Weekend Economists October 17-19, 2008

[Demeter]

Get off the rollercoaster of minute by minute stock index updates, take some Dramamine and study the postings gleaned from a variety of voices which have taken WE fancy....as we try to figure out where we were, how we got there, and what's up next? (Who's on first, Idano on third, etc).

Any levity that anyone can dredge up to lift the spirits is exceedingly welcome. Venters will be tolerated and commiserated with.


U.S. FUTURES &
MARKETS INDICATORS>
NASDAQ FUTURES-----------------------------S&P FUTURES

[Demeter]

1. Banks Are Likely to Hold Tight to Bailout Money

http://www.nytimes.com/2008/10/17/business/17bank.html?_r=6&ref=business&oref=slogin&oref=slogin&oref=slogin&oref=slogin&oref=log&oref=login

By LOUISE STORY and ERIC DASH
Even as the government moves to plug holes in the nation’s banks, new gaps keep appearing.

As two financial giants, Citigroup and Merrill Lynch, reported fresh multibillion-dollar losses on Thursday, the industry passed a grim milestone: All of the combined profits that major banks earned in recent years have vanished.

Since mid-2007, when the credit crisis erupted, the country’s nine largest banks have written down the value of their troubled assets by a combined $323 billion. With a recession looming, the pain is unlikely to end there. The problems that began with home mortgages, analysts say, are migrating to auto, credit card and commercial real estate loans... For every dollar the banks earned during the industry’s most prosperous years, they have now wiped out $1.06.

Even with the capital from the government, analysts say, the banking industry still needs to raise around $275 billion in light of the looming losses...“I don’t think that the market wants to see that capital being put to work to leverage the business up again,” said Roger Freeman, an analyst at Barclays Capital, which acquired parts of the now-bankrupt Lehman Brothers last month. “My expectation is it’s quarters off, not months off, before you see that capital being put to work.”

Many banks are still plagued by past excesses. Losses on a variety of different types of loans of all sorts are growing and spreading beyond the country’s borders. Citigroup and Merrill Lynch have each lost money every quarter in the last year, as deteriorating assets wiped out revenue. Merrill, which is in the process of merging with Bank of America, reported a $5.15 billion loss, dragged down by about $12 billion in write-downs. Citigroup lost $2.82 billion, as its $13.2 billion in charges related to credit losses more than overwhelmed every bit of revenue that the bank generated. And analysts say Citigroup is likely to face several more quarters of loan losses as the global economy slows...In the case of the nine-largest commercial banks — Citigroup, Merrill Lynch, Bank of America, Morgan Stanley, JPMorgan Chase, Goldman Sachs, Wells Fargo, Washington Mutual and Wachovia — profits from early 2004 until the middle of 2007 were a combined $305 billion. But since July 2007, those banks have marked down their valuations on loans and other assets by just over that amount.

“The losses now are showing that in some sense the profits reported in earlier years were not real, because they were taking too much risk then,” said Richard Sylla, an economist and financial historian at the Stern School of Business at New York University...

At Citigroup, for instance, the write-downs on mortgages and other loans have eaten away 60 percent of all the profits made by the bank during the boom years. At Morgan Stanley, the cost has reached 70 percent of those profits, and at Merrill Lynch, the tally is 250 percent of the investment bank’s record earnings over those three and half years...Indeed, observers point to the growing well of bank losses, deeper by the quarter, as reason to question whether the government funding will be used as a financial Band-Aid, instead of an engine to move forward...Bank executives, meanwhile, said on conference calls this week that it was premature to discuss their plans.

Jamie Dimon, the chairman and chief executive of JPMorgan, said his bank was in a stronger position to use the money than some of its competitors.

[Amonester]

8. So... all those multi-millions in bonuses were given based on ...

fake

[Demeter]

2. 'DIP' Loans Are Scarce, Complicating Bankruptcies

http://online.wsj.com/article/SB122421475294443955.html


Credit has gotten so tight in recent weeks that companies contemplating a bankruptcy filing can't find the cash needed to get through the process.

This multibillion-dollar corner of the lending market -- debtor-in-possession and exit financing -- has been rocked by General Electric Co.'s recent, undisclosed decision to largely halt lending to companies in bankruptcy-court protection or near it, said several bankruptcy lawyers and financial advisers. GE is one of the world's largest such lenders, last year doing $1.75 billion in restructuring loans.

Debtor-in-possession, or DIP, financing is essential for the lawyers, layoffs and other restructuring necessary for a company's rebirth. Exit financing is used when a company "exits" reorganization. Banks have been eager to take part in this market because the loans are the first to be paid back and command high interest rates.

Without the lending lines, companies that would normally survive bankruptcy will have to quickly sell assets. Potential buyers may not be able to borrow either, meaning companies could be forced to liquidate immediately instead of working out their problems. That could cost tens of thousands of jobs across the economy.

GE Capital, meanwhile, has told numerous potential borrowers that it is out of the DIP and exit-lending business until at least next year, said these people.

GE Capital spokesman Ned Reynolds said, "We're still open" and the company is living up to its existing commitments. GE executives said last month that demand for DIP financing may jump to as high as $12 billion this year. But market volatility has limited GE's role in DIP financing.

"We have to be very selective right now," said Mr. Reynolds. Pricing deals is difficult, he said, as the cost of funding changes from the time a deal is proposed until when it closes....

[dixiegrrrrl]

69. That's ironic....

You file bankruptcy because you are broke.
Because you broke, you can't afford to file bankruptcy.

Did I get that right?

[Demeter]

3. Financial crisis: Interest rates to hit lowest level since 1694

http://www.telegraph.co.uk/finance/economics/interestrates/3211785/Financial-crisis-Interest-rates-to-hit-lowest-level-since-1694.html


The Bank of England faces cutting borrowing costs to beneath two per cent - or even as low as one per cent - within months as it battles to protect Britain from the financial crisis and the worst recession in decades, economists said.

Such a drastic move would bring rates, currently 4.5 per cent, to their lowest level since the Bank was founded in 1694.

The rate cut would be good news for borrowers, who have faced sharp increases in their mortgage rates as embattled banks have raised the cost of borrowing in recent months.

However, it would be a blow for Britain's savers, who have seen their almost £1 trillion worth of deposits eroded by 16-year high inflation...

[fedsron2us]

21. Pushing on string

as Keynes would have said.

In fact then UK is unlikely to be able to push rates below 2% because it has a substantial government and current account deficit that must be funded by borrowing. Unlike the US it does not have the luxury of owning the world's reserve currency and cannot rely on foreigners to buy its Treasuries at almost any price. It is therefore compelled to offer interest rates on its debts at least 1 to 2 percent higher than its western neighbours. It will only be able to go to 2% interest rates if those in the US and the Eurozone go to 0%.

It is also the wrong policy for recapitalising the banks as it discourages saving.

[Demeter]

4. Baltic Dry index at lowest since 2002

http://www.ft.com/cms/s/0/0d9c4f7e-9ad2-11dd-a653-000077b07658.html

The cost of shipping bulk commodities such as iron ore, coal or grains yesterday tumbled to its lowest level in almost six years as recession fears intensified and the difficulty of obtaining trade finance left many ships without any cargo.

The Baltic Dry Index, a benchmark for global freight costs, plunged 10.7 per cent on the day, to 1,615 points, its lowest level since February 2003. The index has fallen 49.8 per cent since the end of September amid weakening demand.

Steve Rodley, director of the London-based shipping hedge fund Global Maritime Investments, said some vessels were anchoring, waiting for better times, while some shipping companies were thinking about scrapping their older vessels.

“The whole shipping market has crashed,” Mr Rodley said. “But the biggest ships are suffering particularly,” he added.

The average daily cost for the largest dry bulk vessels – known as Capesize and used mostly to ship iron ore from Brazil and Australia to China – yesterday sunk 28.9 per cent, its largest daily fall in a decade, to just $13,070 a day.

The rate has collapsed 94.4 per cent since it hit an all-time high of $233,988 a day in early June.

[dixiegrrrrl]

47. oh oh

Something we pay little attention to...until it stops.

So, we import...by ship...most of our food and oil and etc...

[Demeter]

5. White House not slowed down by disaster in financials

http://angrybear.blogspot.com/2008/10/white-house-not-slowed-down-by-disaster.html



Steve Benen at The Washington Monthly points to a WSJ article that cautions us:

THE ULTIMATE BUSH LEGACY FOR BIG BUSINESS.... Bush's presidency may be winding down, but he's not quite done with his conservative domestic agenda.


Bush administration officials, in their last weeks in office, are pushing to rewrite a wide array of federal rules with changes or additions that could block product-safety lawsuits by consumers and states.

The administration has written language aimed at pre-empting product-liability litigation into 50 rules governing everything from motorcycle brakes to pain medicine. The latest changes cap a multiyear effort that could be one of the administration's lasting legacies, depending in part on how the underlying principle of pre-emption fares in a case the Supreme Court will hear next month.


This amazing piece, from the Wall Street Journal's Alicia Mundy, hasn't generated a lot of attention so far today, and that's a shame. The administration's efforts on this are likely to have a huge impact.

Corporate America has been calling for some mechanism to "preempt" product-liability litigation for years, and Bush had promised to deliver. The White House, however, had limited options in dealing with a Democratic Congress which cares about consumer protections.

So, the Bush gang is adding provisions to obscure federal regulations that will block product safety lawsuits by consumers and states. The scheme would affect products ranging from cars to prescription medication to railroad cars.

But a possible Obama administration can undo this, right? If Obama wins, he'd no doubt want to, but reversing these regulations would take a long while.

These new rules can't quickly be undone by order of the next president. Federal rules usually must go through lengthy review processes before they are changed. Rulemaking at the Food and Drug Administration, where most of the new pre-emption rules have appeared, can take a year or more.

[dixiegrrrrl]

70. That does not make sense..

If "Federal rules usually must go through lengthy review processes before they are changed."
doesn't that include the added changes Bush is trying to hurry thru?
So wouldn't it take a year or more for his changes to be reviewed?

[Demeter]

6. Flat-panel TV prices set to dive, analysts say

http://www.physorg.com/news143309954.html


By PETER SVENSSON , AP Technology Writer, Technology / Business
(AP) -- A combination of weak consumer spending and a peak in manufacturing capacity will push prices for flat-panel TVs down to unprecedented lows this holiday season, according to analysts.

David Barnes, analyst at NPD Group's DisplaySearch unit, said prices look set to decrease rapidly starting on "Black Friday," the day after Thanksgiving, and lasting through next year.

It's even possible that 32-inch LCD TV sets, which now usually cost $600 to $700, will go as low as $350 in stores. That's a significant level: It's close to the long-run average price for a TV in the U.S., Barnes said Tuesday.

He believes these smaller sets will be the big sellers this year, as consumers, and possibly also credit-card companies that had fueled big-ticket spending, tighten their belts.

"We're about at the point where the 32-inch set will be the commodity," Barnes said Tuesday.

Larger 40- or 42-inch sets are already dipping below the $1,000 level, another important psychological barrier.

Barnes' colleague Paul Gagnon said the industry is coming out of a period of rather tight supplies of LCD panels, but more factories are now coming on line.

One factor that could boost sales is the impending shutdown of the analog TV broadcasting network in February, which means that older TVs that receive TV over the air will need a converter box. That will drive people to the stores to figure out their options, Gagnon pointed out. New TVs can receive the digital signals that are replacing analog.

[Dr.Phool]

9. Is this guy for real?

I bought a 42" Vizio 1080p HDTV a year ago, at Costco for $899. I'm really glad prices are going to dip below $1,000 this year. :sarcasm:

[snot]

15. If only it would drive consumers to try living without tv for a while. . .

although tv is one of the "cushions" we've got now that they didn't have after the '29 crash -- that and antidepressants.

[Karenina]

19. I'm not certain a sudden withdrawal of soma

during a sharp economic turndown could be accomplished without significant negative side effects.

[Demeter]

7. Credit market indicators that really matter

http://accruedint.blogspot.com/2008/10/credit-market-indicators-that-really.html

With the credit crisis accelerating and governments attempting a number of "solutions," investors are being introduced to a wide variety of credit metrics. Here is a quick list of the credit market indicators that really matter, and where you can find up-to-date data on each.

LIBOR
LIBOR has gotten plenty of press, but many have been focused on the TED spread, which is the yield differential between 90-day T-Bills and 90-Day LIBOR. TED is interesting in terms of historic comparison, but its the absolute level of LIBOR that is a better credit indicator right now. With T-Bill rates extremely low (0.19% as of 10/10), and intra-day T-Bill moves highly volatile, it would be entirely possible to see T-Bill rates rise by some degree without any significant improvement in conditions. Thus the TED spread would technically be tighter, but to no import.

Instead, watch 1-month and 3-month LIBOR rates. Both should be around 1.5-2%, based on where the Fed Funds target is. Watch Euro-denominated rates as well. A governmental guarantee of inter-bank loans would certainly drive LIBOR lower, as LIBOR is supposed to measure inter-bank lending rates. Otherwise I'd expect LIBOR to remain elevated until at least year-end.

Get various LIBOR rates, including international levels at the British Bankers' Association website.

Commercial Paper Term Spread
Many have been watching commercial paper outstanding as a credit market indicator. The problem there is that CP issuance is bound to decline as the system delevers, so total CP outstanding may see year-over-year declines, even as credit conditions are improving. A much better indicator is the yield spread between over-night CP and 60-day CP. Currently over night AA-Finance CP costs firms 1.23%, according to the Federal Reserve, whereas 60-day CP costs 3.51%. Under normal conditions, those rates would be within 25bps of each other.

The Fed also reports on asset-backed CP rates in the same report. These should converge with AA-Finance rates as conditions improve.

Municipal Bond Swap Index
This index measures the average reset rate on tax-exempt, weekly Variable Rate Demand Notes (VRDN) issued by municipalities. Basically, it is the cost of short-term funding for municipal issuers. It is calculated by the Securities Industry and Financial Markets Association (SIFMA) and hence is often just called the SIFMA index.

