Bioshock 2’s system requirements have been published today, and guess what? Our little friend SecuROM is hidden away, cackling to itself in a way only the most evil beings know how. Alright, there’s no limit on installations this time, but honestly I won’t be happy until SecuROM goes away for good.

By the way, you can pre-order Bioshock 2 on Steam here. It’s 10% off, and comes with a free version of Bioshock (which you can gift to a friend if you already have).

Hit the jump for the (pretty reasonable) System requirements.

Minimum:

* Processor: AMD Athlon 64 Processor 3800+ 2.4Ghz or better, Intel Pentium 4 530 3.0Ghz Processor or better
* Memory: 2GB
* Graphics: NVIDIA 7800GT 256MB graphics card or better, ATI Radeon X1900 256MB graphics card or better
* Hard Drive: 11GB
* Sound: 100% DirectX 9.0C compliant sound card or onboard sound
* OS: Windows XP, Vista, Windows 7
* DirectX: DirectX 9.0c

Recommended:

* Processor: AMD Athlon 64 X2 5200+ Dual Core 2.60Ghz, Intel Core 2 Duo E6420 Dual Core 2.13Ghz
* Memory: 3GB
* Graphics: NVIDIA 8800GT 512MB graphics card or better, ATI Radeon HD4830 512MB graphics card or better

Other Requirements:

* Initial installation requires one-time internet connection.
* Ability to save game, earn achievements, receive title updates and online play requires log-in to Games for Windows LIVE.
* Software installations required including Microsoft Visual C++2008 Runtime Libraries, Games for Windows LIVE client, Games for Windows LIVE Client Patch, Sony DADC SecuROM, Microsoft DirectX.

2K Games has officially released the minimum and recommended PC system requirements for BioShock 2 via Steam, which unfortunately includes the infamous SecuROM DRM activation process.

The listing has revealed that there is a “5 machine activation limit” on each copy of the game. Here are the full list of system requirements:

Minimum:

• OS: Windows XP, Vista, Windows 7
• Processor: AMD Athlon 64 Processor 3800+ 2.4Ghz or better, Intel Pentium 4 530 3.0Ghz Processor or better
• Memory: 2GB
• Graphics: NVIDIA 7800GT 256MB graphics card or better, ATI Radeon X1900 256MB graphics card or better
• DirectX: DirectX 9.0c
• Hard Drive: 11GB
• Sound: 100% DirectX 9.0C compliant sound card or onboard sound

Recommended:

• Processor: AMD Athlon 64 X2 5200+ Dual Core 2.60Ghz, Intel Core 2 Duo E6420 Dual Core 2.13Ghz
• Memory: 3GB
• Graphics: NVIDIA 8800GT 512MB graphics card or better, ATI Radeon HD4830 512MB graphics card or better

Other Requirements & DRM:

• Initial installation requires one-time internet connection; Ability to save game, earn achievements, receive title updates and online play requires log-in to Games for Windows LIVE; software installations required including Microsoft Visual C++2008 Runtime Libraries, Games for Windows LIVE client, Games for Windows LIVE Client Patch, Sony DADC SecuROM, Microsoft DirectX.

(Via Steam)

Bioshock 2 DRM: SecuROM, activation limits, and bears

Bioshock 2 will come both as a boxed retail product and a for-pay digital download if that's more to your taste. Looking at the game's page on Steam reveals something disappointing for those of us against invasive DRM: the game will utilize SecuROM and comes with a five-machine activation limit.

2K Games dealt with this decision head-on via its official forum. “BioShock 2 is using a standard Games for Windows Live activation system, much like other games you have played in the past,” a 2K Community Manager writes. “That doesn't mean you always have to be online to play or save the game—you can create an offline profile for the Single Player portion of the game (you just won't earn achievements and you can't play Multiplayer, of course.)” Of course.

“We are using SecuROM only as a disc check method for the retail copy of BioShock 2. That is it's only use.”

Well, there is also that pesky five-machine limit, which many of our readers find intolerable. Will this lead to lower sales? Who knows. It's important to know what you're buying for your money, however. A quick note: Shacknews lists the activation limit at 15 machines, but as of this writing the listing claims five. We've included a shot of the screen so you can see for yourself. It's very possible that could change before launch.

John Cannon has been financing big real estate loans for $25 billion-asset Capmark Finance Inc. of Horsham and its predecessors since 1985, and he’s never seen business this slow.

