients’ blood. Let’s cut a deal: the BB9BB will represent the debt in any way they want, and in turn, the FDIC will not only turn a blind eye to any and all (guaranteed) abuses that occur as a result, but also will not charge any penalty or enforce any actions against this outright abuse? Done and Done.

This and much more is contained in the attached missive, which was undoubtedly scribbled in short-hand by the BB9BB on the bent over back of one H. Rodgin Cohen. I recommend readers familiarize themselves with just how the world’s most effective lobby power works when it hegemonic status quo is even remote threatened.

Which brings us to topic #2 for today, that of the mellifluously sounding H. Rodgin Cohen. Frequent readers may recall, that H. Rodgin Cohen, whose name rolls out like a haiku by a moderately drunk Basho, was supposed to become none other than Tim Geithner’s right hand man, yet something odd happened on the greenback-bricked road which was supposed to guarantee H. Rodgin Cohen’s unbridled immortality by having his portrait prominently featured on the $100 trillion bill. Just what was, as George Stephanopoulos noted, the “issue that arose in the final stages of the vetting process.” While still on the topic of the haiku-esque H. Rodgin Cohen, many relevant questions brought up, and few answered, in this craftfully worded post by Tom Blumer of NewsBustes. I recommend readers familiarize themselves with the persona that nearly became TurboTaxTim in waiting. In the meantime, Zero Hedge will continue to present any and all lobby papers by Sullivan & Cromwell on behalf of the BB9BB, just in case H. Rodgin Cohen has decided to bypass the post of Secretary of the Treasury and apply straight for that of Overlord and Viceroy of all of Western Capitalism. With the backing of such “clients” as Goldman Sachs, he is essentially guaranteed to “win” that particular popular (or not)election.

hat tip Richard

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• More on StevePerkinsGate: PVM taking a page from the oldest playbook in the world (FT)
• India joins China, Russia in questioning USD dominance (Bloomberg)
• Palin to resign as Alaska governor, will not seek reelection (WSJ) [not even worth discussing the Republican due diligence process]
• Ignoring prophetic predictors (Nader)
• Staffer at SEC had warned of Madoff (WaPo, h/t dartmont)
• Recovering ABS may relapse if TALF support pulled (Reuters)
• Arnold’s IOUs will pay 3.75% (Bloomberg) which Bank of America can’t wait to launder with taxpayer money (PR)
• China needs domestic consumption for economic recovery (Bloomberg), in other words a US-style credit bubble, combined with compelte fake economic data, can only go so far.
• The Taleb – Tavakoli vendetta post-it update (Alphaville)
• Banks own the US government (Guardian)
• Korea fires five more missiles (Bloomberg)
• New York city sees slide in tourism (WSJ)
• William Buiter: Why zombie banks will need more money

Michael Lewis joins the Zero Hedge choir, takes on Joe Cassano

Jetlag edition

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The chart below indicates that while the market is exactly where it was in early December 2008, the VIX has droped by almost 60%. And traditional theories that suggest that the corporate risk is merely being offset to sovereing don’t seem to hold much sway- US CDS is again trading at a ludicrously tight level. So the question arises: just who is selling 1 month forward vol, and just how are they hedging effectively. Granted, one could make the argument that risk was priced at “total chaos” levels in November and December, the market was running even more like a headless chicken in March and breaching lower lows, yet the VIX was unable to even threaten penetrating prior resistance levels.

Alternatively said, even with net option open interest increasing, the VIX shows barely any indication of widening. Who is writing these options? Who is buying these options? Why (for both camps), and what do they know (don’t know) that we don’t know (know).

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Taibbi in his first TV interview since the “Squid” was let loose. Hat tip Calgary Schmooze

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Failure Friday is early today: today’s bank shooting green all the way to the grave is John Warner Bank, from Clinton, IL. Likely more to come today.

The FDIC and State Bank of Lincoln entered into a loss-share transaction on approximately $31 million of The John Warner Bank’s assets. State Bank of Lincoln will share in the losses on the asset pools covered under the loss-share agreement. The loss-sharing arrangement is projected to maximize returns on the assets covered by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $10 million. State Bank of Lincoln’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to alternatives. The John Warner Bank is the 46th FDIC-insured institution to fail in the nation this year, and the seventh in Illinois. The last FDIC-insured institution to be closed in the state was Bank of Lincolnwood, Lincolnwood, on June 5, 2009.