VRDN's are a mainstay of municipal money-market funds. Investors in a VRDN can put their bond back to the issuer at any reset date, which in this case is weekly. This liquidity is usually guaranteed by a highly-rated bank. With banks under such pressure recently (Wachovia and Dexia were major players in this business), and with municipal money-market funds seeing massive redemptions, VRDN rates have risen dramatically.

Typically the SIFMA rate is between 60 and 80% of the 1-week LIBOR rate. So if LIBOR were 4%, SIFMA would usually come in around 3%. But the SIFMA rate spiked to 7.96% on September 24, and although it has fallen to 4.82% as of last week, the level is far above normal levels.

If there rates remain elevated, municipalities will be under pressure to refinance their variable rate debt with long-term debt. And any kind of debt issuance is extremely expensive in this market. However, falling SIFMA rates would indicate investor confidence in municipal issuers.

SIFMA updates its index each Wednesday. Note that VRDNs are not the same as Auction Rate Securities, which remain highly illiquid.

CMBX
The CMBX is a basket of credit default swaps on commercial mortgage-backed securities (CMBS). It goes without saying that commercial mortgages are likely to suffer significant losses in the near future, likely larger than other recent recessions. At the same time, commercial mortgage securities are structured with significant levels of subordination. This means that junior securities take losses before more senior securities suffer. A typical CMBS deal would have 30% or so subordination beneath the AAA-rated tranche.

So while losses may be high, not too many deals will suffer much more than 30% in losses (which implies a much greater default rate). In addition, principal payments go to retire higher-rated tranches first, therefore the subordination actually increases over time. Thus the spread on AAA-rated CMBS should remain relatively tight. Right now, the recent vintage AAA CMBX is trading in the 220bps area.

The CMBX is maintained by MarkIt and is updated daily.

There are a few other indicators which are commonly cited but I don't think are very useful. One is swap spreads. This is the spread between the fixed-leg of a fixed-to-floating swap and a corresponding Treasury. Classically this was seen as a generalized measure of counter-party risk, since normally a highly-rated bank would stand in the middle of any interest rate swap. However right now the swaps market is being driven by some unusual technicals. Note that the 2-year swap spread is at all-time wides, where as the 10-year swap spread is only a couple basis points wider than its 10-year average. The 30-year swap spread is at all-time tight levels. So as a day-to-day indicator, swap spreads aren't very informative.

Another is Agency debt spreads. With Fannie Mae and Freddie Mac now fully backed by the Treasury, one would expect those spreads to collapse to near zero. Yet currently 2-5 year Agency debt is trading at 100bps or more above comparably Treasury rates. While this is indicative of how bad liquidity currently is in the market, this is as much a function of swap spreads as anything else. As long as swap levels remain elevated, so will Agency debt spreads.

Finally, the various measures of borrowing at the Fed. This includes the discount window, the TAF, the TSLF, etc. Investors should realize that the mere existence of these facilities has an influence over how much institutions use them. Put another way, the fact that we need these programs is the real indicator. The most recent TAF auction on 10/6 produced the lowest stop-out rate since the program's inception. Yet I have a very hard time saying liquidity is improving.

[Dr.Phool]

10. Kick! for the morning!

Everybody out of bed. NOW!

[Demeter]

22. Okay! I'm Up!

It's 6 PM and the Kid insisted.....

actually, I was up at the usual 4:30, broke for a nap at 2 PM....The Kid is fixed for 3 mos., the car is fixed, the condo conversion took 3 hours, but that's over for me at least, Thursday was a very busy day. Today was errand day. Now it's time to vote absentee!

[ozymandius]

11. Probe of Lehman collapse escalated: NYT

NEW YORK (Reuters) - Prosecutors have stepped up the investigation into the collapse of Lehman Brothers, with at least a dozen subpoenas being issued including one to the investment bank's chief executive, Richard Fuld, The New York Times reported on Saturday.

...

One person said New Jersey prosecutors were looking into whether Lehman executives including Fuld misled investors involved in the $6 billion infusion of capital announced by Lehman in June about the bank's condition, the Times said. That infusion came as Lehman disclosed a $2.8 billion third-quarter loss, which caused its shares to plunge.

...

Brooklyn and Manhattan prosecutors meanwhile are looking into remarks made by Lehman executives during a September 10 conference call, which was five days before the company's bankruptcy filing, the newspaper said, and are also investigating whether Lehman assigned proper values on its large commercial real estate holdings.

http://www.reuters.com/article/topNews/idUSTRE49H0LQ20081018

[CabalPowered]

13. I happen to know where Mr. Fold has been during most of this

Sun Valley, overseeing a remodel of his $10M estate. His total holdings around SV are estimated in the $30M range.

[Demeter]

23. Incredible! Thanks for the Post!

Welcome to WE, where even the name means FUN!

That is a very subtle slur on Fuld's name, by the way--I had to read it 3 times before it sunk in!

[CabalPowered]

44. Actually it was a pre-coffee spelling error

but you're right, seems to be fitting for the suspect. :hi:

[ozymandius]

12. Financial Crisis Provides Fertile Ground for Boom in Lawsuits

Accusations of executive excess, accounting fraud and lack of disclosure are far more credible now, since bad bets on real estate and securities linked to home loans have caused some of the biggest and most prestigious financial firms in the country — Lehman Brothers, the American International Group, Fannie Mae, Freddie Mac — to collapse, sell parts of themselves at fire-sale prices or suffer outright government takeovers. A legal argument rarely used in investor lawsuits is tempting: res ipsa loquitur, or the thing speaks for itself.

.....

So are investors, who are angry. Individual shareholders as well as big companies want someone else to pay for their losses on investments in everything from basic stocks to exotic swaps. And lawyers are emboldened in their claims by the huge losses and obvious errors in judgment at companies that, until recently, confidently asserted their immunity to market turbulence.

....

A recent report by the law firm Fulbright & Jaworski found that more than one-third of lawyers working internally for companies expected to see more litigation in 2009. Lawyers at the biggest companies were more likely to expect a boom in lawsuits, according to the study.

One factor contributing to litigation is the rapid availability of information about corporate mistakes and losses, which in the past might have taken longer to circulate among investors, said Michael Young, a partner at Willkie Farr & Gallagher in New York.

http://www.nytimes.com/2008/10/18/business/18suits.html?em

---

Praise be the internets! Information is so dang hard to hide.

[Hugin]

14. Where we stand...

A summary.

1) Blame the 'dead-beat' borrowers dehumanized by calling them Sub-prime. Check!
2) Blame the Internets Tubes for exposing our corruption and incompetence. Check!
3) Get massive bailouts from Gullible Congress using same old FUD Fear tactics. Check!


However, I still have a question... If nobody has a job, where's all of this rescue funded by
non-existent taxpayers and the mythological middle-class coming from? Heaven knows the big shots
and Financial Corporations don't pay any taxes.

Anything I've missed so far?

Oh, and I'm currently under siege... They are all ganging up trying to get blood from this turnip.
I have at least 5 instances of corporations changing their lending policies out of the blue... and
that's just me.

[Dr.Phool]

17. I've been keeping an eye on them as well.

I caught a credit card statement the other day. The due date is usually around the 5th of the month, and I always pay it on the 1st with online bill pay. They changed the due date to the 28th, out of the blue. If I hadn't been watching, I'd have gotten nailed for a late fee, and probably a 35% interest rate.

[Demeter]

24. FUD? What Is That, Prag?

[Two Americas]

41. FUD

Fear, uncertainty, doubt.

Defined by Gene Amdahl after he left IBM to found his own company: “FUD is the fear, uncertainty, and doubt that IBM sales people instill in the minds of potential customers who might be considering products.” The idea, of course, was to persuade them to go with safe IBM gear rather than with competitors' equipment. This implicit coercion was traditionally accomplished by promising that Good Things would happen to people who stuck with IBM, but Dark Shadows loomed over the future of competitors' equipment or software. After 1990 the term FUD was associated increasingly frequently with Microsoft, and has become generalized to refer to any kind of disinformation used as a competitive weapon.

http://catb.org/jargon/html/F/FUD.html

[Hugin]

42. I'm not alluding to Dr.Phool's dog...

It stands for Fear Uncertainty and Doubt.

It's a PsyOps and/or marketing strategy which has been very popular with TPTB and assorted Dictators for quite
some time.


http://en.wikipedia.org/wiki/Appeal_to_fear

[Danascot]

16. I appreciate the weekend edition of SMW

So much is going on these days it's good to have this resource, plus I have more time to read on the weekend.

Thanks, Demeter!

[Demeter]

25. You Are Welcome!

It's also the only time I have to post! Most weekends, anyway!

[Danascot]

18. As requested, a little levity

(very little in some of these ... sorry!)


The credit crunch has helped me get back on my feet. My car's been repossessed.

Q: What do you say to a hedge fund manager in these times?
A: Quarter-pounder with fries, please.

Overheard in a NYC bar: 'This credit crunch is worse than a divorce. I've lost half my net worth and I still have a wife.'

The bank returned a check to me this morning, stamped: 'insufficient funds.' … Is it them or me?

Q: What's the capital of Iceland?
A: About $20.

Q: How do you define optimism?
A: A banker who irons five shirts on a Sunday.

Q: What's the difference between a banker and a large pizza?
A: The pizza can still feed a family of four.

Q: Why have real estate agents stopped looking out of the window in the morning?
A: Because otherwise they'd have nothing to do in the afternoon.

Q: What's the difference between an investment banker and a pigeon?
A: The pigeon can still put down a deposit on a new Ferrari.

A man went to his bank manager and said: 'I'd like to start a small business. How do I go about it?' 'Simple,' said the bank manager. 'Buy a big one and wait.'

Money talks. Trouble is, mine knows only one word: 'Goodbye.'

A young man asked an elderly rich man how he made his money. 'Well, son, it was 1932. The depth of the Great Depression. I was down to my last penny, so I invested that penny in an apple. I spent the entire day polishing the apple and, at the end of the day, I sold that apple for ten pennies. The next morning I bought two apples, spent the day polishing them and sold them for 20 pennies. I continued this for a month, by which time I'd accumulated a fortune of $1.37. Then my wife's father died and left us $2 million.'

The credit crunch is getting bad, isn't it? I let my brother borrow a twenty a couple of weeks back, it turns out I'm now America’s fourth biggest lender.

The Bush administration entered office as social conservatives and leaves office as conservative socialists.

In America, banks rob people because that is where the money is.

On my drive home yesterday there was a guy at an intersection with a sign that read, “Will manage your money for food”.

My broker is recommending only two positions, Cash and Fetal

Right now we are advising all our clients to put everything they've got into canned food and shotguns.

Joe Six-pack is now Joe Four-pack

Republicans are the party of small government.

[Demeter]

26. We Need to Get a Drummer!

:rofl: :applause: For the rimshots! Excellent selection. You made me smile, at least!

[Robbien]

20. Grantham: Stocks May Fall Another 50%

Jeremy Grantham's quarterly letter, published yesterday, is a classic. It's also a two-parter, so we'll get the pleasure of another half in two weeks. In the meantime, there's plenty to chew on in this half. We'll carve it into a few posts this weekend.

First: As we've noted before, the three great stock-market bubbles of the 20th Century--US in 1929, US in 1965, and Japan in 1989--were all followed by price troughs that were 50% below fair value. (See charts below right). The bubble that peaked last fall was every bit as spectacular as these earlier bubbles, so it seems reasonable to expect that stock prices might trough 50% below fair value this time, too.

Jeremy puts fair value on the S&P 500 at about 975 (vs. Friday's close of 940). A trough of 50% below fair value, therefore, would be about 500, or some 45%+ below today's levels.

. . . the three most important equity bubbles of the 20th Century all overcorrected around their price trends by more than 50%!

In the interest of general happiness, we do not trot out these exhibits often and, until recently, they would have been seen as totally irrelevant and perhaps indecent. But, after all, it’s just history. Being optimistic like most humans, we draw the line at believing something so dire will happen this time.

. . .Not all of the differences are favorable: we have a more global, interlocking, and complicated system, including non-bank players like hedge funds. We also have the “financial weapons of mass destruction” – asset-backed securities that are tiered and sliced and repackaged – and, perhaps most destabilizing of all, totally unregulated credit default swaps. Did we have even more greed and short-term orientation this time than they did? Well, we certainly didn’t have less!

Still, a 50% overrun seems unacceptable. Probably governments would feel that the consequences of such a loss in asset value would simply be too awful and would do anything to prevent it. And perhaps, just perhaps, their “anything” would work. But a reasonably conservative investor looking at the data would want to allow for at least a 20% overrun to, say, 800 on the S&P 500, and have a tiny portion of their brain loaded with the notion that it just might be quite a bit worse.

the reasoning continues. . .
http://www.clusterstock.com/2008/10/grantham-stocks-may-fall-another-50-but-still-time-to-buy

Not sure where I stand on this, but the article was a bit of a jolt. Someone is calling a bottom and it sure isn't where we are right now.

Rest of the article and graphs are worth a looksee.

[Demeter]

27. Swiss to fund $60bn ‘bad bank’ for UBS

http://www.ft.com/cms/s/0/92a97876-9b4b-11dd-ae76-000077b07658.html

By Haig Simonian in Zurich

Published: October 16 2008 07:41 | Last updated: October 16 2008 22:17

Switzerland moved to restore confidence in its banking system on Thursday, agreeing to fund a vehicle that would take on most of the toxic debts held by UBS and injecting SFr6bn (€3.9bn) to help recapitalise its former national banking champion.

The intervention in UBS came as its cross-town rival, Credit Suisse, raised SFr10bn from strategic investors including the Qatar Investment Authority. The proceeds of the fundraising by UBS will be immediately ploughed back into the bail-out vehicle, which is backed by the central bank and designed to hold up to $60bn in mainly US mortgage assets.

