Debt Rattle, April 2 2008

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See also today's earlier post The Power of the Purse

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Ilargi: Let’s start off the day with a look at Iceland. First it’s good to realize that the country has a total population of just 315.000 people. We have seen in the past 2 months that Iceland has large financial problems; its banking system is reaping the fruits of highly leveraged risky investments.

At the time (March 7) when I announced at The Automatic Earth that the “Game is Over”, and Bear Stearns was heading for the chopping block, I also figured that Iceland might be the next target. And here it is: there will be serious attempts to bankrupt the entire country, simply because it has the weakness of a gravely wounded animal.. This might well happen very soon. It will be interesting to see who will be coming to the rescue. For one thing, Iceland is not a member of the EU.

Note that while Iceland may -rightly or not- lash out at hedge funds as some sort of amoral gutter dwellers, those same hedge funds are at least as deeply in trouble as the country. That brings to mind George Monbiot's image of "cats fighting in a sack". Both parties here are simply trying to survive. Under existing international market rules and regulations, countries may turn out to be less equipped for that kind of fight. If Iceland goes, more smaller national economies will follow. Unless and until the rules are changed.


Iceland's economy 'under attack'

Iceland is considering intervention in its currency and stock markets to fight hedge funds that it says are attacking its financial system.

The country's prime minister, Geir Haarde, told the Financial Times that it was being unfairly targeted. The Icelandic currency has lost a quarter of its value against the euro this year as rumours of a financial and banking crisis have swirled. Last week, the country's central bank made an emergency interest rate rise.

"The central bank and the government have several means at their disposal to influence this situation and we have not used all of them yet," Mr Haarde said. "We would like to see these people off our backs and we are considering all the options available." He said hedge funds wanted to make a profit "by hook or by crook".

The government believes that speculators may have spread false rumours to create fears of a banking crisis in order to profit from short positions on the Icelandic krona and stock market. Short positions are bets that a stock or currency will fall in value. The country's financial watchdog has launched an investigation into the the alleged market manipulation.

Credit ratings agencies Fitch and Standard & Poor's have signalled concern about the health of Iceland's economy and its three main banks - Kaupthing, Glitnir and Landsbanki. The highly-indebted banks have been found it hard to borrow on jittery credit markets over fears that they could default on debt.

The ratings agencies have expressed concern that Iceland may have to support the country's banks to avert a possible financial crisis.

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Ilargi: Anyone seriously believe that he didn’t know what he knows now, 3 months ago?

Bernanke Says U.S. Economy May Slip Into a Recession

Federal Reserve Chairman Ben S. Bernanke acknowledged for the first time that a U.S. recession is possible because homebuilding, unemployment and consumer spending will deteriorate. "It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly," Bernanke said in testimony to Congress's Joint Economic Committee today.

He also told lawmakers the Fed's emergency loan to Bear Stearns Cos. followed a March 13 warning by the company it "would have to file for Chapter 11 bankruptcy the next day." Bernanke, making his first extensive public comments since the Fed's decisions two weeks ago to back the takeover of Bear Stearns and lower interest rates by 0.75 percentage point, is trying to fend off criticism of the deal while struggling to prevent a deeper economic slump. He said he thought "long and hard" about the decision, and hopes not to undertake a similar rescue again.

While the Fed expects the economy to return to its long-term growth pace in 2009, "in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside," he said.
Treasury notes were little changed after Bernanke's remarks. The benchmark 10-year note yielded 3.55 percent at 10:06 a.m. in New York, about the same as late yesterday. Stocks fell.

"This is a much more pessimistic assessment of the economy than what the Fed had three months ago or six months ago," said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, who previously worked as a senior economist in Congress. "Certainly, the Fed and the capital markets have been surprised the economy has slowed so quickly."

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Bernanke to Face Bear Stearns Queries

Long before taking office as chairman of the Federal Reserve, Ben S. Bernanke wrote an article with some other academics calling for the Fed to demystify its actions and pronouncements. “The ‘just trust us’ approach may work in a period when the chair and the board of governors command widespread support,” he and three colleagues wrote in Foreign Affairs. “But the happy state of affairs will not last forever.”