“There’s nothing being bought and sold,” Cannon told me by phone from the vast Virginia headquarters of government-controlled home lender Freddie Mac, one of the few outfits still pumping millions into buildings.

Capmark financed $1.5 billion in apartment deals during the first half of the year, down by half since early 2008. Almost all this year’s lending was refinancing loans, funded by Freddie and Fannie Mae, and the U.S. Department of Housing and Urban Development.

“They’re the only viable lenders in U.S. commercial real estate right now,” and all they do is residential real estate, not offices or industry, Cannon said.

He’s seen slow markets before. The early 1990s, when the savings banks failed. But that “was a supply issue. You saw a lot of empty buildings. Now it’s a liquidity issue.” Banks aren’t lending.

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He’s hoping things have hit bottom. Fannie and Freddie tightened credit sharply last year. Lately, they aren’t requiring quite so many escrow payments, Cannon said hopefully. “Terms are getting looser. Spreads are coming down.”

It’s not that loan rates have fallen. It’s the spread between what money costs and what Fannie and Freddie charge that tells the story, according to Cannon:

Back in the mid-2000s, loans were approved at less than 1 percent above the benchmark 10-year Treasury rate. That zoomed to 3.5 to 4 percent above the benchmark during last fall’s credit crisis, after the Bush administration took control of Fannie and Freddie. Now it’s around 2 percent, Cannon says.

But banks still aren’t coming back into the market. It’s not just that they’re shy. There’s also “the disconnect between buyers’ and sellers’ expectations,” Cannon told me. “Guys bought a building five years ago for $10 million. They don’t want to sell for $8 million.”

NJ to PA

Archer Daniels Midland Co., Decatur, Ill., says it’s closing its Glassboro cocoa plant and ending jobs for 53 workers there. The work is moving to ADM’s new 500,000-square foot plant in Hazleton, says spokesman Roman Blahoski.

Bernanke or Summers?

Democrats in Congress and the Obama White House are plotting to remove Federal Reserve Chairman Benjamin Bernanke and replace him with Obama’s chief economic adviser, Larry Summers, at the end of his term next year, writes veteran bank analyst Richard X. Bove of Connecticut-based Rochdale Securities.

Summers is the brainy Main Line native, Harvard economist, and ex-Treasury Secretary who’s trying to re-regulate the financial institutions he helped deregulate under President Bill Clinton, setting the stage for the current mess.

Bernanke or Summers – what’s the difference? “Mr. Bernanke has demonstrated a willingness to act to defend both the economy and the financial system. Conversely, Mr. Summers has written the bulk of the proposals to regulate the financial industry,” which Bove says “would dramatically restrict fund flow to the economy” and kill the recovery like the government did when it tightened credit rules too soon in 1937. (But when’s the right time?)

Bove credits Bernanke, ex-Treasury Secretary Henry Paulson, and FDIC chief Sheila Bair with “bold, innovative action” that salvaged the banks and prevented a full U.S. takeover. Bush and Obama at that time “did nothing.” Congress was “the proverbial deer in the headlights.”

Yet “the same people who were incapable of acting when there was a clear need for action will now make the decision as to whether the man who helped save the system should be removed.”

Bernanke is set to testify before the House banking committee next Tuesday. Expect Fed critics to ask how he’ll reverse the scary growth in the money supply without stalling the economy.

They will never admit to this at Goldman Sachs (they don’t really fess up to much over there at the Big G) but in the fall of 2008, just after the Lehman Brothers bankruptcy gave the world a lesson in systemic risk, Goldman, the world’s greatest risk taker, was finished too.

That’s right, it was toast. Finished. Kaput. Until, that is, the firm that was built on wheeling and dealing in some of the most esoteric investments the world of high finance had ever seen, needed a government bailout to stay afloat, which included $10 billion in cash from the Treasury Department (granted by its former CEO, then-Treasury Secretary Hank Paulson) and more importantly, full access to the Federal Reserve’s discount window to be a commercial bank.

Goldman Sachs, which was bailed out by the federal government, is now using the bailout to resume some of the same risk-taking activity that got it in trouble in the first place.

Goldman, of course, is a commercial bank like no other. You won’t confuse Goldman with the ol’ Bailey Building & Loan. It has no customer deposits—which are what the access to the discount window was first set up to protect—and you won’t be getting a toaster or a debit card from Goldman Sachs anytime soon.