The government injection represents the third capital raising by UBS this year, and is an attempt by the bank to put the subprime crisis behind it. Under the terms of the deal, the government will buy SFr6bn of mandatory convertible notes, instruments that pay a fixed coupon like bonds but convert into shares at a later date. It contrasts with commitments made by the UK to take direct equity in some of its biggest banks.

Switzerland’s action follows bank bail-outs across Europe and comes amid fears the country might be accused of not pulling its weight internationally.

[Demeter]

28. Gazprom threatens to quit TNK-BP gas deal

http://www.ft.com/cms/s/0/7611c448-9bb4-11dd-ae76-000077b07658.html

By Ed Crooks in London and Catherine Belton in Moscow



Gazprom, the state-controlled Russian gas group, is threatening to pull out of a deal to buy a stake in a vast east Siberian gas field from TNK-BP, BP’s Russian joint venture, saying the stake is likely to be worthless.

The threat reflects the financial pressure on Gazprom, which is being forced to focus on its essential investments in relatively short-term projects. Gazprom agreed to buy TNK-BP’s 63 per cent stake in Kovykta, a field in eastern Russia, in June last year as part of a settlement to resolve a dispute over the licence for the field.

It agreed to pay $700m-$900m (€515m-€662m) for the stake, and also signed a memorandum of understanding with BP to set up a $3bn joint venture to develop projects inside and outside Russia. The deal was seen as an important step for BP in securing its presence in Russia, the country with the world’s biggest hydrocarbon reserves. The UK company has faced persistent problems in Russia, and this year waged a bitter fight over TNK-BP with the Alfa-Access-Renova group of Russian tycoons, its partners in the venture.

Kovykta is estimated to hold more gas than the entire proved reserves of Canada or Kazakhstan, and is a potentially important source of gas supply for Asian countries such as China and South Korea in the second half of the next decade.

However, Gazprom believes that its value is highly uncertain, given the long-term nature of the development, and also thinks the licence for the field is likely to be taken away from the TNK-BP-led consortium that runs it.

Yuri Trutnev, Russia’s natural resources minister, yesterday suggested the field was not producing enough gas to meet the consortium’s licence obligations – the issue at the heart of last year’s dispute.

One Gazprom executive told the Financial Times the company was dubious about paying hundreds of millions of dollars for a potentially worthless asset.

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29. CIC set to boost stake in Blackstone

http://www.ft.com/cms/s/0/f5248e2e-9bb8-11dd-ae76-000077b07658.html


By Henny Sender in New York



China’s sovereign wealth fund, China Investment Corp, is planning to increase its stake in Blackstone Group from 9.9 per cent to 12.5 per cent, according to a US regulatory filing.

This time, however, CIC will buy shares in the open market, where Blackstone is trading at a fraction of the price CIC paid in the spring of 2007 just prior to the US private equity group’s listing. By buying shares at greatly reduced prices, CIC is cutting the average cost of its investment. While its original agreement with Blackstone binds the Chinese to hold shares for four years, any new purchases have no such restrictions. At midday on Thursday, Blackstone shares were trading at $8.83. CIC originally paid over $29 a share, a slight discount to the IPO price.

Morgan Stanley analysts estimate the agreement would allow CIC to buy 25 per cent of the current float. With any new share purchases, CIC would also acquire the same voting rights as other holders.

CIC has not been active in the US market in recent months – a reflection of its concern about the value of its investments, including its stakes in Blackstone, JC Flowers and Morgan Stanley, according to people familiar with the matter.

CIC’s $5bn investment in Morgan Stanley, made last December, lacked the sort of protection Temasek and the Kuwait Investment Authority received when they invested in Merrill Lynch. Both Temasek and the KIA were granted the right to receive more favorable terms if Merrill extended better terms to subsequent investors.

Following the collapse of Lehman Brothers in mid-September, Gao Xiqing, the executive director of CIC, flew to New York for intensive discussions with John Mack, chief executive of Morgan Stanley, about taking a larger stake in the US investment bank. But the talks ended without an agreement.

Chinese authorities discouraged a larger stake, according to people familiar with the talks, in part because of previous losses and concern about the US dollar. Other Chinese investments, such as China Development Bank‘s investment in Barclays, or China’s State Administration of Foreign Exchange’s (SAFE) investment in TPG’s latest fund, have also not fared well. As one of the largest investors in the TPG fund, SAFE was among those who received a letter from TPG saying its $3bn investment in Washington Mutual was worth zero.

For the last few months, most sovereign wealth funds have been on the sidelines as the scale of losses mounted. Efforts by Lehman Brothers to find an investor in the Middle East or Asia were unsuccessful.

The revision of the terms of CIC’s investment in Blackstone did not require regulatory approval.

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30. Southwest reports first loss in 17 years

By Justin Baer in New York

http://www.ft.com/cms/s/0/96fe01b0-9b75-11dd-ae76-000077b07658.html

Southwest Airlines, whose hedges against rising oil prices have helped stave off losses, saw its 17-year streak of profitability end after a stunning reversal in commodity prices forced the carrier to mark down the value of some contracts.

Southwest and its US rival Continental Airlines reported quarterly net losses on Thursday as fuel costs and a rash of hurricanes and tropical storms, in Continental’s case, offset revenue gains. The credit crisis has continued to push commodity prices lower, leaving airlines to navigate through a business environment dominated by two volatile, countervailing forces – cheaper fuel and fewer passengers.

“On the one hand, fuel prices have declined significantly, and if they stay around the current level will benefit greatly,” said Larry Kellner, Continental’s chief executive, in a conference call with analysts.

“On the other hand we know the demand for air travel would be adversely affected by a recession, and it remains to be seen how deep, wide and long the recession will be.”

While most carriers had predicted the economic slowdown would eventually take its toll as business and leisure passengers alike cut back on travel expenses, none could have anticipated the events that have gripped Wall Street in recent weeks, or their effect on commodity prices.

Only months ago, mounting fuel costs had threatened to drain the cash reserves of even some of the nation’s biggest carriers, sending them back to the bankruptcy court for the second time this decade. They slashed capacity, retired older planes, introduced new passenger fees and sought to squeeze every dollar of liquidity from their balance sheets as they braced for even higher fuel bills.

Southwest, the biggest low-cost carrier, swung to a third-quarter net loss of $120m, or 16 cents a share, from income of $162m, or 22 cents, a year ago. Operating revenue rose 12 per cent to a record $2.9bn.

The drop in oil prices during the final weeks of the quarter forced Southwest to mark down the value of some derivatives contracts by $247m, reversing mark- to-market gains recognised in past quarters. Despite the reversal, fuel costs still rose 44 per cent from a year earlier. Continental reported a net loss of $236m, or $2.14 a share, compared with a profit of $241m, or $2.15 a share, a year ago. Operating revenue climbed 8.8 per cent to $4.2bn.

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31. IMF ready to help stabilise Ukraine

POOR UKRAINE!

http://www.ft.com/cms/s/0/49af564c-9bad-11dd-ae76-000077b07658.html

By Krishna Guha in Washington, Stefan Wagstyl in London, Thomas Escritt in Budapest and Roman Olearchyk in Kiev


The global credit crisis took a fresh turn on Thursday as Hungary and Ukraine approached international institutions for support in an effort to avoid following Iceland into financial turmoil....

The mood in Europe was unsettled as Budapest received a €5bn credit facility from the European Central Bank and Kiev said it was seeking an IMF loan of up to $14bn to “stabilise Ukraine’s financial system”. It was the first time in the 15-month credit crunch that multilateral agencies such as the International Monetary Fund had taken steps that are likely to lead to a bail-out of continental European countries – a clear sign of the acute difficulties debtor nations face in raising finance from credit-starved ­markets.

The International Monetary Fund is on an emergency footing and will do everything in its power to support vulnerable emerging economies caught up in the global financial crisis, its chief, Dominique Strauss-Kahn, vowed on Thursday.

“The crisis is now hurting a lot of emerging markets,” he told the Financial Times in an interview. “Some of them may face balance of payments problems.”
“Many countries seem to be experiencing problems because of the repatriation of private capital by foreign investors or the reduction of credit lines from foreign banks,” Dominique Strauss-Kahn, IMF managing director, told the Financial Times. “We are ready to support these economies and we are in discussions with a number of them.”

Hungary’s problems stem from foreign currency loans and big budget deficits. Ukraine’s banks face difficulties repaying foreign credits as the current account is widening. Authorities in both countries insisted they were not in difficulties.

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32. EU leaders demand recession safeguards

By Tony Barber and George Parker in Brussels
http://www.ft.com/cms/s/0/4e524918-9bba-11dd-ae76-000077b07658.html

European Union leaders on Thursday demanded swift measures to shield their manufacturers against the threat of a severe economic recession triggered by the global financial meltdown.

After long and sometimes sharp discussions, the bloc’s 27 leaders also decided to stick to a December deadline to secure a deal on climate change, but promised to take into account the concerns of Poland and other former communist countries. Wrapping up a two-day summit in Brussels, the leaders said they intended to work with the US and other countries to bring about “a real and complete reform of the international financial system”, based on new standards of transparency, cross-border supervision and crisis management.

José Manuel Barroso, the European Commission president and Nicolas Sarkozy, France’s president, will hold talks on Saturday with George W. Bush, the US president, and set out their case for a wholesale redesign of the world’s financial architecture, including broader powers for the International Monetary Fund.

Mr Sarkozy led the call for assistance to European manufacturers, saying: “If we had a co-ordinated response to the financial crisis in Europe, shouldn’t we have a co-ordinated response to the economic crisis in Europe?”

He won enthusiastic support from Silvio Berlusconi, Italy’s premier, who pointed to $25bn (€18.6bn, £14.5bn) in low-interest loans that Congress has approved for US carmakers. “Since the US is taking massive steps to support its auto companies, it shouldn’t be a scandal if some EU states find it necessary to give support to their own,” Mr Berlusconi said.

European carmakers are asking for €40bn ($53.6bn, £31.2bn) in loans, partly to match the US package and partly because they anticipate heavy costs in meeting EU fuel emission standards.

In their summit communiqué, the EU leaders called on the European Commission to present proposals by the end of December “to preserve the international competitiveness of European industry”.

The statement reflected the views of France, Germany, Italy and others that the emergency measures adopted this week to protect Europe’s financial sector from collapse, though necessary, risked leaving manufacturers in the lurch.

An earlier draft of the statement could have been interpreted as a call for a Europe-wide fiscal boost for manufacturing. But the UK insisted on removing a French-inspired phrase that referred to “necessary steps to react to the slowdown in demand”. David Miliband, Britain’s foreign secretary, highlighted a clause that stressed the need to observe EU state aid rules in developing policies. “I think we’d rather stick to the financial sector,” one UK official said.

German officials suggested Gordon Brown, the UK prime minister, was trying to gain credit for initiatives to tighten global financial regulation that had been proposed by Berlin some years ago but resisted by the UK. This dispute was, however, small compared with the heated exchange on climate change issues.

Italy and several central and eastern European countries raised fierce objections to the EU’s approach to cutting carbon dioxide emissions and boosting renewable energy use. Poland won an important concession when its partners agreed that the final EU steps in December should be decided by unanimity rather than majority vote.

Some leaders complained they had not been in power when the EU committed itself to its climate change plan. But when these leaders talked of “red lines”, or non-negotiable national interests, Mr Barroso retorted that he too had a “red line” – the “20-20-20” environment plan.

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33. Iceland slashes interest rates

http://www.ft.com/cms/s/0/a4c9ca86-9aa8-11dd-bfd8-000077b07658.html

Iceland’s central bank slashed interest rates from 15.5 per cent to 12 per cent on Wednesday, citing the ‘grave situation’ facing the country, whose banking system collapsed last week

In a deeply pessimistic statement, the central bank said the implosion of the three banks would be “extremely burdensome, and the accompanying economic contraction very sharp.” The interest rate would be reviewed again on 6th November, it said. “A variety of jobs have disappeared virtually in the blink of an eye, demand has declined precipitously, and by all measures, expectations are at a low ebb,” the statement said.

The independent central bank had raised interest rates to as high as 15.5 per cent this year in an attempt to stem inflation in Iceland, currently running at 14 per cent. But many in Iceland have criticised the policy, including some within the government.

Icelandic banking fallout
A look at UK councils and other bodies known to have deposits in collapsed Icelandic banks
They argue such high rates helped induce the banks’ overseas borrowing spree and turned the currency into a carry trade.

The krona has effectively stopped trading in the wake of the crisis, having plummeted from Kr122 per euro a month ago to as low as Kr340 per euro last week.

Iceland’s government is in talks with Russia and the IMF to secure a loan, which it desperately needs to shore up its currency and begin unfreezing the domestic economy.

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34. Three big US banks unveil $2.6bn in profits (We've Been Played Again)

http://www.ft.com/cms/s/0/e977c8a0-9aac-11dd-bfd8-000077b07658.html

Three of the nine big banks due to receive capital injections from the US government reported total third-quarter profits of more than $2.6bn on Wednesday, highlighting the different needs of companies receiving assistance under the rescue plan.

Wells Fargo and JPMorgan Chase, which are to receive $25bn each in government funds, said they earned $1.64bn and $527m, respectively, during the period, while State Street, which is to receive $2bn in federal money, put its net profit at $477m. Jamie Dimon, JPMorgan chief executive, said his bank did not need the capital injection and acknowledged that the Treasury plan might benefit weaker competitors more. But he said JPMorgan did not want to stand in the way of an initiative that benefited the banking system as a whole.

“The plan may well have asymmetrical benefits . . . but what is good for the system is good for JPMorgan,” he said. “The Treasury plan and all of the things they have done recently, is very powerful stuff that will eventually help to unclog the system.”

Mr Dimon said money markets and other frozen parts of the financial system could start to thaw, adding: “You will see some easing in certain critical areas in the next couple of weeks.”

JPMorgan’s profits were down 84 per cent from $3.4bn in the same quarter of last year. Earnings at Wells fell 24 per cent, but rose 33 per cent at State Street.