It certainly did not survive beyond last month. That was when the Fed played midwife in JPMorgan Chase’s absorption of the investment firm Bear Stearns, while accepting $30 billion worth of questionable mortgage-related assets as collateral for a Fed loan that enabled the deal.

The Bear Stearns arrangement, brokered amid fears of a global financial disaster, was accompanied by many other steps, including establishment of a new lending facility for investment banks and efforts to pump liquidity into the turbulent financial markets.

Taken together, most experts say that what the Fed has done in the last several months is unparalleled in modern times. Indeed, the Bear Stearns deal relied on a provision of the Federal Reserve Act not used since the 1930s. As a result, investment experts, many Americans and most members of Congress are bursting with questions.

Mr. Bernanke has yet to explain, for example, exactly how he negotiated the Bear Stearns deal, how he decided to accept the $30 billion in dubious collateral, who set the share price for Bear Stearns and what role was played by Treasury Secretary Henry M. Paulson Jr., a former Goldman Sachs executive.

On Wednesday the Fed chief begins two days of testimony, his first opportunity to answer some of these questions. They are certain to focus not only on Bear Stearns but also on why the Fed and others let things deteriorate to the point of crisis, and whether their actions should serve as a precedent or guideline for the future of regulation of the financial sector.

“There’s a lot of concern that this was done ad hoc,” Senator Charles E. Schumer, Democrat of New York and the chairman of the Joint Economic Committee, which is to hold the hearings on Wednesday, told The New York Times referring to Bear Stearns. “The irony is that very few people are saying, ‘You shouldn’t have done it.’ A lot of people have questions about the before and after.”

Senator Christopher J. Dodd, the Connecticut Democrat who is chairman of the Senate Banking Committee, has also signaled that at his panel’s hearing on Thursday he will ask Mr. Bernanke about Bear Stearns and why the financial sector’s problems were allowed to fester.

The nation’s trust in the Fed and the administration, Mr. Dodd said this week, “has been shattered — not because regulators did too much, but because they did too little.”

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Ilargi: Caroline Baum has it right: As I've said before, the Fed bought Bear Stearns’ securities, for all intents and purposes, and most likely also according to the law. Which looks to be against the law. Does this matter? I'd say it still does. Laws can be changed, but there is a political process in place for that, which has been completely ignored.

Basically, the Fed handed JPMorgan a $30 billion credit to take over Bear Stearns. The woolly mammoth in the room here is that JPM stood most to lose from a Bear bankruptcy, but let's leave that be for now. What's more important even is that JPM only has $1 billion in liabilities in the deal. $29 billion has been shouldered by the Fed. But any losses on that will be shifted to the US Treasury, which means the taxpayer. That is de facto nationalization of losses. There is more to say about what happens in the case of profits, but that's irrelevant, since there is no chance in hell of these "assets" ever turning a profit.

Fed Should Clarify Link to Bear Stearns Assets

When the Federal Reserve brokered a weekend deal last month for JPMorgan Chase & Co. to purchase Bear Stearns Cos. before it collapsed, many of the terms of the agreement were murky. The Fed made it clear it had to cough up $30 billion ($29 billion on the second go-round) for Bear Stearns's "less liquid assets" to induce JPMorgan Chief Executive Jamie Dimon to sign off on the deal. What was unclear was the Fed's relationship to those assets.

At the time, the Fed said it was taking control of the $30 billion portfolio, that it wasn't purchasing the assets. The Fed was assuming the risk if the eventual liquidation of the securities produced further losses -- losses that accrue to the taxpayer since the Fed turns over its profits to the U.S. Treasury. It also stood to benefit if the portfolio appreciated in value. That doesn't pass the lender duck test. Lenders don't profit from the appreciation of an asset against which they extend credit. Only an equity owner does.

