Top 10 at 10: Hanover's 'correction'; Oil hits highs; Drop the Lat; Jon Stewart's feud

Here's my Top 10 links from around the Internet in the last day at 10 am. I welcome your additions in the comments below. Dilbert is a cracker. Glad I'm not Dogbert... 1. Denise McNabb at The Independent points out that Hanover Finance was in a far worse state at the end of June 2008 than former chairman Greg Muir led hapless investors to believe, according to accounts filed on March 31 in the Companies Office by its auditors KPMG. Sigh. The original accounts showing a profit were the ones relied on by investors when they approved a moratorium. I recommended Hanover investors reject the moratorium 2. Adam Bennett at the NZHerald.co.nz has an interesting little history lesson about the perils of property syndicates and the dramas surrounding Waltus Group, which was run by Lower Hutt father and son team John and Shayne Hodge. I've pointed out here at my NZHerald blog the potential pitfalls of property syndicates. 3. Financial markets are betting the Reserve Bank will increase New Zealand's Official Cash Rate by around 70 basis points in the next year, despite the bank's reassurances yesterday that it would hold the OCR at or below 2.5% until late in 2010. Bloomberg reports markets also see the Reserve Bank of Australia lifting rates. 4. The oil price hit a 7 month high of US$72.50 a barrel overnight because of a weak US dollar, WSJ.com reports. 5. Fears that markets could not handle big new US government debt issuance proved unfounded, at least last night. There was strong demand for an US$11 billion auction of new 30 year Treasury bonds that yielded 4.72%, the highest since October 2007, WSJ.com reports. There was stronger demand from 'indirect bidders', which are often foreign central banks.

Thursday's auction result was a relief for the U.S. government, given rising concern that investors may be less willing to underwrite long-dated Treasury auctions owing to worsening budget shortfalls and swelling public debt. So far, government debt auctions have generally gone well despite the flood of supply this year, though the government's cost of funding has increased as auctioned yields have climbed over the past months. Foreign investors, which own more than half of the Treasurys market, still actively bid up the three auctions this week, despite worries from big creditors such as China, Russia and Brazil. They are fretting that aggressive fiscal and monetary stimulus to the economy may generate inflation and weaken the dollar in the long term, which will trim the value of their Treasurys holdings. On Thursday, market participants noted that the 10-year note's yield, which earlier moved briefly above the psychologically important 4% level, attracted investors.

6. However, interestingly, the US Federal Reserve appears to be slowing down its programme of bond buying (money printing), Bloomberg reports. 7. The World Bank is now seeing a 3% contraction in global GDP in 2009, while the IMF is more optimistic about 2010, forecasting growth of 2.4%, up from a forecast in April of 1.9% growth, WSJ.com reports. 8. Nouriel Roubini in FT.com points to the growing currency crisis in Latvia and recommends a devaluation of the Lat, which could prove painful for Swedish and Swiss banks that have lent heavily in foreign currency to Latvian home owners and developers. Roubini thinks a devaluation followed by a conversion to the Euro makes sense and warns against repeating the mistakes of Argentina.

An introduction of the euro immediately after devaluation could help prevent the exchange rate from overshooting, although it would require the eurozone to admit a country that does not yet satisfy the formal criteria for membership. Euroisation after depreciation is a more credible strategy for Latvia than dollarisation would have been for Argentina, as Latvia was on its way to membership and its business cycle is highly correlated with that of the EU. Euroisation without depreciation will not work, as a real depreciation is necessary to restore competitiveness. Of course, any depreciation "“ with or without euroisation "“ will make many foreign currency debts unsustainable and will require a forced debt restructuring, as in the case of Argentina. To minimise the risk of contagion, the best strategy may be: depreciate the currency, euroise after depreciation, restructure private foreign currency liabilities without a formal "default", and augment the IMF plan to limit the financial fallout. It is a risky strategy but "“ as in Buenos Aires nine years ago "“ when plan A does not work it is time to move to plan B sooner rather than later. Delaying plan B would only cause a bigger blowout when the unavoidable currency crisis eventually occurs. It is to be hoped the lessons of Argentina in 2001 have been learnt.

9. The United States may see a few more dips before it recovers properly. This is a nice Bloomberg story explaining a fresh wave of foreclosures is likely to further depress the US housing market as borrowers are forced to reset their Adjustable Rate Mortgages at higher rates.

About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show. Option ARM borrowers hit with unaffordable monthly payments are another threat to the housing recovery and the economy, said Susan Wachter, a professor of real estate finance at the University of Pennsylvania's Wharton School in Philadelphia. Owners who surrender properties to the bank rather than make higher payments for homes that have plummeted in value will further depress real estate prices and add to the inventory of properties on the market, she said. "The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market," Wachter said in an interview. "The option ARMs will be part of the reason that the path to recovery will be long and slow."

10. Here's where bloggers are simply brilliant. Felix Salmon at Reuters points out a fantastic post by Mike at Rortybomb. He has found a flexible spreadsheet with the Treasury's stress tests that allows people to work out what would happen (bank by bank) if assumptions were tweaked, in particular unemployment. The results are startling and frightening for the banks deemed too big to fail and Bank of America in particular if unemployment heads towards 12%.

It seems that the result of the government's ad hoc financial engineering over the past year or so has been to shove hundreds of billions of dollars of tail risk into a handful of enormous banking institutions. Which isn't reassuring at all.

Jon Stewart stirs up his feud with Joe Scarborough over the Starbucks sponsorship.