...Experts say it was important for big banks to join at once to avoid potential “stigma” problems for companies receiving government funds.

STIGMA? WELL, WHAT'S WRONG WITH A SCARLET A FOR ASSHOLE?

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35. Fighting The Last Depression While Ushering In The Next One

http://www.clusterstock.com/2008/10/fighting-the-last-depression-while-ushering-in-the-next-one

John Carney |
So why isn't the bailout working? They say generals are always fighting the last war. Now Ben Bernanke, who was a financial historian before he became a World Saver, may be fighting the last depression. Unfortunately, our current economic crisis is not like the one we faced in the 1930s. It's almost its photographic negative. Policies designed to avert the last depression may actually be prolonging this crisis.

In the Great Depression, banks that were otherwise solvent, if not entirely healthy, were being brought down by panic driven bank runs and a lack of liquidity. That truly was a liquidity crisis. The Federal Reserve had it within its power to support the banks by adding liquidity but it refused to do so. Since then an academic consensus has developed around the theory that it would have been better for the Fed to take an active role in preventing the crash of solvent financial institutions.

Our problem is very different. As we've seen from the wreckage of Lehman Brothers, Bear Stearns and Merrill Lynch, many of our financial institutions are insolvent. They aren't healthy victims of bank runs. They are ailing institutions barely kept alive by frantic rounds of capital raising. The lessons of the Great Depression simply don't apply here.

In fact, we're probably making things worse. Allowing insolvent institutions to fail and requiring worthless and worth less assets to be fully written down would provide transparency to the market. Instead, we're dedicated to the post-Lehman proposition of "Never Again." The various programs of our government continue to obscure asset pricing and conceal insolvency. This means that you can't trust the market to tell you which firms are failing.

Twisting the arms of bankers to lend to institutions that may be insolvent is a recipe for deepening the crisis. We've just been through a period of malinvestment--we spent too much borrowed money on junk. Borrowing more to spend on junk only digs us in deeper.

Bank lending won't get going again until trust in the markets can be restored. Fighting a Great Depression era problem probably won't help. More transparency, which means more write-downs and failures, is probably necessary if we're going to get through this. Unfortunately, we're still sailing in the opposite direction.

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36. Foreign central banks seek safety; the Fed, by contrast …

http://blogs.cfr.org/setser/2008/10/16/foreign-central-banks-seek-safety-the-fed-by-contrast/



Over the last 52 weeks, foreign central banks have added $321b to their Treasury holdings at the New York Fed (and no doubt more to other accounts) and $147b to their Agency holdings — for a total of $468b. And there clearly has been a big shift towards Treasuries recently. The rise in Treasury holdings over the last two weeks, annualized, tops $1 trillion. The fall in Agency holdings over that period (after the bailout of the Agencies), annualized, also tops $1 trillion.



Stunning? Yes. Stabilizing? Not really. There isn’t a shortage of demand for Treasuries right now. But there is a shortage of willing lenders of dollars to European banks and — to a degree, s shortage of buyers for the debt issued by the US Agencies (Freddie, Fannie and the like). And remember that the Agencies are the main current source of credit for American households looking to buy a home — without their lending, home prices would fall much much further.*

The Fed’s balance sheet by contrast is moving in the opposite direction — out of Treasuries. The Fed has been selling off its Treasury holdings for a while now. But there are limits to how many loans to banks and broker dealers and European central banks the Fed can finance through the sale of its existing stock of Treasuries. The recent increase in Federal Reserve lending has been financed by both the $500b in cash raised by the Treasury and deposited at the Fed through the supplementary financing facility — and a big rise in bank deposits at the Fed. Those two sources combined to provide the Fed with about $750b in financing.



The scale of the expansion of the Fed’s balance sheet is equally stunning. The Fed is currently provided at least $950b in dollar liquidity to the US financial system through various term facilities and its direct lending, and another $450b of dollar liquidity to European central banks — liquidity that is then lent to European financial institutions that are facing a shortage of dollars. Let there be no doubt that this is a systemic crisis.



The falling purple line is the Fed’s total holdings of long-term Treasuries (really holdings of Treasuries that have not been lent out to the dealers); the falling red line is the Fed’s holdings of Treasury bills; the rising green line is the financing from the Treasury supplementary financing account and the rise in bank reserve balances at the Fed; the rising blue line is the financing the Fed is providing to the global financial system. Tim Geithner has been a very busy man this year.


There is though one tiny bit of good news buried in the Fed’s balance sheet: the banks had slightly less money on deposit at the Fed on Wednesday ($261.6b) than they had on deposit over the weekend. That is why the average over the last week ($271.8b) was higher than the Wednesday total. Clearly, there were a lot of worried bankers over the weekend. And they are a bit less worried now.

Thanks to Paul Swartz for help with these graphs; more of his work — and the work of the Council’s Center for Geoeconomic Studies — can be found on the our homepage.

* I am sometimes asked if sovereign wealth funds will participate in the rescue plan for US and European financial institutions. That strikes me as the wrong question. Sovereign funds aren’t really in the business of doing rescues. Rescues are done primarily to keep the financial system afloat; financial return isn’t the main consideration. Sovereign wealth funds have been used to help “rescue” their own banking systems: Look at the recent actions of Kuwait, Russia and even China. But they aren’t going to rescue other countries’ banks. Not when their own economies are under strain — and not when central banks don’t seem willing to take on any risk whatsoever. A few bold funds might try to buy at the bottom — if they think they can get a good deal. But that isn’t really a rescue …

A more pertinent question would be “when will foreign central banks resume lending to the Agencies (Fannie, Freddie, and the like) and in the process, help the Agencies finance mortgage lending that could help to stabilize the US housing market … “

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37. Hedge fund manager slams ‘idiot’ bankers

http://www.ft.com/cms/s/0/b0a40c72-9c83-11dd-a42e-000077b07658.html


A hedge fund manager who made what is thought to be one of the biggest percentage profits of all time bowed out of the business on Friday with a fierce attack on the “idiots” running big banks who were willing to take the other side of his bets.

Andrew Lahde, founder of California’s Lahde Capital, used his farewell letter to investors to round on the US “aristocracy” able to pay for their children to gain a top-class education.

Mr Lahde, who has made tens of millions of dollars from his highly successful bets against the financial and property sectors during the past two years, also called for the legalisation of cannabis and said he was now dropping out to spend time with his money.

Saying he was “in this game for the money”, Mr Lahde went on to mock those who traded with him.

“The low-hanging fruit, ie idiots whose parents paid for prep school, Yale and then the Harvard MBA, was there for the taking.”

“These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government.

“All of this behaviour supporting the aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.”

Mr Lahde is one of the few hedge fund managers to have correctly predicted the subprime crisis. One of his funds made a return of 870 per cent last year. Money is now being returned to investors as the remaining business is shut down.

On Friday, Mr Lahde said he would no longer run other people’s money, preferring to concentrate on managing his own, and urged wealthy hedge fund managers and corporate chieftains to “throw the Blackberry away and enjoy life”.

“I will let others try to amass nine, 10 or 11 figure net worths,” he said.

“Meanwhile, their lives suck . . . What is the point? They will all be forgotten in 50 years anyway. Steve Ballmer , Steven Cohen and Larry Ellison will all be forgotten.”

Mr Lahde did not immediately return calls.

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38. Wall Street banks in $70bn staff payout: Pay and bonus deals equivalent to 10% of US government bail

http://www.guardian.co.uk/business/2008/oct/17/executivesalaries-banking

Simon Bowers The Guardian


Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.

Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government's cash has been poured in on the condition that excessive executive pay would be curbed.

Pay plans for bankers have been disclosed in recent corporate statements. Pressure on the US firms to review preparations for annual bonuses increased yesterday when Germany's Deutsche Bank said many of its leading traders would join Josef Ackermann, its chief executive, in waiving millions of euros in annual payouts.

The sums that continue to be spent by Wall Street firms on payroll, payoffs and, most controversially, bonuses appear to bear no relation to the losses incurred by investors in the banks. Shares in Citigroup and Goldman Sachs have declined by more than 45% since the start of the year. Merrill Lynch and Morgan Stanley have fallen by more than 60%. JP MorganChase fell 6.4% and Lehman Brothers has collapsed.

At one point last week the Morgan Stanley $10.7bn pay pot for the year to date was greater than the entire stock market value of the business. In effect, staff, on receiving their remuneration, could club together and buy the bank.

In the first nine months of the year Citigroup, which employs thousands of staff in the UK, accrued $25.9bn for salaries and bonuses, an increase on the previous year of 4%. Earlier this week the bank accepted a $25bn investment by the US government as part of its bail-out plan.

At Goldman Sachs the figure was $11.4bn, Morgan Stanley $10.73bn, JP Morgan $6.53bn and Merrill Lynch $11.7bn. At Merrill, which was on the point of going bust last month before being taken over by Bank of America, the total accrued in the last quarter grew 76% to $3.49bn. At Morgan Stanley, the amount put aside for staff compensation also grew in the last quarter to the end of August by 3% to $3.7bn.

Days before it collapsed into bankruptcy protection a month ago Lehman Brothers revealed $6.12bn of staff pay plans in its corporate filings. These payouts, the bank insisted, were justified despite net revenue collapsing from $14.9bn to a net outgoing of $64m.

None of the banks the Guardian contacted wished to comment on the record about their pay plans. But behind the scenes, one source said: "For a normal person the salaries are very high and the bonuses seem even higher. But in this world you get a top bonus for top performance, a medium bonus for mediocre performance and a much smaller bonus if you don't do so well."

Many critics of investment banks have questioned why firms continue to siphon off billions of dollars of bank earnings into bonus pools rather than using the funds to shore up the capital position of the crisis-stricken institutions. One source said: "That's a fair question - and it may well be that by the end of the year the banks start review the situation."

Much of the anger about investment banking bonuses has focused on boardroom executives such as former Lehman boss Dick Fuld, who was paid $485m in salary, bonuses and options between 2000 and 2007.

Last year Merrill Lynch's chairman Stan O'Neal retired after announcing losses of $8bn, taking a final pay deal worth $161m. Citigroup boss Chuck Prince left last year with a $38m in bonuses, shares and options after multibillion-dollar write-downs. In Britain, Bob Diamond, Barclays president, is one of the few investment bankers whose pay is public. Last year he received a salary of £250,000, but his total pay, including bonuses, reached £36m.

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39. AIG Bailout Saved Goldman From Major Loss

http://www.nakedcapitalism.com/2008/09/aig-bailout-saved-goldman.html


Gretchen Morgenson in the New York Times reports that Goldman and no other Wall Street firm was involved in the AIG rescue talks and an AIG failure would have created a hole as big as $20 billion in Goldman's balance sheet.

This is special dealing, pure and simple. Even if AIG needed to be salvaged (there was considerable agreement on this point), having Goldman deeply involved in the process is cronyism. But that's been a staple of this Administration.

From the New York Times:

As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

The only Wall Street chief executive participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.....

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.

If you believe that, I imagine you believe in the tooth fairy too. Goldman had $45 billion of equity as of its last balance sheet date. A loss, if it approached $20 billion, in this general environment of worries about financial firms, would have sent Goldman shares into a tailspin, and the rating agencies have started taking a dim view of overlevered financial firms that appear unable to raise equity on reasonable terms. This certainly would have lead to a downgrade, and that has put other firms on a slippery downward slope.

Note the article contains a recitation of denials later in the piece that the damage would have been as large as $20 billion or that Goldman's exclusive role in the talks was self-interested.

The rest of the story focuses on how the credit default swaps operation, a small unit at AIG, was allowed to take on risks that brought a sizable and otherwise highly successful firm to its knees. It is a riveting read.

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49. The Guys From ‘Government Sachs’ By JULIE CRESWELL and BEN WHITE

http://www.nytimes.com/2008/10/19/business/19gold.html?_r=1&ref=business&oref=slogin

THIS summer, when the Treasury secretary, Henry M. Paulson Jr., sought help navigating the Wall Street meltdown, he turned to his old firm, Goldman Sachs, snagging a handful of former bankers and other experts in corporate restructurings...In September, after the government bailed out the American International Group, the faltering insurance giant, for $85 billion, Mr. Paulson helped select a director from Goldman’s own board to lead A.I.G...And earlier this month, when Mr. Paulson needed someone to oversee the government’s proposed $700 billion bailout fund, he again recruited someone with a Goldman pedigree, giving the post to a 35-year-old former investment banker who, before coming to the Treasury Department, had little background in housing finance.

Indeed, Goldman’s presence in the department and around the federal response to the financial crisis is so ubiquitous that other bankers and competitors have given the star-studded firm a new nickname: Government Sachs.

The power and influence that Goldman wields at the nexus of politics and finance is no accident. Long regarded as the savviest and most admired firm among the ranks — now decimated — of Wall Street investment banks, it has a history and culture of encouraging its partners to take leadership roles in public service. It is a widely held view within the bank that no matter how much money you pile up, you are not a true Goldman star until you make your mark in the political sphere. While Goldman sees this as little more than giving back to the financial world, outside executives and analysts wonder about potential conflicts of interest presented by the firm’s unique perch.

They note that decisions that Mr. Paulson and other Goldman alumni make at Treasury directly affect the firm’s own fortunes. They also question why Goldman, which with other firms may have helped fuel the financial crisis through the use of exotic securities, has such a strong hand in trying to resolve the problem. The very scale of the financial calamity and the historic government response to it have spawned a host of other questions about Goldman’s role.

Analysts wonder why Mr. Paulson hasn’t hired more individuals from other banks to limit the appearance that the Treasury Department has become a de facto Goldman division. Others ask whose interests Mr. Paulson and his coterie of former Goldman executives have in mind: those overseeing tottering financial services firms, or average homeowners squeezed by the crisis?

Still others question whether Goldman alumni leading the federal bailout have the breadth and depth of experience needed to tackle financial problems of such complexity — and whether Mr. Paulson has cast his net widely enough to ensure that innovative responses are pursued.

