Signs of the Economic times

When the economy goes really bad, large financial institutions find they have to either be bailed out or go bankrupt.

They don't come much bigger than Merrill Lynch. From the New York Times:

Merrill Lynch is expected to suffer $15 billion in losses stemming from soured mortgage investments, almost double its original estimate, prompting the firm to raise additional capital from an outside investor.

Merrill, the nation’s largest brokerage firm, is expected to disclose the huge write-down when it reports earnings next week, according to people who have been briefed on its plans. The loss far exceeds the $12 billion hit many Wall Street analysts had forecast.

To shore up its deteriorating finances, Merrill is now in discussions with investors in the United States, Asia and the Middle East, including American private equity firms, to raise about $4 billion in the coming days, these people said.

The developments underscore the rising toll that the mortgage crisis is taking on many once-proud Wall Street banks. In recent months Merrill and several other firms have grabbed financial lifelines from wealthy foreign governments. Further investments by so-called sovereign wealth funds could prompt scrutiny by Congress.

The latest moves at Merrill come as John A. Thain, who became the company’s chairman and chief executive in December, struggles to bolster the firm’s capital, burnish its reputation and avoid the toxic internal battles that have hurt the firm in the past.

Merril's surprise choice of John Thaine as their new CEO was advance warging of the severity of the crisis.

Merrill is America's largest stock broker. Now let's look at how America's largest Mortgage broker, CountryWide, is fairing. From Market Watch:

NEW YORK (MarketWatch) -- Bank of America Corp. said Friday it's purchasing Countrywide Financial Corp. for $4 billion, effectively doubling down on a previous investment in the troubled firm and catapulting the buyer into the top spot among mortgage lenders and loan servicers in the U.S.
The stock-swap deal will put an end to the independence of the troubled California lender headed by Angelo Mozilo, and represents an increase from the Charlotte, N.C., bank's August investment of about $2 billion.

So Merrill Lynch is looking outside the U.S. for funds that will permit it to survive, while CountryWide will cease to exist.

Keep in mind that this is still early in the Recession. The government is not yet ready to admit that there is a recession, and assures us that if there is, it will be over by late 2008.

Then we have the breaking economic news for today (January 11, 2008) from Bloomberg:

• Stocks in U.S. Tumble; American Express, Tiffany Fall on Profit Forecasts
• Soybeans Soar to Record, Corn, Wheat Rise After U.S. Report on Plantings
• Bank of America's Risk of Default Increases Following Countrywide Purchase
• U.S. November Trade Deficit Widens More Than Forecast on Record Oil Prices
• Bank of America Will Buy Unprofitable Countrywide for $4 Billion in Stock
• Merrill Writedown Pares Shareholder Equity to 12% Less Than Goldman Sachs
• MBIA Forced to Pay 14 Percent Yield on Bonds Being Sold to Bolster Capital
• Clinton Introduces $70 Billion Economic Plan, With Middle-Income Rebates
• China, U.S. Make Intervention Plans for North Korea Collapse, Reports Say

And then we have Ben Bernanke, the Chairman of the Federal Reserve, making the very unusual action of warning in advance that the fed was going to lower interest rates more sharply than expected. The fed has finally decided that the immediate problem of economic slowdown is more important right now than the longterm problem of inflation. This action will cause further drop in the dollar, and thus increase the price of imports - first among imports being oil. Gold, the traditional hedge against inflation, has just topped $900 per ounce.

So let's check in with Nouriel Roubini

"We're facing the worst housing recession in U.S. history," according to Nouriel Roubini, an economics professor at New York University and co-founder of RGE Monitor, an economic research and analysis firm. He predicted peak-to-bottom national home price losses of 30 percent.

Roubini joined a group of three other real estate experts at the Real Estate Connect NYC 2008 conference in New York Wednesday for a discussion titled, "The Housing Debate: Bull vs. Bear."

"There will be 10 million houses with negative equity," he said, where the owners will owe more on their mortgages than the properties are worth, giving them less incentive to keep making payments. Many will walk away, he said, depressing markets further.

The housing turndown, according to Roubini, was the initial trigger for a broad economic decline. "We're in an economy-wide recession already, one that will be much more severe than those of 1991 or 2001," he said.

Although housing only accounts for 5 percent of the economy, he noted, the slump has already reduced consumption, which makes up two-thirds of it. Consumers are no longer tapping home equity, and they're cutting back on spending.

And credit problems are no longer confined to subprime loans, according to Roubini. They've spread to near-prime mortgages, prime, auto loans and junk bonds, with losses that could reach trillions of dollars.

The phrase "Whistling past the graveyard" comes to mind.