Would you invest money — at a very low interest rate — to finance mortgage loans made to risky borrowers who put no money down?

What’s interesting about the offering was that not only was it risky, but the yield was low, Norris notes.

“Although market interest rates were low when these mortgages were written, the mortgages had rates averaging 11.2 percent. Yet investors who put up most of the money were willing to accept a floating rate of just 30 basis points — three-tenths of one percentage point — over the London interbank offered rate. At the moment, that gives them a yield of 3.2 percent. ”

“Making the situation worse is the nature of many of the mortgages in the Merrill securitization,” Norris writes. “Fewer than 30 percent of the loans were made to borrowers who provided full documentation of their income and assets. Many of the other borrowers probably lied about their income. Nearly all had borrowed the full appraised value of the home, either for the purchase or for refinancing, and it is possible that some appraisals were unreasonably high even before home prices began to fall.”

Moody’s forecasts that by the time it is wrapped up, so many of the mortgages will have gone bad that 60 percent of the money lent will not be paid back.

Also worth a listen is This American Life’s podcast “The Giant Pool of Money” in which Alex Blumberg and NPR’s Adam Davidson teamed up to look at the mortgage meltdown from the inside out.

With oil prices reaching record highs on an almost daily basis, it is no suprise that the IMF’s Speculation Playing “Significant Role” in Oil Price Surge was popular. You know this issue is getting serious when the Financial Times calls for a global oil summit.

Such a summit would have three objectives: to encourage energy efficiency, and so reduce future oil demand; to promote investment in new oil supplies; and to smooth the recycling of billions of dollars in oil revenues from producers back into consuming countries. All three tasks would be easier with international co-operation and there are enough shared interests to make a worthwhile deal possible.

Staying with energy, Freeedonia’ massive Industry Study World Biofuels Demand to Expand 20 percent Annually, drew interest, concluding that ethanol will dominate the industry for some time despite criticism that its is driving up food prices.

Research Recap Quote of the Week:

Maybe working longer is the best answer. After all, the retirement age was set at 65 in 1933, when average life expectancy was 63. With life expectancy today at 78 years, perhaps we should just plan to work until we’re 80.

S&P chief economist David Wyss’s proposed solution for Baby Boomer generation’s projected shortfall in retirement resources.

The BoE’s optimism contrasts with the IMF’s claim that total financial system losses — estimated at $945 billion dollars — remain in excess of writedowns announced so far by banks and other financial intermediaries.

In a new analysis BoE seeks light amid the gloom, OxAn says “it is debatable whether current pricing methods have led to excessively depressed ABS valuations. Mark-to-market pricing, or ‘fair value’ accounting, is strongly endorsed by the accounting profession.”

By arguing that current mark-to-market pricing is overstating financial losses, the Bank of England appears to be seeking to restore confidence in increasingly risk-averse markets, OxAn Says.

However, its contrarian views have called to question its credibility.

“The wide acceptance of ‘fair value’ accounting makes it unlikely to be dropped as common practice. Moreover, the (BoE’s) latest report fails to analyse sufficiently the market for ABCP or the risk of feedback — from a declining economy to the financial system — should present uncertainties be allowed to persist,” OxAn concludes.

In Older But Not Wiser: Why Americans Remain Dangerously Unprepared For Retirement, Wyss points out that as the oldest Baby Boomers turn 62, the sharp rise in the number of workers near the average retirement age will result in a group of workers with a less-than-normal need/desire to work. A jump in layoffs could convince many of these workers to retire early—either in response to buy-out offers or as a result of weak job prospects.

The result could be a drop in payroll employment with a less-than-expected rise in the unemployment rate. Labor statistics might not even count these workers as “discouraged” because they will report themselves as retired.

This could explain why in the last few months, we have seen such a sharp drop in the number of people employed, while unemployment claims have remained relatively low, Wyss writes.

Employers could be shedding workers into retirement rather than into unemployment.

The report outlines the challenges facing Baby Boomers as they near retirement:

The S&P 500 will have its worst decade since the Depression if it closes below 1,469 at the end of 2009. The decline in home prices is also eroding wealth.

Low interest rates mean low incomes for retirees. The 10-year Treasury note is yielding only 3.9%, up from the lows of a few weeks ago but well below its 6.9% average since 1960.

Retiring in a period like this strains assets in the best case—and this is far from the best case. Asset values have been declining, while saving rates have hovered near 0%. If older workers aren’t adding to their wealth and if their asset values are falling, the prospects of a comfortable retirement are receding. The average household had wealth equal to 558% of after-tax income at the end of 2007, down from 569% a year earlier and 618% at the market peak in 1999.

Wyss’s bottom line: “We’re in trouble. The average American is worried about retirement but is doing little to provide for it.”

Maybe working longer is the best answer. After all, the retirement age was set at 65 in 1933, when average life expectancy was 63. With life expectancy today at 78 years, perhaps we should just plan to work until we’re 80.