But being a bank has its rewards. With full access to the discount window, Goldman can now borrow cheaply and massively from the Fed in a pinch, and because of that access, it can borrow more cheaply in the credit markets. It’s a loophole that has allowed Goldman to turn back the clock and once again resume much of its risk-taking activities, only this time it’s being financed by the American taxpayer.

There are, of course, many urban legends about Goldman and how it uses its clout in Washington and in the financial business (both Paulson and another former CEO, Robert Rubin held the Treasury secretary post) to advance its allegedly nefarious corporate agenda.

Recent reports have the firm gaming the energy markets, creating the dot-com bubble, and the subprime-debt crisis that took down Wall Street, and then for a time benefitting from its implosion when it “shorted” subprime-related investments, a trade that allowed the bank to profit from the downward spiral. (Hell, I’m sure there are people who also believe Goldman was somehow behind the swine-flu epidemic to corner the market on drug stocks.)

Some of these stories have a basis in fact and some don’t—I’ll leave it up to the reader to figure this out—but what is true is equally disturbing: Goldman Sachs, which was bailed out by the federal government, is now using the bailout to resume the many of the same risk-taking activities that got it in trouble in the first place.

The question I have, of course, is why is the Obama administration, which has decried corporate greed whenever it’s politically feasible, allowed Goldman all the advantages of a bank, when it is really a big hedge fund?

The Treasury Department won’t say and it’s obvious why Goldman is doing what it is doing: Money, and lots of it. The firm announced Tuesday morning that net income for the second quarter was $3.44 billion, while its biggest rival, Morgan Stanley, is likely to announce a quarterly loss.

And it all comes down to risk, or to be more precise, how much risk Morgan is willing to take on the taxpayers’ dime compared to what Goldman Sachs is now taking. Morgan Stanley’s CEO John Mack, chastened by the firm’s own near-implosion last year when it too was forced to become a bank, has radically reduced the amount of borrowing, or “leverage,” Morgan is taking in trading. People inside the firm say it’s difficult to meet client demands without borrowing money.

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“We just can’t get anything done,” said one senior Morgan Stanley executive, speaking on the condition of anonymity. Borrowing to finance trades amplifies gains, but it also amplifies losses when trades go bad. During the first quarter of 2009, Morgan borrowed just $11 for every dollar it had in capital (by comparison during the Wall Street boom, firms borrowed as much as $35 for every dollar in capital), while Goldman borrowed a significantly higher amount—close to $15 for every dollar it has in capital. “Our leverage is the result of risk-taking on behalf of our clients,” Goldman spokesman Lucas van Praag says about the strategy.

And keep in mind this is only for the first quarter. Goldman’s second-quarter leverage is likely much higher given the fact that interest rates have remained remarkably low. Those low interest rates have had another benefit—it has allowed Goldman to make winning bets in the bond markets (bond prices rise when interest rates fall), the same place that decimated Wall Street in 2007 and 2008.

Of course, there are lots of reasons for Goldman’s success. The firm has amazing intellectual capital; some of the smartest people in the world of finance work there. It also knows how to game the system better than any firm on the face of the earth. Case in point: In mid-September 2008, when the world was crashing following Lehman’s bankruptcy, Goldman held $13 billion in highly risky mortgage bonds known as collateralized debt obligations. These bonds were insured by American International Group, which itself was about to go bankrupt.

Without that insurance, Goldman itself would have imploded because the bonds would have been marked down to just pennies on the dollar. The rescue of AIG was supposed to prevent a large-scale crash of the financial system, but it also prevented a crash of Goldman Sachs, which bought those crappy CDOs from Merrill Lynch, which was forced to find a buyer (Bank of America) because it too held the same sludge.

The Goldman purchase of the Merrill CDOs is proof positive that the geniuses at Goldman screw up like everyone else. And I don’t buy van Praag’s spin on the firm’s famous hedges that minimized its losses because the smart money in the markets didn’t at the time. Goldman’s shares were in a freefall, bottoming out at around $50 in the fall of 2008, compared to close to $235 just a year earlier.

Now with all the government help, Goldman is marching its way back up to $235 a share—trading at around $150 Monday—by embracing much of the same risk that nearly led to its demise. It would be nice, though, if the next time Goldman losses money taxpayers didn’t foot the bill.