“He’s brought on people who have the same life experiences and ideologies as he does,” said William K. Black, an associate professor of law and economics at the University of Missouri and counsel to the Federal Home Loan Bank Board during the savings and loan crisis of the 1980s. “These people were trained by Paulson, evaluated by Paulson so their mind-set is not just shaped in generalized group think — it’s specific Paulson group think.”
................

MR. PAULSON himself landed atop Treasury because of a Goldman tie. Joshua B. Bolten, a former Goldman executive and President Bush’s chief of staff, helped recruit him to the post in 2006.

Some analysts say that given the pressures Mr. Paulson faced creating a SWAT team to address the financial crisis, it was only natural for him to turn to his former firm for a capable battery.

And if there is one thing Goldman has, it is an imposing army of top-of-their-class, up-before-dawn über-achievers. The most prominent former Goldman banker now working for Mr. Paulson at Treasury is also perhaps the most unlikely.

Neel T. Kashkari arrived in Washington in 2006 after spending two years as a low-level technology investment banker for Goldman in San Francisco, where he advised start-up computer security companies. Before joining Goldman, Mr. Kashkari, who has two engineering degrees in addition to an M.B.A. from the Wharton School of the University of Pennsylvania, worked on satellite projects for TRW, the space company that now belongs to Northrop Grumman.

He was originally appointed to oversee a $700 billion fund that Mr. Paulson orchestrated to buy toxic and complex bank assets, but the role evolved as his boss decided to invest taxpayer money directly in troubled financial institutions.

Mr. Kashkari, who met Mr. Paulson only briefly before going to the Treasury Department, is also in charge of selecting the staff to run the bailout program. One of his early picks was Reuben Jeffrey, a former Goldman executive, to serve as interim chief investment officer.

Mr. Kashkari is considered highly intelligent and talented. He has also been Mr. Paulson’s right-hand man — and constant public shadow — during the financial crisis.

He played a main role in the emergency sale of Bear Stearns to JPMorgan Chase in March, sitting in a Park Avenue conference room as details of the acquisition were hammered out. He often exited the room to funnel information to Mr. Paulson about the progress.

Despite Mr. Kashkari’s talents in deal-making, there are widespread questions about whether he has the experience or expertise to manage such a project.

“Mr. Kashkari may be the most brilliant, talented person in the United States, but the optics of putting a 35-year-old Paulson protégé in charge of what, at least at one point, was supposed to be the most important part of the recovery effort are just very damaging,” said Michael Greenberger, a University of Maryland law professor and a former senior official with the Commodity Futures Trading Commission.

“The American people are fed up with Wall Street, and there are plenty of people around who could have been brought in here to offer broader judgment on these problems,” Mr. Greenberger added. “All wisdom about financial matters does not reside on Wall Street.”

Mr. Kashkari won’t directly manage the bailout fund. More than 200 firms submitted bids to oversee pieces of the program, and Treasury has winnowed the list to fewer than 10 and could announce the results as early as this week. Goldman submitted a bid but offered to provide its services gratis.

While Mr. Kashkari is playing a prominent public role, other Goldman alumni dominate Mr. Paulson’s inner sanctum.


.............
The A-team includes Dan Jester, a former strategic officer for Goldman who has been involved in most of Treasury’s recent initiatives, especially the government takeover of the mortgage giants Fannie Mae and Freddie Mac. Mr. Jester has also been central to the effort to inject capital into banks, a list that includes Goldman.

Another central player is Steve Shafran, who grew close to Mr. Paulson in the 1990s while working in Goldman’s private equity business in Asia. Initially focused on student loan problems, Mr. Shafran quickly became involved in Treasury’s initiative to guarantee money market funds, among other things.

Mr. Shafran, who retired from Goldman in 2000, had settled with his family in Ketchum, Idaho, where he joined the city council. Baird Gourlay, the council president, said he had spoken a couple of times with Mr. Shafran since he returned to Washington last year.

“He was initially working on the student loan part of the problem,” Mr. Gourlay said. “But as things started falling apart, he said Paulson was relying on him more and more.”

The Treasury Department said Mr. Shafran and the other former Goldman executives were unavailable for comment.

Other prominent former Goldman executives now at Treasury include Kendrick R. Wilson III, a seasoned adviser to chief executives of the nation’s biggest banks. Mr. Wilson, an unpaid adviser, mainly spends his time working his ample contact list of bank chiefs to apprise them of possible Treasury plans and gauge reaction.

Another Goldman veteran, Edward C. Forst, served briefly as an adviser to Mr. Paulson on setting up the bailout fund but has since left to return to his post as executive vice president of Harvard. Robert K. Steel, a former vice chairman at Goldman, was tapped to look at ways to shore up Fannie Mae and Freddie Mac. Mr. Steel left Treasury to become chief executive of Wachovia this summer before the government took over the entities.

LONG LIST OF KEY PLAYERS IN THE GOVERNMENT, WHERE THEY COME FROM AND WHAT THEY DO--SEE LINK!

Ultimately, analysts say, the actions of Mr. Paulson and his alumni club may come under more study.

“I suspect the conduct of Goldman Sachs and other bankers in the rescue will be a background theme, if not a highlighted theme, as Congress decides how much regulation, how much control and frankly, how punitive to be with respect to the financial services industry,” said Mr. Langevoort at Georgetown. “The settling up is going to come in Congress next spring.”

[Demeter]

50. More Bailout Obscenity

http://econospeak.blogspot.com/2008/10/more-bailout-obscenity.html


As if the bailout were not were not bad enough, the Wall Street Journal reports that the Treasury Department is, in effect, rewriting the tax code to give away what will easily be tens of billions of dollars.

On the opposite page, the paper reports that the Fannie and Freddie bailout is likely to cost the government considerably more than expected because of court suits charging, probably correctly, that management misled investors.

One can safely as that more will be discovered later.


Drucker, Jesse. 2008. "Obscure Tax Breaks Increase Cost of Financial Rescue." Wall Street Journal (10 October).

http://online.wsj.com/article/SB122428410507346351.html?mod=todays_us_page_one

Saha-Bubna, Aparajita. 2008. "Fannie Suit Vexes Regulator, May Pay Shareholders." Wall Street Journal (10 October).

http://online.wsj.com/article/SB122428804156146581.html?mod=todays_us_page_one


The $700 billion financial rescue package approved by Congress to shore up banks also carries a parallel bailout of the financial sector and other industries through a series of obscure tax breaks.

Operating mostly under the radar screen, Congress, the Treasury Department and the Internal Revenue Service have been rolling back various provisions of the tax code to help out industries and investors caught up in the turmoil.

MASSIVE AMOUNT OF SPECIFICS FOLLOWS--WE'VE BEEN HAD, FOLKS!

[snot]

51. it dam' well better (the settling up, come this spring). but where have i heard this before . . .

election irregularities, perhaps, among other things? which you'd THINK the Dems should consider worthwhile . . .

[Demeter]

53. Who is Henry Paulson? By Tom Eley

http://www.wsws.org/articles/2008/sep2008/paul-s23.shtml

The plan to rescue the US financial industry arrogates virtually unlimited money and power over the financial affairs of the state to the office of Treasury Secretary Henry Paulson. Paulson is a figure with a long history of intimate connections to the political and financial elite.

In 1970, fresh from the Masters program of the Harvard Business School, Paulson entered the Nixon administration, working first as staff assistant to the assistant secretary of defense. In 1972-73, Paulson worked as office assistant to John Erlichman, assistant to the president for domestic affairs. Erlichman was one of the key figures involved in organizing President Richard Nixon’s notorious “plumbers” unit that carried out illegal covert operations against the president’s political opponents, including espionage, blackmail, and revenge. Ehlichman resigned in 1973, and in 1975 he was convicted of obstruction of justice, perjury, and conspiracy, and was imprisoned for 18 months.

Utilizing his connections, Paulson went to work for Goldman Sachs in 1974. In a 2007 feature, the British newspaper the Guardian wrote, “Not only was he well connected enough to get the job , but well connected enough to resign in the thick of the Watergate scandal without ever getting caught up in the fallout. He went straight to Goldman back home in Illinois.”

Paulson rose through the ranks of Goldman Sachs, becoming a partner in 1982, co-head of investment banking in 1990, chief operating officer in 1994. In 1998 he forced out his co-chairman Jon Corzine “in what amounted to a coup,” according to New York Times economics correspondent Floyd Norris, and took over the post of CEO.

Goldman Sachs is perhaps the single best-connected Wall Street firm. Its executives routinely go in and out of top government posts. Corzine went on to become US senator from New Jersey and is now the state’s governor. Corzine’s predecessor, Stephen Friedman, served in the Bush administration as assistant to the president for economic policy and as chairman of the National Economic Council (NEC). Friedman’s predecessor as Goldman Sachs CEO, Robert Rubin, served as chairman of the NEC and later treasury secretary under Bill Clinton.

Agence France Press, in a 2006 article on Paulson’s appointment, “Has Goldman Sachs Taken Over the Bush Administration?” noted that, in addition to Paulson, “he president’s chief of staff, Josh Bolten, and the chairman of the Commodity Futures Trading Commission, Jeffery Reuben, are Goldman alumni.”

“But the flow goes both ways,” the article continued, “Goldman recently hired Robert Zoellick, who stepped down as the US deputy secretary of state, and Faryar Shirzad, who worked as one of Bush’s national security advisors.”

Prior to being selected as treasury secretary, Paulson was a major individual campaign contributor to Republican candidates, giving over $336,000 of his own money between 1998 and 2006.

Since taking office, Paulson has overseen the destruction of three of Goldman Sachs’ rivals. In March, Paulson helped arrange the fire sale of Bear Stearns to JPMorgan Chase. Then, a little more than a week ago, he allowed Lehman Brothers to collapse, while simultaneously organizing the absorption of Merrill Lynch by Bank of America. This left only Goldman Sachs and Morgan Stanley as major investment banks, both of which were converted on Sunday into bank holding companies, a move that effectively ended the existence of the investment bank as a distinct economic form.

In the months leading up to his proposed $700 billion bailout of the financial industry, Paulson had already used his office to dole out hundreds of billions of dollars. After his July 2008 proposal for $70 billion to resolve the insolvency of Fannie Mae and Freddie Mac failed, Paulson organized the government takeover of the two mortgage-lending giants for an immediate $200 billion price tag, while making the government potentially liable for hundreds of billions more in bad debt. He then organized a federal purchase of an 80 percent stake in the giant insurer American International Group (AIG) at a cost of $85 billion.

These bailouts have been designed to prevent a chain reaction collapse of the world economy, but more importantly they aimed to insulate and even reward the wealthy shareholders, like Paulson, primarily responsible for the financial collapse.

Paulson bears a considerable amount of personal responsibility for the crisis.

Paulson, according to a celebratory 2006 BusinessWeek article entitled “Mr. Risk Goes to Washington,” was “one of the key architects of a more daring Wall Street, where securities firms are taking greater and greater chances in their pursuit of profits.” Under Paulson’s watch, that meant “taking on more debt: $100 billion in long-term debt in 2005, compared with about $20 billion in 1999. It means placing big bets on all sorts of exotic derivatives and other securities.”

According to the International Herald Tribune, Paulson “was one of the first Wall Street leaders to recognize how drastically investment banks could enhance their profitability by betting with their own capital instead of acting as mere intermediaries.” Paulson “stubbornly assert Goldman’s right to invest in, advise on and finance deals, regardless of potential conflicts.”

Paulson then handsomely benefited from the speculative boom. This wealth was based on financial manipulation and did nothing to create real value in the economy. On the contrary, the extraordinary enrichment of individuals like Paulson was the corollary to the dismantling of the real economy, the bankrupting of the government, and the impoverishment of masses the world over.

Paulson was compensated to the tune of $30 million in 2004 and took home $37 million in 2005. In his career at Goldman Sachs he built up a personal net worth of over $700 million, according to estimates.

After Paulson’s ascension to the treasury, his colleagues at Goldman Sachs carried on the bonanza. At the end of 2006, Paulson’s successor Lloyd Blankfein was handed over a $53.4 million year-end bonus, while 11 other Goldman Sachs executives raked in $150 million in year-end bonuses combined. That year, the top investment firms Goldman Sacks, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns handed out $36 billion in bonuses. At the end of 2007, the executives of the same firms, excepting Merrill, were handed another $30 billion.

[Demeter]

40. Making "Who Could Have Known?" Unacceptable: The Key to Popping Bubbles

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=10&year=2008&base_name=making_who_could_have_known_un

During this financial crisis, at the top levels of all the major banks, where people get paid tens of millions of dollars a year, the most common refrain is "who could have known?" Okay, I don't know that anyone is saying this, but I do know that these people are not being fired en masse.

How could people who put their banks at the edge of bankruptcy, or beyond, not get fired. If this doesn't get someone fired what would? Are these people paid tens of millions of dollars to destroy tens of billions of shareholder value and put thousands of workers out of their jobs?

The reason that they don't get fired is the "who could have known?" ethic. The collapse of the housing bubble and the related fallout are treated as unpredictable events, as opposed to entirely preventable mistakes.

The reason why this is important is because the Wall Street Journal writes that that collapsing bubbles would require raising interest rates, which would in turn slow the economy and throw people out of work.

That is certainly unpleasant outcome, but let's try an alternative route. Suppose that in 2002, instead of testifying that there is no housing bubble, Alan Greenspan tells Congress that he is very worried about the unprecedented run-up in house prices. Suppose that he tells Congress that this run-up in prices cannot be explain by any changes in the fundamentals. Suppose further that he says that when this bubble bursts it is likely to lead to serious damage to the banking system because default rates will soar, leading to large losses.

Suppose that he repeated these comments again and again with supporting evidence. Suppose that Greenspan had the Fed staff grinding out papers documenting the evidence that there was a housing bubble and projecting the damage to various banks and other financial institutions from its collapse.