Update: First State Bank, IL and Rock River Bank, IL failures #2 and #3

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Tsk tsk. Those pesky SPARCs. Anyone remember March 2007? In other news, Sky Net will be nominating a robo-president for 2012 shortly.

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• Dan Loeb’s Third Point June P&L: 1.8%; 7.2% YTD (Third Point)
• Captain Morgan – Best use of $2.7 billion in TARP funding. Ever (Moneynews, h/t Cris)
• BOE’s Miles says helpful to include housing in inflation gauge [Amen]
• Unemployed finance guys in Buenos Aires search for sex, drugs, and their own souls (Playboy h/t Clusterstock)
  
• Boeing lost orders for 15 787 Dreamliners in past week: those lost airplanes sure not helping the manufacturing index
• China Vice Premier says global financial crisis hasn’t bottomed
• Russia Central bank says scraps recommendation for banks not to increase foreign currency denominated assets from Q3
• Weather Derivatives latest forecast sees average temperatures in the US for the next 6-10 days to be 0.2F vs. Prev. -1.3F
• US to provide $1.175 bln to wind down GM, previously the number was $950 million
• FDIC board weighs rules for buyout firms acquiring failed banks
• Gazprom seeks global deal to build gas grid encircling Europe (Bloomberg) – Naming contest is on: most PC incorrect name wins of course
• Michael Lewis on Wall Street’s Day of Reckoning (WS Tech h/t Joe)
• William Cohan on Goldman Sachs and AIG (Tech Ticker)

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It seems quite a few individuals noticed our post attempting to justify some very peculiar language in not just a certain Goldman Sachs Internet disclaimer, but also the strange wording prominently featured in critical GS-client agreements. One happened to be Goldman Sachs itself. We take this opportunity to present the response by Goldman Sachs’ spokesman Ed Canaday:

Dear Mr Durbin:

This is in response to your recent blog about our web site disclaimer. It is quite usual for websites to have disclaimers that refer to the monitoring of site usage. Most web sites, including yours we noticed, track usage by their visitors. This is primarily used for marketing and to help inform decision about enhancing content.

Your suggestion that we monitor our web site to facilitate front-running is untrue and offensive.

Sincerely

Ed Canaday
Vice President
Goldman, Sachs & Co.

____________________
Ed Canaday
Office: xxx-xxx-xxxx
Cell: xxx-xxx-xxxx

We are happy to have caught the attention of Mr. Canaday. We believe this is the start of a great ongoing dialog. In that vein, Marla has replied to Mr. Canaday and Goldman Sachs, attempting to elaborate on some of the point that Ed did not touch upon. I present it below and am looking forward for Goldman’s forthcoming reponse:

Dear Mr. Canady:

Thanks for your quick reply.

For your future reference, the correct spelling for “Tyler” is “Tyler Durden.” (A re-viewing of “Fight Club” might be in order, but I know Goldman VPs probably rarely have time for such luxuries).

Obviously, we want to make sure we have our facts correct so I am pleased to see your email. Perhaps you can lay to rest some questions we have for the record:

1. Indeed, data use disclaimers are a common feature on most websites. Still, I think you will agree that where usage patterns are so directly linked with potential investment activity and customer intentions it is a bit unusual not to have a more explicit description of the kind of use Goldman intends here. This is particularly so where customer attitudes are concerned, and appearances are important. “Internal business purposes” is a bit vague in this respect, don’t you find? This seems unlike Goldman, usually a firm known for very careful attention to detail. Why is a more specific description of such purposes not included? I would think that easier than explaining the matter repeatedly to random bloggers (and customers).

2. I notice that you have not taken the opportunity to address similar disclaimer language in the form contracts used by Goldman and Spear, Leeds and Kellogg. Was this omission intentional or an oversight? (For your reference you can find the language we are curious about here: http://www.zerohedge.com/node/12083). “You acknowledge that we may monitor your use of the Services for our own purposes (and not for your benefit). We may use the resulting information for internal business purposes or in accordance with the rules of any applicable regulatory or self-regulatory body and in compliance with applicable law and regulation.”