NEW YORK (CNNMoney.com) — Two companies that have received billions of dollars in aid from the U.S. government have been kicked out of the Dow Jones industrial average (INDU).

According to a statement released Monday, General Motors, which filed for bankruptcy on Monday, will be replaced by Cisco Systems (CSCO, Fortune 500); Citigroup (C, Fortune 500) will be replaced by The Travelers Companies (TRV, Fortune 500).

The changes in the Dow will go into effect on on June 8, according to Dow Jones.

GM shares opened for trading on the New York Stock Exchange after a brief delay Monday morning, but the NYSE says the shares will be delisted before trading begins Tuesday. GM has the right to appeal that decision.

GM stock plunged to 75 cents per share on Friday, its lowest level since the Great Depression. Shares of Citigroup dipped below $1 per share in early March but were trading above $3 on Monday.

General Motors became ineligible for inclusion in the benchmark indicator when it filed for Chapter 11 bankruptcy protection Monday.

“The parlous state of GM has left us with no choice but to remove it from The Dow,” said Robert Thomson, managing editor of The Wall Street Journal and editor-in-chief for all of Dow Jones, in a written statement. “A bankruptcy filing immediately disqualifies a stock regardless of a company’s history or its role as a cultural icon.”

The company taking the place for the bankrupt automaker is tech bellwether Cisco Systems, which is based in San Jose, Calif., and makes networking equipment.

“We were reluctant to remove Citigroup at the height of the financial frenzy, but it is clear that the bank is in the midst of a substantial restructuring which will see the government with a large and ongoing stake,” said Thomson.

Thomson left the door open for the financial giant to be put back on the Dow when it stabilizes. “We genuinely hope that once the bank has refashioned itself that we will again be able to consider it for inclusion – Citigroup is a renowned institution, not only in this country, but around the world.”

GM ends an 83-year run as a component of the Dow. The automaker was added to the index twice, first for 18 months in 1915 and then again on Aug. 31, 1925, according to the release from Dow Jones.

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The only current company with a longer history as a component of the index is General Electric (GE, Fortune 500). GE was initially included in the Dow in 1896 but was removed after a few years of fitful stops and starts. In 1907 it was relisted.

GM’s absence from the Dow marks the auto industry’s waning power and influence. And its replacement — a technology heavyweight — is representative of larger industrial evolutions. Cisco’s “communications and computer-networking products are vital to an economy and culture still adapting to the Information Age – just as automobiles were essential to America in the 20th Century,” Thompson said.

Citigroup joined the Dow in 1997, as Citicorp. Ironically, Travelers merged with Citicorp to form Citigroup in 1998, creating what was then termed a “financial supermarket.” Citigroup spun off Travelers in 2002. At the time of the 1998 merger, Travelers was a member of the Dow 30.

Dow Jones decided to add another financial company to the index in order to re-calibrate the index. When the Dow let go of American International Group in September, it replaced the insurance company with Kraft Foods (KFT, Fortune 500) because the financial sector was in so much turmoil.

“The selection of Travelers, a property and casualty insurance company, is intended to restore the financials industry to full representation in The Dow,” said Thomson.

Dow Jones said the changes won’t cause any disruption in the level of the index. A divisor is used to calculate The Dow from its components’ prices, which prevents any distortion in the Dow.

“In our judgment, the stocks until now helped the Dow Jones industrial average tell the daily story of the stock market,” said John A. Prestbo, editor and executive director of Dow Jones Indexes, in the written statement. “The extraordinary conditions of the severe bear market and recession kept these stocks relevant and representative for a longer period than might have been the case in more normal times.”

In a regulatory filing, G.M. also filled out many of the details of the reorganization plan, crafted under the eye of the Treasury Department.

G.M. confirmed that the government would provide more than $50 billion in bankruptcy financing to see the company through its Chapter 11 filing. What will emerge, through an asset sale known as a 363 transaction, is a newer, slimmer G.M. with about $17 billion in debt.

Under the terms of the deal, G.M. would sell itself in Chapter 11 and bondholders would receive a 10 percent stake in the newly reorganized company in exchange for about $27 billion in bonds. They would also receive warrants to buy an additional 15 percent of a new G.M., exercisable if G.M.’s value rises to certain levels.