Will everyone panic and reverse their irrational exuberance? That would be my bet. But suppose that they don't and the housing bubble just keeps expanding. Then we arrive at this same juncture with a collapsed housing bubble and devastated financial system, in spite of the Fed's best efforts.

Does anyone think that the execs at Goldman Sachs, Citigroup, Merrill Lynch and the rest could say "who could have known?" to their shareholders, who just saw most of the value of their stock disappear? My guess is that all of these execs would be out of their jobs and facing lawsuits for neglecting their responsibilities to their shareholders.

The Fed would have taken a situation where the risks are now entirely one-sided (the Wall Street crew face no risk from going with the flow) and made them more symmetric. The Wall Street executives would then have to analyze the evidence and make their own judgment. In other words, they would have to work for a living.

I know that the Wall Street gang would consider this the height of injustice, but hey, we all have to sacrifice.

--Dean Baker

[machI]

43. I expect not one, but several, 'insider trading' scandals to come from this

When people in the Government are giving away bucket loads of taxpayer dollars, their friends will be close by to catch a ride on the gravy train.

As corrupt as the current crop of Republicans are, it would not surprise me to hear of another Duke Cunningham getting caught funneling money to his industry backers.

[Demeter]

45. No, It Will Be Paulson Who Hangs

and all his buddies in industry will help him swing.

[Ghost Dog]

46. Ok. All's (relatively) quiet on the western front, then.

Thanks guys for the info, and greetings from here in a rowdy café in the city of Cordoba.

Curiously, having driven these last three days on ancient roads through old towns from Catalonia down to Andalusia, I can comment that, North of here, folks seem to be depressed, expecting the worst. But here in Andalusia, suddenly, all is bright, sunny, full of optimism and joy!

Staying cool... Ciao.

[Demeter]

48. I Envy You!

I have fond memories of Spain....

[Demeter]

52. An Emergency Bailout Plan That Americans Will Love By Jonathan Tasini

http://www.workinglife.org/blogs/view_post.php?content_id=9646


30/09/08 "Working Life" -- There is a great economic emergency looming in our country. But, it seems to me that we—or at least our elected leaders—have only looked at one side of the crisis, that of the housing bubble-inspired financial credit crunch. By doing so, we’ve missed the bigger picture and the solutions needed. So, here is one person’s take on the Emergency Economic Bailout package that will heal the economy.
As quick background, let’s consider this:
24.5 percent of all Americans earn poverty wages ($9.60 or less)

10 percent of all Americans—15 million Americans—earn $6.79 or less

33.3 percent of African American works and 39.3 of Hispanic workers earn poverty wages.

The share of our entire national income hoarded by the top one percent is, as of 2005, 21.8 percent. The last time it was that high was in 1928 (23.9)—just as the Great Depression was about to hit with its full fury.

We accept poverty as a fact of life in this country—partly because workers have not gotten the fair share of their hard work over the past three decades (in Republican and Democratic Administrations). If productivity and wages had kept their historic link (meaning, as workers were more productive, that translated into higher paychecks), the MINIMUM WAGE in the country would be $19.12. Yes, $19.12.

At the recent new minimum wage of $6.55 an hour, if you worked every single day, 40 hours a week, with no vacations, no holidays, no health care and no pension, you would earn the grand sum of $13.624. The POVERTY LEVEL for a family of three is $17,600.

47 million Americans have no health care and tens of millions more have inadequate or costly health care that can bankrupt them.

Since 1978, the number of defined-benefit plans—that means, pensions that give retirees a promised monthly amount—plummeted from 128,041 plans covering some 41 percent of private-sector workers to only 26,000 today. It’s a Dog Food Retirement future for millions of people.

All those numbers above do relate to the more narrow crisis in a very specific way: without being able to rely on their paychecks to survive, a lot of people got sucked into the housing bubble mania as an economic coping mechanism. Home equity credit lines substituted for decent pay, retirement and affordable, quality health care. And we know the rest.

So, here is what I think is a more comprehensive economic rescue plan, all of which should be attached to any new "bailout" proposal:

1. Immediately raise the minimum wage to $10 an hour, with additional increases over the fives years following raising the minimum wage to $20, which will begin to return some justice and return to workers’ sweat of the brow.

2. Pass HR676, Medicare for All legislation to (Rep. John Conyers is the main sponsor of the bill). Aside from the moral issue of covering every single American and making health care a right not a privilege, it would save the economy hundreds of billions of dollars and immediately make American-based companies competitive around the world with companies operating from countries with national health care.

3. Create a national guaranteed universal pension plan, backed by the government, so people can be sure that their retirement years will not be threatened by the wild swings of Wall Street.

4. Repeal the Bush tax cuts now and raise the top two income tax rates to 40% and 45%, add a new 50% income tax bracket for those with taxable income over $1 million, and tax investment income as ordinary income. Frankly, that is pretty modest and should only be the first step in rediscovering a progressive taxation system—but it will still raise several hundred billion dollars this year to finance a variety of public investments. The very people who have enriched themselves in the deregulation orgy of the past couple of decades should pay to repair the country.

5. A couple of years ago, when I was involved in a little political race of my own, I latched on to this idea: a tiny transactions tax on stock sales. It would be so miniscule that the small investors would never feel it, say, 0.25 percent of the sale. It would raise about $150 billion. Wall Street benefits from government protections, not the least of which is a regulatory system (oh, there I go using that "regulation" word, which now seems to be back in vogue) that prevents, in theory, fraud and crazy speculation (ok, so that doesn’t always work out well). Plus, such a tax might also exercise some restraint, perhaps modest, on the wild and crazy big trades made on rumors and the thirst for a quick buck. But, the main point is shared responsibility. You live in this society and, so, you make a contribution. And that contribution is relatively modest and relatively painless.

6. The Employee Free Choice Act. There is no better middle-class jobs program than unionization. Period.

The point of these suggestions is not just moral but common, economic sense. The way to avoid, to some extent, speculation and crazy amounts of debt is to take away the victims that are preyed on by banks, unscrupulous investors and free-market pirates. If a person has a decent income, real health care, a secure retirement and a government that can invest in the country, he or she is less likely to feel the need to latch on to risky investments and get-rich-quick schemes (also known as day-trading).

My guess is the American people would feel pretty good about a deal that included the above. To those, I’d add two specific pieces about the current mess:

First, any investment of money in banks is done on a debt-for-equity swap. No bailouts. As Nouriel Roubini and my friend Dean Baker have both pointed out, there is no justification or economic logic to bailout banks as a solution to the crisis we find ourselves in. Roubini writes, in arguing that the buying up bad assets is the exception, not the rule, and:

So this rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the financial firms (not just banks but also other non bank financial institutions); with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession. Instead, the restoration of the financial health of distressed financial firms could have been achieved with a cheaper and better use of public money.

Second, as I’ve argued, we should own Freddie Mac and Fannie Mae. We need those two huge institutions to be boring and predictable, not participating in crazy leveraging and speculation. The only we guarantee that is by installing publicly accountable board members who will run the companies for the benefit of homeowners, not profiteers.

[Demeter]

54. The Free Market Preachers Have Long Practised State Welfare For The Rich

http://www.guardian.co.uk/commentisfree/2008/sep/30/marketturmoil.subprimecrisis


Bailing out banks seems unprecedented, but the US government's form in subsidising big business is well established

By George Monbiot

30/09/08 "The Guardian" -- - According to Senator Jim Bunning, the proposal to purchase $700bn of dodgy debt by the US government was "financial socialism, it is un-American". The economics professor Nouriel Roubini called George Bush, Henry Paulson and Ben Bernanke "a troika of Bolsheviks who turned the USA into the United Socialist State Republic of America". Bill Perkins, the venture capitalist who took out an ad in the New York Times attacking the plan, called it "trickle-down communism".

They are wrong. Any subsidies eventually given to the monster banks of Wall Street will be as American as apple pie and obesity. The sums demanded may be unprecedented, but there is nothing new about the principle: corporate welfare is a consistent feature of advanced capitalism. Only one thing has changed: Congress has been forced to confront its contradictions.

One of the best studies of corporate welfare in the US is published by my old enemies at the Cato Institute. Its report, by Stephen Slivinski, estimates that in 2006 the federal government spent $92bn subsidising business. Much of it went to major corporations such as Boeing, IBM and General Electric.

The biggest money crop - $21bn - is harvested by Big Farmer. Slivinski shows that the richest 10% of subsidised farmers took 66% of the payouts. Every few years, Congress or the administration promises to stop this swindle, then hands even more state money to agribusiness. The farm bill passed by Congress in May guarantees farmers a minimum of 90% of the income they've received over the past two years, which happen to be among the most profitable they've ever had. The middlemen do even better, especially the companies spreading starvation by turning maize into ethanol, which are guzzling billions of dollars' worth of tax credits.

Slivinski shows how the federal government's Advanced Technology Program, which was supposed to support the development of technologies that are "pre-competitive" or "high risk", has instead been captured by big businesses flogging proven products. Since 1991, companies such as IBM, General Electric, Dow Chemical, Caterpillar, Ford, DuPont, General Motors, Chevron and Monsanto have extracted hundreds of millions from this programme. Big business is also underwritten by the Export-Import Bank: in 2006, for example, Boeing alone received $4.5bn in loan guarantees.

The government runs something called the Foreign Military Financing programme, which gives money to other countries to purchase weaponry from US corporations. It doles out grants to airports for building runways and to fishing companies to help them wipe out endangered stocks.

But the Cato Institute's report has exposed only part of the corporate welfare scandal. A new paper by the US Institute for Policy Studies shows that, through a series of cunning tax and accounting loopholes, the US spends $20bn a year subsidising executive pay. By disguising their professional fees as capital gains rather than income, for example, the managers of hedge funds and private equity companies pay lower rates of tax than the people who clean their offices. A year ago, the House of Representatives tried to close this loophole, but the bill was blocked in the Senate after a lobbying campaign by some of the richest men in America.

Another report, by a group called Good Jobs First, reveals that Wal-Mart has received at least $1bn of public money. Over 90% of its distribution centres and many of its retail outlets have been subsidised by county and local governments. They give the chain free land, they pay for the roads, water and sewerage required to make that land usable, and they grant it property tax breaks and subsidies (called tax increment financing) originally intended to regenerate depressed communities. Sometimes state governments give the firm straight cash as well: in Virginia, for example, Wal-Mart's distribution centres receive handouts from the Governor's Opportunity Fund.

Corporate welfare is arguably the core business of some government departments. Many of the Pentagon's programmes deliver benefits only to its contractors. Ballistic missile defence, for example, which has no obvious strategic purpose and is unlikely ever to work, has already cost the US between $120bn and $150bn. The US is unique among major donors in insisting that the food it offers in aid is produced on its own soil, rather than in the regions it is meant to be helping. USAid used to boast on its website that "the principal beneficiary of America's foreign assistance programs has always been the United States. Close to 80% of the USAid's contracts and grants go directly to American firms." There is not and has never been a free market in the US.

Why not? Because the congressmen and women now railing against financial socialism depend for their re-election on the companies they subsidise. The legal bribes paid by these businesses deliver two short-term benefits for them. The first is that they prevent proper regulation, allowing them to make spectacular profits and to generate disasters of the kind Congress is now confronting. The second is that public money that should be used to help the poorest is instead diverted into the pockets of the rich.

A report published last week by the advocacy group Common Cause shows how bankers and brokers stopped legislators banning unsustainable lending. Over the past financial year, the big banks spent $49m on lobbying and $7m in direct campaign contributions. Fannie Mae and Freddie Mac spent $180m in lobbying and campaign finance over the past eight years. Much of this was thrown at members of the House financial services committee and the Senate banking committee.

Whenever congressmen tried to rein in the banks and mortgage lenders they were blocked by the banks' money. Dick Durbin's 2005 amendment seeking to stop predatory mortgage lending, for example, was defeated in the Senate by 58 to 40. The former representative Jim Leach proposed re-regulating Fannie Mae and Freddie Mac. Their lobbyists, he recalls, managed in "less than 48 hours to orchestrate both parties' leadership" to crush his amendments.

The money these firms spend buys the socialisation of financial risk. The $700bn the government was looking for was just one of the public costs of its repeated failure to regulate. Even now the lobbying power of the banks has been making itself felt: on Saturday the Democrats watered down their demand that the money earned by executives of companies rescued by the government be capped. Campaign finance is the best investment a corporation can make. You give a million dollars to the right man and reap a billion dollars' worth of state protection, tax breaks and subsidies. When the same thing happens in Africa we call it corruption.

European governments are no better. The free market economics they proclaim are a con: they intervene repeatedly on behalf of the rich, while leaving everyone else to fend for themselves. Just as in the US, the bosses of farm companies, oil drillers, supermarkets and banks capture the funds extracted by government from the pockets of people much poorer than themselves. Taxpayers everywhere should be asking the same question: why the hell should we be supporting them?

[Demeter]

55. 'Five UK banks may qualify for US bailout package'

http://www.financialexpress.com/news/five-uk-banks-may-qualify-for-us-bailout-package/366287/#

London, September 26:UK's five leading banks own around 95.3 billion pounds of distressed assets that may qualify for the US government's proposed USD 700-billion bailout package, a media report said.

"Britain's five leading high street banks have as much as 95.3 billion pounds (USD 175 billion) of distressed assets on their books that may qualify for the American bailout scheme," The Times reported.

If the British banks tap into the bailout package to the maximum, they could secure one quarter of the USD 700-billion being made available, the The Times reported.

"Under the terms of an outline agreement that appeared to have been reached by US policymakers last night, Britain's lenders will be able to use the facility," the report added.

The securities together held by the five British lenders can be transfered to a federally-backed Treasury fund.

The Times said under the proposed terms of bailout package, non-US financial institutions must have significant operations in America to qualify.

Attributing to analysts' estimates and the banks' own recent filings, the report said HSBC had as much as 45 billion pounds in structured mortgage debt and other soured assets sitting on its balance sheet that it might look to exchange with the Fed under the plan.