"They get the residual -- that almost always defines ownership," said Paul DeRosa, a partner at Mt. Lucas Management Co. "The disclaimer of ownership is purely semantic." If the Fed is the residual owner of these securities, which seems likely based on its assumption of both risk and reward, it could be in violation of its charter. According to the 1913 Federal Reserve Act, which has been amended over the years, the Fed can buy U.S. Treasury and agency securities, foreign government securities, bankers acceptances, bills of exchange, certain municipal debt, foreign currency and gold.

Nothing in there about collateralized debt obligations, private mortgage-backed securities or other derivatives of questionable quality. Of course, if the Fed structured its loan as a "discount" -- the Fed is authorized to discount drafts, notes and bills of exchange, redeeming them at maturity -- then it would be a lender and a residual owner, said Vince Reinhart, former director of the Fed's Monetary Affairs Division and now a scholar at the American Enterprise Institute in Washington.

Most of today's loans from the Fed are "advances," secured by "acceptable collateral" (the level of acceptability keeps declining). The collateral is returned to the borrower after a specified time. If it seems like a distinction without a difference, it is. "From an economic perspective, they are the residual claimant," Reinhart said. "They have equity ownership." In the spirit of increased transparency, why can't the Fed come out and say that?

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Time to Pay the Piper

I'd use the phrase "The Big One" to refer to what people will call this period in the future. This is where it all changed.

After years of credit inflation caused by excessively easy credit produced by central banks, around mid-2007 the major world economies, led by the U.S., finally began experiencing trouble in carrying all that debt. Debt levels in the U.S. reached six times their usual amount relative to economic production. As the credit began to deflate, liquidity driving asset prices quickly dried up. We're now seeing those same central banks desperately attempting to reflate credit, only to see that borrowers are no longer in shape to borrow and lenders are no longer in shape to lend.

In fact, we've reached the point where banks and dealers in the financial system are forced to suck at the teat of the central bank credit machine in order to survive. Banks literally have no capital to support their declining asset values: the harder they suck at the teat, thus devaluing the dollar more and more, the more the collateral value declines. But even the teat isn't enough. Dealers and banks are having to raise longer term capital at egregious rates, thus diluting future earnings even more, and this despite record low treasury rates. Lehman raised about $4 billion through a preferred stock offering at 8.5%. This may seem low relative to Citigroup raising money at 13%, but in reality it is fairly comparable because the preferred is not tax deductible.

Yesterday some very large European dealers wrote off vast sums of debt. There will be more to come. But the market took it as the last write-down, just as it has in the past, and a vicious short covering rally ensued with the help of government hands behind the scenes. Desperation is everywhere. But don’t confuse a short covering rally in a bear market with a bottom in a bull market correction: the news will continue to get worse and the manufactured rallies will be fewer and fewer as deflation takes hold.

In all my years I have not seen anything like this. My overly conservative bent used to be commonplace, back in a time when investments produced cash and people invested accordingly. People used to evaluate a business on what it actually produced, not where it could pretend to mark its assets as a form of return.

Banks and dealers have produced one thing over the past several years: various forms of loans in paper form. When banks value a loan there are two primary variables: default rates and interest rates. Default rates estimate the probability of getting your money back; interest rates how much you get paid for taking that risk. Banks and dealers made gobs of loans valuing them way too high because they underestimated default rates and over-estimated the interest rates they'd receive (the bank gave full value to the paper assuming the borrower would successfully be able to pay higher rates when the lower teaser rate converted to a higher fixed rate). So all this paper was carried on the books at a high price: The banks showed profits by marking up the value of the paper.

That brings us to our paradox. Now we know that those variables were fallacious: higher default rates and lower interest rate assumptions are forcing those banks to write-down the value of those loans. But they still haven’t written down the paper to where realistic default and interest rate assumptions lie. Real buyers are now assuming realistic assumptions where banks still aren't. If banks assume higher interest rates so they get more cash over the life of the loan, they must then assume higher default rates for those go up when interest rates, the cost of a loan, goes up.