Not to be a stickler, but the drafting here seems quite careless.
Note the differing terms between the website disclaimer “…the resultant information may be used by GS for its internal business purposes OR in accordance with the rules of any applicable regulatory or self-regulatory organization….” (emphasis added) and the form disclaimer “…we may use the resulting information for internal business purposes or in accordance with the rules of any applicable regulatory or self-regulatory body AND in compliance with applicable law and regulation….” (emphasis added).

As a reformed legal professional myself, this seems a bit sloppy to me. Can you comment on the language and in particular why a more explicit definition of “internal business purposes” is not included?

3. I also notice that you do not specifically address our question:
“…has Goldman has ever actually used 360 submitted information in the decision making process of its prop trading desk?” Could you give us a response there? Perhaps you might augment that to include the decision making process of any Goldman investment decisions rather than just the prop desk and all information Goldman collects about 360 users.

And lastly, while we have your attention, we were hoping you could make a statement for Zero Hedge and its readers on the long discussed topic on our pages regarding Goldman Sachs’ effective monopolization of Principal Program Trading in the New York Stock Exchange. In other venues you have attributed this domination solely to Goldman’s selection as the one and only SLP currently used by the NYSE. Would you care to elaborate how that fits in with the NYSE’s upcoming changes to their DPTR (http://www.zerohedge.com/node/11769)
specifically as pertaining to J and K account type indicators. Was Goldman in any way consulted in the making of this decision by the NYSE? Did Goldman have any direct communication with the SEC on this issue?

Thanks for your help with these matters. As an aside, if there is a contact at Goldman we can routinely direct these questions to that might be helpful for both of us going forward. I look forward to hearing from you.

Best Regards,

“Marla Singer”

Zero Hedge

Of course, as soon as we receive additional disclosure on this matter, we will post it promptly.

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We know this is the one you have all been waiting for. Ever since we first reported on the Nigaz JV, our proverbial phones would have been ringing off the hook, of course, if we had any listed phone numbers. Of course, the upside is many sleepless nights at the NSA…

So we are considering it. In the meantime, some late morning amusement courtesy of the Daily Mail. Little commentary is needed… suffice it to say “Nigerians No Nigaz” is likely soon to eclipse “Dennis Kneale Idiot” as the most popular rising term in Google:

When a $2.5billion international venture is being planned you might expect there to be hours of debate over what to call it.

Yet branding is not the forte of some companies, it seems.

Russian Energy giant Gazprom has inadvertently walked into a racism row with the announcement of its joint venture in Nigeria – Nigaz.

Russian President Dmitry Medvedev and his Nigerian counterpart Umaru Yar’Adua last week agreed the deal to build refineries, pipelines and gas power stations in Africa’s most populous nation.

The name is meant to be an amalgamation of ‘Nigeria’ and ‘Gazprom’, pronounced ‘nye-gaz’, but it can be read phonetically as an offensive term for those of black African origin.

‘How more derogatory can it be. Let’s join forces in making our government rename this,’ said the creator of ‘Nigerians No Nigaz‘, a group on Facebook.

Many comments on the blunder were from white bloggers.

But others mocked the mistake – one African-American suggested a playlist of songs from U.S. hip-hop artists for the Nigaz launch party.

One Nigerian in Lagos said: ‘White people are making too much of this.

‘As long as the Russians pay us, they can call it what they like.’

hat tip Nathan
.

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If anyone had told us a year ago that Fitch would at least attempt to be a voice of reason, while Merrill Lynch, which has gotten destroyed on real estate, would be a CRE permabull, we would have punched them in the face. Alas, this seems to have become the case. While readers are all to aware of Zero Hedge’s coverage of the Merrill REIT team’s follies in “analysis land”, a Fitch piece from last week has some surprisingly insightful commentary on REIT. In a report titled “U.S. Equity REIT Liquidity Update: Hold the Applause” the rating agency paints a much more detailed and credible picture than i) expected and ii) than the 20 brand new analysts at ML/BofA could come up with.