"Next are Barclays, with 17.4 billion pounds, Royal Bank of Scotland with 16.2 billion pounds and HBOS with 13.3 billion pounds," the report said quoting analysts.

Lloyds TSB, which agreed to buy HBOS for 12.2 billion pounds last week, stands some way behind in its exposure to the troubled mortgage securities, with assets of about 3.4 billion pounds, the report added.

[Demeter]

56. Bailout Could Deepen Crisis, CBO Chief Says; Asset Sales May Lead to Write-Downs, Insolvencies, Orsz

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/24/AR2008092402799.html?nav=hcmodule



By Frank Ahrens
Washington Post Staff Writer
Thursday, September 25, 2008; D04



The director of the Congressional Budget Office said yesterday that the proposed Wall Street bailout could actually worsen the current financial crisis.

During testimony before the House Budget Committee, Peter R. Orszag -- Congress's top bookkeeper -- said the bailout could expose the way companies are stowing toxic assets on their books, leading to greater problems.

"Ironically, the intervention could even trigger additional failures of large institutions, because some institutions may be carrying troubled assets on their books at inflated values," Orszag said in his testimony. "Establishing clearer prices might reveal those institutions to be insolvent."

...But Orszag yesterday questioned the wisdom of the plan itself, testifying that "it therefore remains uncertain whether the program will be sufficient to restore trust."

In yesterday's interview, Orszag said, "The key question is: What are we buying and what are we paying for it?"

Orszag offered alternatives, such as equity injections into particularly troubled companies, but allowed that those could lead to further problems, as well. In the end, he said, Congress must pass some sort of relief, if only because Wall Street is expecting it.

"If we did nothing, there is a significant risk of another collapse of confidence in the financial markets," he said....

[snot]

60. this needs to be its own O.P., pls!

[Demeter]

65. If You Like, Go Right Ahead!

[Demeter]

57. Bailout Plan: Show Us the Money By William Greider

http://www.thenation.com/doc/20081006/greider3

September 24, 2008


Taxpayers should wake up the politicians and ask them to tell Wall Street: "We want the same deal Warren Buffett got." The Omaha billionaire announced he is playing White Knight to Goldman Sachs by investing $5 billion in the endangered investment house. What a big-hearted guy. Buffett is an old-fashioned capitalist who invests in companies for the long term and I am a big admirer. But Warren Buffett did not get to be a billionaire by committing public-spirited acts of charity. He plays to win.

MULTIPLE LINKS TO SUPPORTING ARTICLES IN ORIGINAL

So his deal with Goldman Sachs is carefully wired to produce gorgeous returns for Buffett's Berkshire Hathaway. Upfront, he gets a 10 percent ownership stake in preferential shares that will pay a 10 percent dividend--even if Goldman's stock price keeps falling. But Buffett also gets the right to buy $5 billion in common shares at below the market price. So if Goldman flourishes in these hard times, Buffett will win big as its stock price soars.

To sweeten his chances, the Omaha sage quickly announced that he endorses the $700 billion bailout plan proposed by Treasury Secretary Paulson. Let's follow the bouncing ball. Buffett puts some of his capital at risk on terms that are smartly protected from loss. Then Buffett urges the taxpayers to put their money on the line too. Only the taxpayers don't have any deal. They are the naked investors in this drama, asked to put up many billions to rescue Wall Street firms with nothing more than a vague promise it will save the Republic. I am reminded of the oldest rule in the financial business: "Get it in writing."

Warren Buffett's intervention provides a clarifying moment because it demonstrates what's wrong with the bipartisan bailout Congress is preparing to authorize. There's nothing illegitimate in what Buffett accomplished. The overlapping terms and contingencies he secured for his capital are standard practice in Wall Street deal-making. Investment bankers work out the fine print and put it in enforceable contracts or the deal doesn't happen.

Hank Paulson was a star in that world. When he left as chief executive to become Treasury Secretary in 2006, Goldman awarded him $110 million in cash to cover remaining stock options and restricted stock, in addition to $51 million to repurchase family shares. These payments were on top of the approximately $500 million in Goldman shares Paulson sold when he joined the government.

Doing hard-nosed deals in the Buffett style is essentially what the federal government should be doing now--bank by bank--as it intervenes to rescue the financial system from ruin. In our situation, the public treasury is the White Knight because private capital is afraid to play. The federal government has all the leverage it needs to demand very stern terms. That includes demanding an equivalent equity stake in banks or brokerages it assists, but also the power to impose explicit commandments and prohibitions on how these rescued firms must behave. The threat that banks will refuse to play is a meaningless whine from the banking industry. If bankers find a better deal from private lenders, they should take it. Otherwise, they are down the tubes.

The underlying power relationship in this crisis has been artfully obscured by the bailout sponsors because they decline to explain clearly what the bailout really is intended to accomplish. First, they said it was to restore calm in markets. Then they said it was the rotten assets centered in mortgage securities. But the problem is more accurately described as the great deflation of Wall Street's illusions--inflated prices, profits, deals, commissions and bonuses. You name it, they ran it up to stratospheric levels. Now the dream is dying and values are falling, but have not yet hit bottom.

To put it more concretely, the banks and investment houses have lost massive amounts of capital--a hole that is real, not psychological. Maybe $1 trillion, possibly twice that. We can't say exactly, because the banks have still not come clean and because assets in bank portfolios continue to lose value as housing prices continue to deflate.

The great capital losses mean Wall Street is sure to get smaller--a lot smaller--with fewer firms, less leveraged deals based on inadequate capital and a general retreat from its domineering role in economic life. Personally, I believe a smaller Wall Street will be good for the country, part of restoring balance to the damaged economy.

In any case, it is folly for Washington to imagine that it can--or should--simply replenish Wall Street's great loss. That essentially is what Paulson's blanket bailout attempts to do--restore conditions to "normal" by buying up the bad assets from banks at inflated prices. In other words, supply the missing capital that private lenders won't provide. Good luck with that. "Normal" is not in the cards. Trying to accomplish this, given present realities is not in the country's interest. It also resembles King Canute trying to command the tides.

The real goal for government intervention should be to manage Wall Street's inescapble downward adjustments in ways as peaceable as possible. Stabilize the shrinking financial system so it will keep the the real economy going, that is, insure that credit and capital flows continue, while Wall Street is gradually cut down to normal size. There is real pain in that for everyone, but the objective is concrete and manageable.

Washington would exercise an activist supervisory role and offer deals in exchange for cooperative, compliant behavior. Bank regulatory agencies, including the Federal Reserve, already do this with troubled banks; now they have to step up with a more forceful hand. Banking watchdogs estimate at least 100 (maybe 200) banks are already doomed to fail. But another 1,000 banks are still solvent but on the edge. These can be managed to safe ground with tougher regulatory controls and some aid. Subsidiary financial markets need similar treatment and liquidity injections if they seize up.

At center stage are the big, bad players--the mega-banks and some others--who took the extreme risks and are now conveniently described as"too big to fail." If that's so, then one goal of government should be to make them get smaller, either through market forces or by lawful edict. The public likewise needs a new federal agency to manage the deal-making--something like the Reconstruction Finance Corporation during the New Deal--and determine which major banks can be cleaned up and stabilized, which ones cannot. The objective is not to save everyone--that is not what the nation needs--but to wind up with a broadly balanced financial system, chastened by new rules and ready to serve the rest of us, rather than eat us alive.

Only the federal government can do this. But I am suggesting government should mimic the hard-headed assumptions and practices that are commonplace in Wall Street. Don't take wishful promises in exchange for your money. Insist on hedges to protect the broad public interest. And get it in writing.

Maybe Warren Buffett and some other trustworthy capitalists would come to Washington during this emergency and show government officials how to make real deals. These are savvy people. Many are genuinely interested in helping the country get out of this mess. We could offer them a dollar a year.

Update: After I filed the above, the New York Times reported that Bill Gross, managing partner of Pimco, the giant bond investment house, is offering to serve as expert advisor to help Treasury sort through the rotten bank assets. "If the Treasury wanted to use our help, it would come, you know, free and clear," Gross said. Like Warren Buffett, Gross is a brilliant capitalist who plays to win. I happen to know him and I trust him. He has an enlightened understanding of global capitalism, not just financial markets and monetary economics but the deeper tides of history. In fact, Gross should be the next president's pick for chairman of the Federal Reserve. I don't know his politics, though I assume he is Republican.

[Demeter]

58. Trouble in Banktopia By Mike Whitney

http://www.informationclearinghouse.info/article20883.htm


27/09/08 "ICH" -- - The financial system is blowing up. Don't listen to the experts; just look at the numbers. Last week, according to Reuters, "U.S. banks borrowed a record amount from the Federal Reserve nearly $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression." The Fed opened the various "auction facilities" to create the appearance that insolvent banks were thriving businesses, but they are not. They're dead; their liabilities exceed their assets. Now the Fed is desperate because the hundreds of billions of dollars of mortgage-backed securities (MBS) in the banks vaults have bankrupt the entire system and the Fed's balance sheet is ballooning by the day. The market for MBS will not bounce back in the foreseeable future and the banks are unable to roll-over their short term debt. Game over. The Federal Reserve itself is in danger. So, it's on to Plan B; which is to dump all the toxic sludge on the taxpayer before he realizes that the whole system is cratering and his life is about to change forever. It's called the Paulson Plan, a $700 billion boondoggle which has already been disparaged by every economist of merit in the country.

From Reuters:

"Borrowings by primary dealers via the Primary Dealer Credit Facility, and through another facility created on Sunday for Goldman Sachs, Morgan Stanley, and Merrill Lynch, and their London-based subsidiaries, totaled $105.66 billion as of Wednesday, the Fed said."

See what I mean; they're all broke. The Fed's rotating loans are just a way to perpetuate the myth that the banks aren't flat-lining already. Bernanke has tied strings to the various body parts and jerks them every so often to make it look like they're alive. But the Wall Street model is broken and the bailout is pointless.

Last week, there was a digital run on the banks that most people never even heard about; a "real time" crash. An article in the New York Post by Michael Gray gave a blow by blow description of how events unfolded. Here's a clip from Gray's "Almost Armageddon":

"The market was 500 trades away from Armageddon on Thursday...Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level - a 22 percent decline! - while the clang of the opening bell was still echoing around the cavernous exchange floor. According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening. The total money-market capitalization was roughly $4 trillion that morning.

The panicked selling was directly linked to the seizing up of the credit markets - including a $52 billion constriction in commercial paper - and the rumors of additional money market funds "breaking the buck," or dropping below $1 net asset value."

The Fed's dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt." (New York Post)

Commercial paper is the lubricant that keeps the financial markets functioning. When confidence vanishes (because the stewards of the system in Washington are buffoons), investors withdraw their money, normal business operations become impossible, and the markets collapse. End of story. So, rather than restore the public's confidence by strong leadership and behavior designed to reassure investors; President Bush decided to give a major prime-time speech stating that if Paulson's emergency bailout package was not passed immediately, the nation's economy would vaporize into the ether. Go figure?


Last week, the commercial paper market, (much of which is backed by mortgage-backed securities) shrunk by a whopping $61. billion to $1.702 trillion, the lowest level since early 2006. So, Paulson's bailout will effectively underwrite CP as well as the whole alphabet soup of mortgage-backed derivatives for which there is currently no market. The US taxpayer is not only getting into the plummeting real estate market, he is also backstopping the entire financial system including defaulting car loan securities, waning student loan securities, flailing home equity loan securities and faltering credit card securities. The whole mountainous pile of horsecrap-debt is about to be stacked on the back of the maxed-out taxpayer and the ever-shriveling greenback. Paulson assures us that its a "good deal". Booyah, Hank!

PAULSON'S $700 BILLION BOONDOGGLE

How did Treasury Secretary Paulson figure out that recapitalizing the banking system would cost $700 billion? Or did he just estimate the amount of money that could be loaded on the back of the Treasury's flatbed truck when it sputters off to shower his buddies at G-Sax with freshly minted greenbacks? The point is, that Paulson's calculations were not assisted by any economists at all, and they cannot be trusted. It is a purely arbitrary, "back of the envelope" type figuring. According to Bloomberg: Swiss investor Marc Faber, known for a long track record of good calls, believes the damage may come to $5 trillion:

"Marc Faber, managing director of Marc Faber Ltd. in Hong Kong, said the U.S. government's rescue package for the financial system may require as much as $5 trillion, seven times the amount Treasury Secretary Henry Paulson has requested....

``The $700 billion is really nothing,'' Faber said in a television interview. ``The treasury is just giving out this figure when the end figure may be $5 trillion.''(Bloomberg News)

Most people who follow these matters would trust Faber's assessment way over Paulson's. In his latest blog entry, economist Nouriel Roubini said that "no professional economist was consulted by Congress or invited to present his/her views at the Congressional hearings on the Treasury rescue plan." Roubini added:

"The Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown."


Roubini is right on all counts. So far, more than a 190 prominent economists have urged Congress not to pass the $700 bailout bill. There is growing consensus that the so-called "rescue package" does not address the central economic issues and has the potential to make a bad situation even worse.


BANKER'S COUP?

Financial industry rep. Paulson is the ringleader in a banker's coup the results of which will decide America's economic and political future for years to come. The coup leaders have drained tens of billions of dollars of liquidity from the already-strained banking system to trigger a freeze in interbank lending and hasten a stock market crash. This, they believe, will force Congress to pass Paulson's $770 billion bailout package without further congressional resistance. It's blackmail.

As yet, no one knows whether the coup-backers will succeed and further consolidate their political power via a massive economic shock to the system, but their plan continues to move jauntily forward while the economy follows its inexorable slide to disaster.

The bailout has galvanized grassroots movements which have flooded congressional FAXs and phone lines. Callers are overwhelmingly opposed to any bailout for banks that are buckling under their own toxic mortgage-backed assets. One analyst said that the calls to Congress are 50 percent "No" and 50 percent "Hell, No". There is virtually no popular support for the bill.