G.M. said in the regulatory filing that the proposal depends on the government getting enough bondholders to make statements of support backing the terms of the swap. Without those statements, which are due by Saturday, the amount of stock and warrants for bondholders would be “substantially reduced or eliminated.”

The bondholder committee, which represents holders of about 20 percent of the bonds’ value, had already said they support the proposal, G.M. said.

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“The ad hoc committee of G.M. bondholders supports the revised offer from G.M. and believes that when contrasted with the alternative — uncertain and costly bankruptcy court litigation — that it represents the best alternative for bondholders in the current difficult and dire situation,” the group said Thursday in a statement.

Earlier this week, bondholders overwhelmingly rejected a debt exchange offer that would have swapped their bonds for 10 percent of the company’s equity. It is believed that G.M.’s bonds are held by tens of thousands of investors, ranging from institutions to individuals.

Thursday’s announcement came after German and American negotiators in Britain failed to agree on a crucial bridge loan to sustain Opel and the rest of the European operations of General Motors in the event of a bankruptcy filing, following a marathon negotiating session that stretched till nearly 5 a.m. Thursday.

But officials did manage to narrow the field of potential suitors for Opel to two companies — Fiat, the Italian automaker, and Magna, a Canadian auto parts giant. A Belgian private equity firm as well as a Chinese automaker were knocked out of contention.

NY Times

The last remnants of the American free-market system are experiencing a quick death by strangulation. Perhaps the most disturbing casualties of government intervention are General Motors and Chrysler, two disgraced automakers that have gone from private ownership to the public trough virtually overnight. The US government has effectively grabbed a financial stake in each company while attempting to control the reorganization process without any constitutional authority to commence such actions.

The takeovers, which have occurred at breakneck speed, are alarming. A defining characteristic of economic fascism is the control of private property and business through a government-business “partnership.” This public-private alliance, while permitting private business ownership, is an arrangement that allows government to control and plan private industry. What we are experiencing from the schemers in Washington, DC is a planned capitalism, or soft fascism, that is being rolled out at an unprecedented pace.

One of the more disturbing actions on the part of the Washington establishment has been the blatant disregard for property and contract rights. First, consider the case of Chrysler. The government, while coming to the aid of a dying Chrysler, lobbed offers to its lenders, the bondholders. A group of dissident bondholders spurned the government’s offer that would have given them a minuscule stake in the company while the UAW received a majority ownership position.

In response, the president denounced the bondholders, publicly proclaiming their obligation to sacrifice and referring to them as “vultures” because they insisted on maintaining their rights as senior creditors. Chrysler’s bondholders, by law, are secured creditors, and they hold a senior ranking above unsecured creditors or shareholders in a bankruptcy or reorganization. Yet they were vilified and bullied for refusing to agree to a shoddy deal. Some of the holdout bondholders finally did buckle under; they dropped their legal challenge and agreed to the government’s lowball offer, but only because they were strong-armed by Washington’s bully tactics. Thomas Lauria, the attorney representing the group, stated that his clients weren’t able to “withstand the enormous pressure and machinery of the US government.” Thus the senior creditors were plundered while ownership was redistributed to the UAW, whose members are junior creditors. This makes a mockery of US securities law.

The bailout and ensuing appropriation of General Motors is no less tragic. The current restructuring plan calls for the US Treasury Department to have controlling interest in General Motors, which amounts to absolute nationalization. In GM’s headquarters in Detroit there is a cluster of bureaucrats from the government’s task force telling GM how to run its business. The task force, assembled by the White House, has the power to exercise significant control over product decisions. According to a GM news release, the Treasury Department will have the power to elect all of GM’s directors and control the vote on matters brought before the stockholders. Additionally, the bondholders who have funded the company are being offered a paltry piece of the equity of the reorganized company — another major blow against the sanctity of contract.

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Furthermore, the White House fired General Motors Chairman and CEO Rick Wagoner. When the executive branch intervenes in a private business and ousts management, bailout or not, it is a staggering violation of the American ideal of free enterprise. This sets a precedent for unlimited government trampling over the private sector. On March 30th, Obama said, “Let me be clear. The United States government has no interest in running GM. We have no intention of running GM.” If that’s the case — and we know it’s not — then why scoop up majority ownership?