From the report:

Challenges remain, including:

• Tenuous financing available across the capital markets.

• Deteriorating performance in commercial real estate and the sizable overhang of debt maturities for equity REITs looming in 2011.

• Limited visibility regarding net operating income capitalization rates, which continues to stress commercial property values constraining the magnitude of institutional investor-secured debt lending volume.

Also included is a pretty extensive laundry list for all the companies out there who still have not used ML’s magical stock underwriting services.

• Likely Reduced Revolving Credit Facility Commitments: Most REITs’ unsecured revolving credit facilities mature beyond Dec. 31, 2010. Within the tables on page 47, Fitch has reduced the borrowing capacity under revolving lines of credit by 33% for REITs that have revolving lines of credit that mature before Dec. 31, 2010 after taking into account extension options for illustrative purposes. This capacity reduction reflects a “what if” scenario for certain REITs as revolving credit facility maturities approach. While a limited number of REITs have either recently extended or increased the borrowing capacity under such revolving facilities, Fitch believes that many of these facilities will be reduced in size. For its rated universe, Fitch does not believe that many of these facilities will be converted from unsecured to secured given the strong lending relationships most of the seissuers have with their banking groups. That said, for weaker issuers across the equity REIT universe, the prevalence of secured credit facilities will likely increase given banks’ limited capital and concerns regarding borrower credit.

• Limited Unsecured Bond Issuances: Recent unsecured bond issuances do not constitute a panacea for REIT liquidity, as the unsecured bond market remains unattractive to most equity REITs. Credit spreads have tightened, but indicative pricing across the industry remains unattractive to many companies, particularly relative to secured debt.

• Near-Dormant CMBS Market: Liquidity remains weak in certain areas such as secured funding in the commercial mortgage-backed securities (CMBS) market. Although the inclusion of legacy CMBS for eligibility under the Federal Reserve’s Term Asset Backed Securities Loan Facility beginning in July may play a role in the restoration of investor confidence in commercial real estate, CMBS issuance volumes are highly unlikely to be restored to pre-2008 levels.

• Reduced Bond Tender Activity: While $2.8 billion in bond tender offers executed year to date have allowed companies to reduce uses of liquidity, such transactions have been a byproduct of bonds trading at discounts to par, which have included securities issued by REITs with below-investment-grade issuer default ratings (IDRs). Spreads have tightened recently, shrinking the arbitrage opportunity bond tenders present.

• Uncertain Common Equity Issuance: With $12.4 billion in new equity raised year to date by REITs, the re-equitization wave has enabled REITs to strengthen their capital bases. However, investor demand may be driven in part by low share prices relative to net asset values, while share prices of certain other equity REITs are such that prospective equity issuances are unlikely.

And some more good insight:

Encouraging Signs Are Not Ubiquitous

Year to date, 18 REITs have launched tender offers to repurchase approximately $7.0 billion of outstanding bonds and have tendered for approximately $3.1 billion of securities. Many REITs that have launched tender offers have IDRs in the ‘BBB’ rating category. Fitch’s ratings for REITs that have launched tender offers range widely, from Public Storage (which has an IDR of ‘A’ by Fitch, with a Stable Rating Outlook) to Centro NP LLC (which has an IDR of ‘CCC’ by Fitch, with a Negative Rating Outlook). Fitch views consummated tender offers as encouraging in that they demonstrate REITs’ ability to reduce their future funding obligations and temporarily reduce cash interest expense by utilizing low-cost unsecured lines of credit. Such tender offers have been affected by REITs with capacity under their credit facilities. REITs that have not executed tender offers may have limited liquidity to launch tender offers, while others have shorter tem funding needs to address.

Similarly, the equity issuance wave has been encouraging for REIT liquidity, as year to date, 38 REITs have raised an aggregate of approximately $12.8 billion in proceeds. With certain companies reluctant to issue at these prices

It will be interesting what everyone will be saying about REITs in a few months when the impacts of the recent hotel bankruptcies start reverberating through the system, and the full scale of the massive overhang of excess inventory in major metropolitan areas become fully flushed out.

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