From Bloomberg News: "Erik Brynjolfsson, of the Massachusetts Institute of Technology's Sloan School, said his main objection "is the breathtaking amount of unchecked discretion it gives to the Secretary of the Treasury. It is unprecedented in a modern democracy."

"I suspect that part of what we're seeing in the freezing up of lending markets is strategic behavior on the part of big financial players who stand to benefit from the bailout," said David K. Levine, an economist at Washington University in St. Louis, who studies liquidity constraints and game theory." (Mish's Global Economic Trend Analysis)

Brynjolfsson's suspicions are well-founded. "Market Ticker's" Karl Denninger confirms that the Fed has been draining the banking system of liquidity in order to blackmail Congress into passing the new legislation. Here's Denninger:

"The Effective Fed Funds rate has been trading 50 basis points or more below the 2% target for five straight days now, and for the last two days, it has traded 75 basis points under. The IRX is demanding an immediate rate cut. The Slosh has been intentionally drained by over $125 billion in the last week and lowering the water in the swamp exposed one dead body - Washington Mutual - which was immediately raided on a no-notice basis by JP Morgan. Not even WaMu's CEO knew about the raid until it was done....The Fed claims to be an "independent central bank." They are nothing of the kind; they are now acting as an arsonist. The Fed and Treasury have claimed this is a "liquidity crisis"; it is not. It is an insolvency crisis that The Fed, Treasury and the other regulatory organs of our government have intentionally allowed to occur."

Bingo. This is a banker's coup cooked up and facilitated by the deep-money guys who operate stealthily behind the political sideshow. The only time they emerge from their stinkholes is when they're flushed out by a crisis that threatens their continued dominance. Grassroots resistance, spearheaded by Internet bloggers (like Mish, Roubini and Denninger) are demonstrating that they can mobilize tens of thousands of "peasants with pitchforks" and be a factor in political decision making. It also helps to have elected officials, like Senator Richard Shelby, who stand firm on principle and don't faint at the first whiff of grapeshot (like his weak-kneed Democratic counterparts) Shelby has shouldered the full-weight of executive pressure which has descended on him like a Appalachian rockslide. As a result, there's still a slight chance that the bill will have to be shelved and the industry reps will have to go back to Square 1.

Market Ticker has provided charts from the Federal Reserve that prove that Bernanke has withdrawn $125 billion from the banking system in the last 4 days alone to create a crisis situation that will incite credit market mayhem and increase the liklihood of passing the bill. This is coercion of the worst kind. http://market-ticker.denninger.net/archives/2008/09/24.html

The country's economic predicament is steadily deteriorating. Orders for manufactured durable goods were off 4.5 percent last month while inventories continued to rise. Unemployment is soaring and the housing crash continues to accelerate. Credit Suisse now expects 10.3 million foreclosures (total) in the next few years. Numbers like that are not accidental, but part of a larger scheme to use monetary policy as a way to shift wealth from one class to another while degrading the nation's overall economic well-being. More alarming, the country's primary creditors are now staging a rebellion that is likely to cut off the flow of capital to US markets sending the dollar plummeting and triggering a deflationary credit collapse. This is from Reuters:

"Chinese regulators have asked domestic banks to stop lending to U.S. financial institutions in the interbank money markets to prevent possible losses during the financial crisis, the South China Morning Post reported Thursday. The China Banking Regulatory Commission's ban on interbank lending of all currencies applied to U.S. banks, but not to lenders from other countries, the report added."

Bloomberg News reports that Dallas Federal Reserve Bank President Richard Fisher has broken with tradition and lambasted the proposed bailout saying that it "would plunge the U.S. government deeper into a fiscal abyss."

From Bloomberg: "The plan by Treasury Secretary Henry Paulson to buy troubled assets from financial institutions would put 'one more straw on the back of the frightfully encumbered camel that is the federal government ledger,' Fisher said today in the text of a speech in New York. 'We are deeply submerged in a vast fiscal chasm.'...The seizures and convulsions we have experienced in the debt and equity markets have been the consequences of a sustained orgy of excess and reckless behavior, not a too-tight monetary policy," Fisher said to the New York University Money Marketeers Club." (Bloomberg)

Surely, the cure for hyperbolic "credit excesses and reckless behavior" cannot be "more of the same." In fact, Paulson's bailout does not even address the core issues which have been obscured by demagoguery and threats. The worthless assets must be written-down, insolvent banks must be allowed to go bust, and the crooks and criminals who engineered this financial blitz on the nation's coffers must be held to account.

The carnage from Greenspan's low interest rate, "easy money" binge is now visible everywhere. Inflated home and stock values are crashing as the gas continues to escape from the massive equity bubble. The FDIC will have to be recapitalized--perhaps, $500 billion--to account for the anticipated loss of deposits from failing banks caught in the cross-hairs of asset-deflation and steadily contracting credit. Recession is coming, but economic collapse can still be avoided if Paulson's misguided plan is abandoned and corrective action is taken to put the country on solid financial footing. Market Ticker lays out framework for a workable solution to the crisis, but they must be acted on swiftly to rebuild confidence that major systemic changes are underway:

1--Force all off-balance sheet "assets" back onto the balance sheet, and force the valuation models and identification of individual assets out of Level 3 and into 10Qs and 10Ks. Do it now. (Editor: In other words, no more Enron-type accounting mumbo-jumbo and no more allowing the banks assign their own "values" to dodgy assets)

2--Force all OTC derivatives onto a regulated exchange similar to that used by listed options in the equity markets. This permanently defuses the derivatives time bomb. Give market participants 90 days; any that are not listed in 90 days are declared void; let the participants sue each other if they can't prove capital adequacy.(Ed: If trading derivatives contracts can damage the "regulated" system, than that trading must take place under strict government regulations)

3--Force leverage by all institutions to no more than 12:1. The SEC intentionally dropped broker/dealer leverage limits in 2004; prior to that date 12:1 was the limit. Every firm that has failed had double or more the leverage of that former 12:1 limit. Enact this with a six month time limit and require 1/6th of the excess taken down monthly. (Ed: The collapse in the "structured finance" model is mainly due to too much leverage. For example, Fannie Mae and Freddie Mac had $80 of debt for every $1 dollar od capital reserves when they were taken into government conservatorship)

If there's going to be a bailout, let's get it right. Paulson's $700 billion bill does nothing to fix the deep structural problems in the financial markets; it merely pushes the day of reckoning a little further into the future while shifting the burden of payment for toxic assets onto the taxpayer. It's a real turkey. The entire system needs transformational change so that the activities of Wall Street mesh with the broader objectives of the society it's supposed to serve. Paulson's business-model is busted; it does no one any good to try to glue it back together.

[snot]

61. just wish i'd seen this when it was published.

[Demeter]

64. Sorry! I'm Still trying to Empty the Email Box from May's Computer Crash

I'm a bit behind....still, with a few weeks' (or months') perspective, it helps to sort out which things are of lasting improtance, interest, or mysteriously vanished into the black hole....

[DemReadingDU]

59. Debt Rattle: October 18th and October 19th

I've been away for the weekend, camping with two of my sisters and daughter, near Madison, Indiana (one of my childhood towns). We had a great time trying to locate our homes during the pre-school years.

Now the latest from ilargei at http://theautomaticearth.blogspot.com/

Debt Rattle, October 18 2008: Empires Built on Debt

Ilargi: Bankers on Wall Street and London’s City are to be paid salaries, fees and bonuses of close to $100 billion, for 'work' that has cost the two countries’ taxpayers well north of $1 trillion.

It's important to note that the bankers are no longer responsible for their own actions. Since all banks involved are now de facto owned by their respective governments, the responsibility for the pay-outs rests squarely on the shoulders of the Treasury secretaries Paulson and Darling, their bosses, Bush and Brown, and the houses of representatives.

US and UK citizens should send a very clear message to their elected representatives that if this is not halted immediately, they will, all of them, be indicted for fraud and other criminal acts. The people’s money cannot be used to spend on multi-million dollar compensation packages for the same guys and dolls whose gross incompetence and blatant greed has already cost the people a true fortune.

It might be good to warn these representatives that being dragged into court is quite likely to be their best-case scenario. Beyond that, there are pitchforks. If the nations’ legal systems are unable or unwilling to apply the full extent of the law to these bizarre acts of highway robbery, the legitimacy of the judiciary branch of government will find itself in the same grave danger that the the legislative and executive branches have now been in for quite some time.

If the people lose faith in the principle that their rights are secured by the laws of the land, then there is no longer a democracy. As long as they are provided with sufficient bread and circuses, a situation such as this can linger for a while. Today, however, the bread is disappearing from the table, and a circus alone will not stem the tide.

Spain, Argentina, Pakistan, Ecuador, Ukraine, Hungary, Serbia, Latvia, Estonia, Lithuania, Romania, Bulgaria, Turkey and Switzerland are today all teetering dangerously close to various brinks, while there are undoubtedly dozens of basket cases hiding in the shadows, behind the veils of reassuring PR.

The people of Iceland, until a few weeks ago one of the richest countries in the world, no longer have access to the money in their bank accounts. That should be a warning sign for everyone, wherever you live. No matter how much money you have in the bank, if you can’t get to it, you can be poor from one day to the next.

And when the first of the long list of troubled countries start collapsing economically, we are all smart enough to realize that there will be mobs in the streets and runs on the banks.

What we see unfold before our eyes is not an economic crisis. It is something much bigger.

click to read related articles followed by the comments
http://theautomaticearth.blogspot.com/2008/10/debt-rattle-october-18-2008-built-on.html



Debt Rattle, October 19 2008: Deadly Sins and Screaming Giveaways

Ilargi: Ah, the blessings of globalization... I made a list yesterday of countries known to be in deep financial trouble: Spain, Argentina, Pakistan, Ecuador, Ukraine, Hungary, Serbia, Latvia, Estonia, Lithuania, Romania, Bulgaria, Turkey and Switzerland.

Today, an article in the Independent adds a few more (it also misses some of mine). Hence, I’ll add these countries to the list: South Korea, Russia, Australia, Austria, Kazakhstan, Brazil, India, Indonesia and China.

Of course, as the list gets longer, the problems become more diverse in shape and form. I don't yet see, for instance, Russia or China in immediate danger, while Hungary, Latvia and the Ukraine certainly are.

Still, I also understand how fast events can take place, how rapid a banking system can be forced to its knees. There are gigantic amounts of debt that need to be rolled over and refinanced, and some of that simply won’t happen, while a lot of what will can only succeed at much higher interest rates.

For now, I hesitate to include countries like the US, the UK, Holland, Germany and France in my list, simply because there is so much wealth -old money- still left in these nations. But once more: once the equilibrium is far enough away, and oscillation takes over as the driving force, collapses can happen in a matter of days.

These rich nations have all thrown hundreds of billions of dollars at their banks, and if that doesn’t work, they are more or less staring at an empty toolbox. There will undoubtedly be additional rate cuts, but the last -global- one, two weeks ago, didn’t move anything or anyone; so why would it be different this time? If the same happens with the combined $3 trillion they have injected, then what? $30 trillion? No can do.

Holland today nationalized their last remaining bank, ING, for $14 billion (at least they cut all bonuses for managers). If I’m not mistaken, that means just about all commercial banks in the west are now state-owned. And that can have grave consequences: if the banks go belly-up, the taxpayer will have to cover their losses, an expense that will come on top of the bail-out costs.

For now, though, if I were a betting man, I would predict failures, state bankruptcies, in "lesser" nations. Pakistan counted on China for loans, and apparently the Chinese, after reviewing the books, have said "No way". Hungary obtained an $7 billion emergency loan from the EU, but it should be obvious that any country these days can burn through that sort of money in mere days. Just watch Iceland.

The US and EU might want to prop up the Ukraine, but they would insist on bringing it into NATO. Which is an absolute and total no-go for Russia. Then again, neither Kiev nor Brussels nor Washington wants a Moscow bail-out for the country. Financial check mate.

My little betting man says perhaps Latvia is now the prime candidate to take the silver medal in bankruptcy behind Iceland.

There is a parallel thread developing throughout the western world, and likely beyond. All levels of government, from federal through states and provinces to communities, are invested in questionable banks and funds. And that will start to hit soon.

European lower-level authorities have billions of dollars invested in Iceland’s frozen banks, as well as Lehman subsidiaries and god knows what else. To date, all is quiet on that front, even though there’s no escaping the mighty rumblings beneath the surface.

Similarly, the state of California has better be praying with all its might; it will not survive much longer if the economy keeps tanking. A $20 billion deficit is looming, and it can’t even get the full first $7 billion in emergency funds. If -make that when- other states start announcing similar shortfalls, not the sky, but the bottom of the ocean is the limit.

A crude example of boon-doggled investments comes to light this weekend, and it will soon have many peers. LA County commuters will see services cut badly, because the transit agency has entered into lease-back deals through AIG, and must now pay up. 30 more transit agencies have done the same.

The global trickle down economy is soon coming to a town near you.

click to read related articles followed by the comments
http://theautomaticearth.blogspot.com/2008/10/debt-rattle-october-19-2008-deadly-sins.html

[Demeter]

66. They Nationalized ING???!!!

It assured us it was well-managed and in no danger because it didn't do that kind of monkeyshines....

[DemReadingDU]

67. I was shocked too!

I have a little money there, I am going to get it out before the country goes kaput.


edit for links
http://money.cnn.com/news/newsfeeds/articles/apwire/8674da5b78e14eaf398b9bf0efbe658e.htm


http://www.reuters.com/article/businessNews/idUSTRE49I1CB20081019?sp=true

[Demeter]

68. Looks Like They Were Experiencing a Run on Their Deposits

due to all the other banks freezing up...I'm not worried. They seem to be handling it competently.

[antigop]

62. 60 Minutes expose from 1995 on derivatives

http://www.cbsnews.com/video/watch/?id=4501762n

Steve Kroft investigates what stock derivatives are and the dangers they pose to investors.

13 years ago...

[snot]

63. Pls k&r this if you think it might be helpful:

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=103&topic_id=394695&mesg_id=394695