The revolving door between Wall Street and the bowels of Washington are getting a workout. It’s the guys from Wall Street who run the government and the guys from government who run Wall Street. Only the guys from Wall Street – especially Goldman Sachs – who have taken over the Treasury Department are now taking over control of the domestic auto industry. You know what happened when they tried to run their own company, Goldman Sachs. How in the heck did I miss the part in the Constitution where powers were granted to the Treasury Department and its hired hacks?

Another notable abomination is the use of taxpayer dollars, on the part of the political establishment, to grant preferential treatment to one group of constituents — the unions — at the expense of each company’s creditors, the bondholders. Not only is this an illicit use of the executive office for political pandering, it’s a deliberate redistribution of wealth. It’s also a handsome payoff to the loyal unions, who have long been big supporters of the Democratic Party.

The GM and Chrysler takeovers are orchestrated political restructurings aimed at serving the larger interests of the US government. The apparatchiks on the Potomac have the authority to coordinate production in a manner that compliments their political and social agenda. The White House has not been shy about its ambitions for green policy and the future of American-made automobiles. This coup paves the way for big government to get its tentacles into an industry that will allow the feds to ram their socialist-totalitarian, green agenda down all of our throats.

Moreover, the Obama regime already announced that it is buying 17,600 green vehicles (hybrid sedans) from Detroit’s Big Three by June 1, using $285 million from the $787 billion stimulus bill. Representative Sander Levin, a Democrat from Michigan, stated, “The federal government’s purchase of thousands of hybrids and other fuel-efficient vehicles from the Big Three shows that our domestic auto industry will weather this current crisis and build the cars of the future.” But certainly, it shows nothing. If the car companies were capable of building the cars of the future that consumers want to buy, no bailout would have been needed, and the government would not have to place an enormous, personal order for automobiles in order to keep the assembly lines moving and inventory lots turning over. The only thing the mega-purchase “shows” is Detroit’s inability to sell its automobiles at bloated prices in the free market, thereby leaving the government to spend taxpayers’ money on goods they refused to buy on their own.

In fact, giving the kiss of life to two dead horses, GM and Chrysler, illustrates the futility at work here, considering that both companies have just announced there will be a considerable number of dealership closings all over the country. Chrysler plans to close about 800 dealerships while GM will trim back 2,600 dealers by 2010. The fact that GM is cutting back its dealerships to the tune of 42 percent speaks volumes about its bloated, bubble-fueled predicament. The government has been pouring billions into each company’s bailout bin in order to keep these inefficient, surplus dealerships around so that they could continue on their path of chasing invisible customers and not selling cars. The misallocation of resources has been staggering. Half-baked investment decisions, like these, are what we can expect from a politically anointed task force that will centrally plan the manufacture of automobiles.

$19 $15

As the Chrysler resuscitation continues and GM morphs into Government Motors, we can expect that the government will prepare to churn out its environmentally correct greenmobiles that the market has rejected over and over again. Freedom, choice, and capitalism will pay a dear price because a group of government bureaucrats, on the receiving end of political favors, will run a major sector of the US economy and foist a prescribed lifestyle upon American consumers.

The funeral bell is ringing a reminder of capitalism’s mortality. And I won’t dare touch on what happens when government-run automobile manufacturers perform like the post office or the DMV.

1) Average annual gains?

2) Gains relative to an underlying index (the S&P 500)?

3) Gains relative to inflation?

Of these three, the last is the only real means of gauging wealth creation or destruction. Commentators have been going bananas over the fact that stocks are up 20%+ since their bottom of 666. No one mentions that this rally may actually be induced by the Federal Reserve pumping trillions of dollars into the financial system.

Similarly, no one mentions that adjusted for inflation, stocks are still WAY down from their peak during the Tech bubble.

As you can see, stocks entered a bear market in earnest following the Tech Crash. Yes, in number or nominal terms, the Dow has risen. But you have to remember the dollar lost roughly a third of its value from 2001 to today. Measuring stocks or anything in dollars between now and then was like measuring with a ruler that was continually shrinking.

Also, bear in mind that the above chart is using the Government’s phony measure of inflation: the Consumer Price Index [CPI] which DOESN’T include food or energy prices. Using accurate inflationary data, stocks are down even more in real terms.