A new study for the Department of Energy concludes that the goal is technically feasible, but also identifies the many challenges that need to be overcome. Put simply it would require a major national commitment by business and government and a change to business as usual.

The DOE report “20 Percent Wind Energy by 2030”, identifies requirements to achieve this goal including reducing the cost of wind technologies, new transmission infrastructure, and enhancing domestic manufacturing capability. The report identifies opportunities for 7.6 cumulative gigatons of CO2 to be avoided by 2030, saving 825 million metric tons in 2030 and every year thereafter if wind energy achieves 20 percent of the nation’s electricity mix.

The analysis concludes that reaching 20 percent wind energy will require enhanced transmission infrastructure, streamlined siting and permitting regimes, improved reliability and operability of wind systems, and increased U.S. wind manufacturing capacity.

There are significant costs, challenges, and impacts associated with the 20% Wind Scenario presented in this report.

“There are also substantial positive impacts from wind power,” the report says.…”expansion on the scale and pace described in this chapter are not likely to be realized in a business-as-usual future. Achieving this scenario would involve a major national commitment to clean, domestic energy sources with minimal emissions of GHGs and other environmental pollutants.”

Specific challenges include:

• Investment in the nation’s transmission system so the power generated is delivered to urban centers that need the increased supply;
• Larger electric load balancing areas, in tandem with better regional planning, so that regions can depend on a diversity of generation sources, including wind power;
• Continued reduction in wind capital cost and improvement in turbine performance through technology advancement and improved manufacturing capabilities; and
• Addressing potential concerns about local siting, wildlife, and environmental issues within the context of generating electricity.

Other highlights of the report include:

• Annual installations need to increase more than threefold. Achieving 20 percent wind will require the number of annual turbine installations to increase from approximately 2000 in 2006 to almost 7000 in 2017.
• Costs of integrating intermittent wind power into the grid are modest. 20 percent wind can be reliably integrated into the grid for less than 0.5 cents per kWh.
• No material constraints currently exist. Although demand for copper, fiberglass and other raw materials will increase, achieving 20 percent wind is not limited by the availability of raw materials.
• Transmission challenges need to be addressed. Issues related to siting and cost allocation of new transmission lines to access the Nation’s best wind resources will need to be resolved in order to achieve 20 percent wind.

In an analysis in its Regional Economic Outlook for the Middle East and Central Asia, the IMF says “The recent surge in the oil price (from $80 to over $100 a barrel) seems to go well beyond what would be indicated by the growth of the world economy.”

Producers in particular argue that fundamentals would yield an oil price of about $80 a barrel, with the rest being the result of speculative activity.

The IMF says one way to get a sense of speculative activity is to compare movements in the real price of oil with the real price of gold. This relationship has been surprisingly close for a long period of time. Gold is well known to be a highly speculative commodity, driven by factors other than derived demand, the IMF said.

“One could reasonably argue that this relationship, which has continued in 2008, is
evidence of speculative behavior in oil. If the oil price does fall significantly in the near term, it may reflect more the unwinding of speculative positions in both gold and oil than indicate that a recession is under way.”

“In summary, it appears that speculation has played a significant role in the run-up in oil prices as the U.S. dollar has weakened and investors have looked for a hedge in oil futures (and gold). ”

As financial market conditions settle down, fundamentals should take over and oil prices should come down further from the highs recently observed.

March 2008 data indicate a weakening outlook for all the major seven OECD economies. The latest data for major OECD non-member economies indicate a potential downturn in Brazil, China and India while continued expansion is ahead in Russia, the OECD said.

The CLI for the OECD area fell by 0.5 point in March 2008 and was 3.2 points lower than in March 2007.

The United States fell by 0.9 point in March after dropping 0.1 point in February and was 3.6 points lower than a year ago. The Euro area’s CLI decreased by 0.7 point in March after a 0.3-point drop in February and stood 3.3 points lower than a year ago.

The CLI for the United Kingdom fell by 0.7 point in March 2008 after dropping 0.3. point in February and was 2.6 points lower than a year ago.

Japan’s CLI matched February’s increase of 0.4 point, but it was 4.3 points lower than a year ago.

The CLI for China was up by 0.1 point in March 2008, after dropping 0.7 point the month before, but still stood 1.6 point lower than a year ago. Russia reversed the prior month’s 0.1 point drop, increasing by 0.1 point in March, and its level was 3.2 points higher than a year ago. In March 2008 the CLI for Brazil dropped 1.9 point after losing 0.6 point in February , and it was 1.4 points lower than a year ago.
India’s CLI data, which lags by a month fell fell by 1.3 point in February 2008 after a 0.7-point decline in January,and was 1.6 point lower than in February 2007.

It can be applied to the to all manner of ills in the financal and economic world, from the subprime crisis to global warming.

Another candidate for the boiling frog theory is corporate responsibility and management integrity, where the water appears to be getting warm enough for people to start taking notice.