My main point is this: inflation is an ever-present reality in the post WWII era. Investors need to be protecting themselves from this beast at all costs. You can do this by:

• Buying gold
• Buying commodities or real assets
• Buying companies that can offset inflationary costs by raising the price of their products
  

I suggest having some money in all three. It’s the only certain way to protect your wealth from inflation. The Feds are cooking up an inflationary storm of epic proportions, pumping TRILLIONS of dollars into the financial system. Stocks may rally like a rocket-ship from here. But in real terms they’re still tanking.

After all, if the Dow hits 30,000, but you’re celebrating by drinking a $150.00 coke… are you really any richer?

The above chart shows the projected sources of funding (receipts) for the U.S. Government for 2009.  Borrowing (the federal budget deficit) is projected to account for nearly half of all funding.  If you read yesterday’s post, you also know that the amount of borrowing in 2009 is likely to increase (because the Obama administration’s budget assumptions are too optimistic).

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Let me be abundantly clear.  We still have a Pay Option ARM and Alt-A mortgage problem.  This will hit in full force in 2010 and we are already seeing many mortgage holders having trouble with actual recasts brought on by negative amortization.  Yet there is a crew of people saying that Alt-A mortgage products will not bring any trouble because of the low interest rate environment.  Unfortunately the low rate misses the bigger issue.  Low rates are helping but the problem that we will be seeing is the massive onslaught of recasts, not resets that will be occurring over the next few years.  This is a big reason why we won’t see a housing bottom in California until 2011 at the earliest.  Many of these loans were made to supposedly better qualified borrowers in mid to upper priced areas.  These areas will begin to crack like an egg dropped on the floor late in 2009.  The Notice of Default tsunami will guarantee this much.

I’m am stunned that some people are actually saying that Alt-A mortgages or Pay Option ARMs will create little problems in the market.  Okay.  Then how about we remove the public-private investment program that conveniently has a cap with the FDIC of $500 billion?  After all, if there isn’t any problem with toxic mortgages why should we have a toxic mortgage program that has the design to eat up $1 trillion in loans.  Exactly.  Let me break down the latest figures from data by none other than the Federal Reserve:

California

At the end of March 2009

Subprime loans active:  $119 billion

Alt-A loans active:            $288 billion

U.S.

Alt-A active:       $469 billion

When we talk about the $500 billion in Alt-A mortgages this is what we are talking about.  Last time I checked $469 billion does not mean the problem has gone away.  Businessweek came out with a chart only last month showing how Pay Option ARMs will be recasting over the next few years:

Click for sharper image

I’ve added a reference point for all those people who seem to think that Option ARMs and Alt-A loans have somehow disappeared from the market.  The game is just starting.  Currently, we are seeing less than $2 billion per month of these loans recasting.  However, in 2010 we are going to start seeing $8 to $10 billion per month recast, nearly 5 times the current rate.  The chart states “months to 1^st reset” but they are referring to recasts brought on by negative amortization.  And as you will see, since the majority of these loans are in California the bulk are underwater Jacque Cousteau style.

Wachovia in their infinite wisdom swallowed up Golden West at the height of the lending insanity.  This cratered the bank which was taken over by Wells Fargo.  Just because you eat a bank doesn’t mean the toxic waste suddenly disappears.  In fact, there is still well over $100 billion in Pick-A-Pay mortgages in their portfolio.  Wells Fargo has written off a portion of the portfolio but there is still a significant amount remaining:

This is from their most recent 10-Q.  Wells Fargo alone has $42 billion in unpaid principal linked to Pick-A-Pay mortgages here in California.  The Pick-A-Pay was basically the Pay Option ARM World Savings Style.  Here were the terms:

Source:  Mortgage X

These are the crappiest loans in the world.  World Savings which was owned by Golden West thought that by simply having a little more collateral and looking at FICO scores that handing out toxic waste would be smart.  Some of these insane loans don’t have the first adjustment until 10 years later!  Of course, if Wells Fargo had any sense they would look at that absurd 152% LTV and freaking recast the entire lot.  Somehow I doubt they are doing this since they are too busy sucking up taxpayer money through the crony bailout and pretending everything is fine through manufactured stress tests.  Look at the LTV on some of the toxic foursome.  Arizona actually beats California out with a 161% LTV which is astonishing in itself.  But again, out of this little section of $61 billion in Pick-A-Pay loans $42 billion are in California, a state that has seen the median price drop by 50% in one year.

Wells Fargo seems to have the biggest amount of this crap on their books.  Yet Bank of America and JP Morgan now have a lot since they acquired toxic mortgage experts Countrywide Financial and WaMu.  Let us first look at Bank of America:

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Bank of America has $20 billion in Pay Option ARMs courtesy of Countrywide.  But keep in mind Countrywide was a toxic mortgage expert and other Alt-A crap producer.  They are the 31-Flavors of toxic waste.  We can find some of that junk in the whopping $261 billion residential mortgage portfolio.  If you haven’t realized it yet, if you lose your job any mortgage becomes toxic if you are underwater and can’t make the payment.  So many of these “prime” loans are equally bad.  The only difference is these Pay Option ARMs are monstrosities of epic proportions born in the laboratory of financial meth labs.  Take a look at what the California Attorney General shows through one glorious example of a Countrywide Pay Option ARM:

Here we get a firsthand look of a toxic mortgage product in action.  This is for a $460,000 loan which is what is sitting in many of those mid to upper priced areas in California.  Initially, the first year payment is $1,479 which of course is absurdly low.  But by the time we hit the first 5 year adjustment our payment jumps up to $3,747!  The payment more than doubles.  These craptastic loans were made throughout the bubble from 2004 to 2008 (yes, 2008 with freaking Wachoiva).  A large number of these will have major adjustments in 5 years (that is why we are seeing the first batch now) while some like the idiotic Pick-A-Pay loans can go on for 10 years.  Like I stated before, I highly doubt that Wells or BofA are going to push to recast many of these loans since they are going to fold the minute they do it.  Most people in these loans can’t sell and are basically renters.  That is until they hit recast and you will be seeing some massive moonwalking from homes.  Yet buyers are walking because they are not building equity (aka, renting).  If you bought a place for $500,000 and now know it is worth $250,000, you might make that $1,500 a month payment but are you going to make the payment once it goes up to $3,700?  Heck no!  You are out.  These banks are praying the market will recover.  It will not.  At least not under their delusional expectations and V-shaped bubble recovery plans.

Let us look at JP Morgan who ended up swallowing up WaMu, another Pay Option ARM fanatic.  Before WaMu went under like the titanic they had a gigantic amount of Pay Option ARMs:

Right before WaMu bit the banking dust, it had $52 billion in Pay Option ARMs.  And where were the bulk of these loans?  If you guessed California you win a prize:

Now JP Morgan wrote down a large part of this portfolio.  But how much of it?  That is the real question.  If we are to take the stress test as any guide, banks are still insanely optimistic of potential losses.  Let us pull up the latest 10-Q for JP Morgan:

According to the above, they still have $40.2 billion in Option ARMs and $21 billion in subprime loans.  But another major issue that I won’t address here but should be obvious is that massive “home equity” line item.  JP Morgan has $140 billion in these loans.  Many times, these loans are combined with Pay Option ARMs which makes for a dynamic duo of crap.  These loans are secured by home equity which doesn’t even exist anymore!  These will implode simultaneously as things get worse with these loans.  In the Pick-A-Pay portfolio with Wells, the majority of people make the minimum payment meaning negative amortization.  Meaning, the bank most likely will recast the product based on the appraised price at time of sale.  Many will say otherwise but this is the only logical conclusion.  If we are to appraise those loans in today’s current market, the vast majority of the portfolio would shatter the 110% or 125% (insane) caps and all these mortgages would hit recast oblivion.  I doubt that since banks are waiting for the PPIP so the taxpayer can assume the position at the worst time.  And that is why this problem hasn’t been solved.  I’ve heard a few misguided pundits say that most of these loans have been refinanced.  Sorry, the data above doesn’t show that.  Most of these are still out there.  The only refinancing going on with these toxic mortgages occurs in the foreclosure process.

So why has refinancing activity picked up?  Because buyers in no financial trouble have taken advantage of the low mortgage rate environment and this is smart.  But don’t think all the activity was because of subprime and Alt-A borrowers running to get new government backed mortgages.  They don’t qualify!

I’ll leave you with the most recent graph from Credit Suisse:

The big hit is going to be in 2010.  With 135,000 Notice of Defaults in California for Q1 of 2009, the second half of the year is going to expose the eye of the hurricane we are currently in.  The pundits who say these loans have been taken care mistake silence with a problem being solved.  The data does not back them up but since when do we expect pundits to pay attention to data?