This was evident in Research Recap’s most popular post of the week, based on an Audit Integrity report identifying stocks with questionable management integrity. Audit Integrity Chairman Jim Kaplan says the ratings are “cause for concern that the companies may be intentionally deceiving their shareholders to mask serious problems,”

Meanwhile, Sir Evelyn Rothschild, former chairman of NM Rothschild & Sons, laments the decline in ethical behavior in the financial sector, in a commentary in today’s Financial Times. “Financial services and banking should set the very highest standards for ethical behaviour, ” he writes.

Ethics is not only a question of acting correctly. It is a matter of not trying to avoid regulation even if one thinks one can get away with it.

“This must be taught at a very early stage and demonstrated in the way a firm is managed. I passionately believe that this is something that has deteriorated in the past few years,” he concludes.

Corporate behavior was also a theme of another popular post, on Berkshire Hathaway’s annual shareholder meeting. In the words of Berkshire’s Charlie Munger, “It’s a crazy culture of greed and overreaching and overconfidence in trading algorithms.”

Signs of improved corporate responsibility were evident in our post on Climate Counts’ latest ranking of companies’ commitment to fighting climate change. A cynic might say that the improvements registered over the past year represent a commercial calculation rather than a sudden ethical awakening. But the outcome is what matters, not the motivation.

The global carbon market doubled or tripled in value for all segments, except for projects in developing countries which saw a leveling off of market volumes transacted under the Clean Development Mechanisms

The global carbon market more than doubled to $64 billion in 2007, the report shows. The European Union Emission Trading Scheme (EU ETS) also saw a doubling of both value and number of allowances transacted to the tune of $50 billion.

There are significant problems with the market, however:

“The overall data in the report masks some key vulnerabilities—especially for developing countries. All developing countries face a demand gap sometime in 2008 when buyers realize that there is not enough time to fulfill Kyoto commitments with new projects, and demand will have not yet kicked in from emerging markets in the US and Australia that are expected to be players in a future market after 2012.”

Another problem is that market growth is limited by the uncertainty of what will happen after the Kyoto protocol expires in 2012.

An interesting observation of the report is the degree to which business and environmentalists are working together:

“The world has truly changed today when power company executives and investment bankers talk about climate risk and environmentalists talk about leveraging the power of markets. Climate policy has mobilized the world of private capital to work in favor of protecting the environment. In so doing, it has brought together two
widely different worlds with very little experience and knowledge of each other.”

Considering how widely different these two cultures are, it is quite extraordinary to recognize how successfully they have worked together so far to produce concrete action to reduce carbon emissions.

In 2007, some prominent investment banks tried to further bridge the gap between the two worlds, as they hired specialist carbon staff, bought small and boutique carbon originators and made investments in the “infrastructure” of the carbon market, including exchanges and registries.

Consumers in Brazil and India tied as most “green,” while those in the United States scored lowest, or most wasteful.

To create the survey, GlobeScan conducted Internet surveys of consumers in 14 countries, which together represent more than half of the world’s population and use about 75 percent of its energy. Rather than measuring each nation’s environmental impact, the Greendex compares the behaviors of individuals in four key areas: housing, transportation, food, and consumer goods.

Brazilians and Indians each scored 60 on the sustainable-consumption scale. Citizens of other nations scored as follows: China (56.1); Mexico (54.3); Hungary (53.2); Russia (52.4); Great Britain, Germany and Australia (each at 50.2); Spain (50); Japan (49.1); France (48.7); Canada (48.5); and the U.S. (44.9).

Housing factors included dwelling size; energy use for heating, cooling, and appliances; and water needs. Brazilians topped this category because they typically have smaller homes, rarely use air conditioning or heating, and rely heavily on on-demand, tankless water-heating systems.

Transportation behaviors measured included ownership rates and average usage of motorized vehicles, length of daily commutes, and utilization of public transport. Chinese scored highest on transportation, because, at least for now, most rely on bicycles or walking and drive few motorized vehicles per capita.

The foods category polled consumers on their consumption of locally produced foods, as well as their relative consumption of bottled water, meat, and seafood—products that typically have high environmental impact. Indians had the greenest food habits because they consume little meat and eat many fruits and vegetables.

The goods category looked at the items that people typically buy, reuse, and discard—including both day-to-day purchases and larger items such as televisions. Consumer preference for environmentally friendly products and packaging, as well as overall levels of personal consumption, were also considered.

The Greendex also found that people in developing nations felt more responsible for environmental problems and worried more about the impacts of global warming.

A few interesting findings:

• More than half of houses in the UK, US and Australia have 7 or more rooms.
• Only 5% of US consumers use public transportation most days, compared with 53% in Russia.
• 62% of Brazilians consume beef at least several times a week, the same as the percentage of Japanese who consume fish that often.
• 83% of Germans consume bottled water at least several times a week.