So there's no place the banks can go except to write-down more the value of the enormous debt they are carrying on the books. Those buying financial stocks now say the loans have been written down enough. The problem with this logic is that if they are right about default rates they are wrong about how much banks will earn off the loans.

Even if those loans are near correct valuations for now, the stifling of the great credit machine will (has) caused a recession. The consumer's in no shape to borrow and with the decline in the value of the dollar that need is rising not falling. As the recession takes hold the value of the loans will fall again (higher default rates) and the deflation cycle will continue until vast amounts of debt is written off.

This story's not about three 400-point rallies in the Dow over the last month or so. This is a much bigger story: one that will unfold over the next few years. Traders will get chewed up in market volatility, we will be fed new saving regulations by government bureaucrats, and the media will mis-inform us all along the way.

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Ilargi: See here for proof that the taxpayer is on the hook for the losses the Fed will inevitably take in "buying" Bear’s securities. How many direct questions will Bernanke face today and tomorrow on this topic?

Treasury says Bear Stearns deal 'necessary' to maintain financial stability

A top Treasury Department official told members of the Senate late last week that JP Morgan Chase's pending buyout of Bear Stears was 'necessary' to maintaining stability in the financial markets. 'Treasury is very supportive of this agreement, as well as the merger agreement between JPMorgan and Bear Stearns,' Assistant Secretary of Treasury for Legislative Affairs Kevin Fromer said in a March 28 letter to Senate staff.

'Among other things, these agreements were necessary and appropriate to maintain stability in our financial system at a critical juncture,' he wrote. The letter was in response to a Senate request for information about the agreement, in particular whether the agreement might end up costing taxpayers.

In answer to this question, Fromer attached a March 17 letter from Treasury Secretary Henry Paulson to Federal Reserve Bank of New York President Tim Geithner. In this letter, Paulson said the NY Fed is loaning JPMorgan $29 billion for the buyout, and is taking billions of dollars worth of mortgage-backed securities owned by Bear as collateral.

Paulson acknowledged that this transaction could lead to losses at the NY Fed if those securities lose value, and agreed that in turn, this 'may reduce the net earnings transferred by the FRBNY to the Treasury general fund.'

Despite this potential risk, Fromer said Treasury and the Fed worked to minimize the risk posed to taxpayers. Fromer also said the private parties to the deal have the information requested by the Senate on issues such as full descriptions of the assets and more details about the transaction.

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U.K., Spain housing markets face major corrections: S&P

Standard & Poor's Ratings Services said Europe's housing markets are finally, and overwhelmingly, turning down. 'And in those countries where the housing bubbles have been expanding for longer, Standard & Poor's believes the corrections could be severe and painful,' the agency added.

Particularly at risk are the U.K. housing market, where the financial crisis is exacerbating issues of affordability and general economic gloom, and the Spanish housing market, which is coming to terms with a largess of new homes, S&P said. It added that, at the same time, there are signs that housing in Ireland is becoming more affordable, while a combination of low indebtedness and fiscal stimulus should help support the market in France.

S&P said the current deceleration in the U.K. market, which began in August 2007, could be attributed to the rise in interest rates from August 2006 to September 2007. It added that if that logic holds true, interest rate cuts since last December could see house price inflation bounce back in the second half of 2008.

'In our opinion, such a favorable outcome is extremely unlikely in the current circumstances. This is because the U.K. housing market is now experiencing three shocks at the same time -- deteriorating levels of affordability, scarcer funding, and a cautious reaction from buyers to the domestic economic slowdown,' S&P however said. It noted that the price-to-income ratio is at an all-time high and this, combined with unprecedented levels of household debt (97 percent of GDP in 2007 compared with 59 percent in the Eurozone), calls for a significant correction.

S&P's central forecast assumes U.K. house prices to be flat on average in 2008, with a modest increase of 4 percent in 2009. Repossessions will likely rise as a result of the worsening market conditions, to reach 45,000 in 2008 from 30,000 in 2007, it said. 'Compared with previous downturns, these predictions appear relatively moderate. However, the downside risks should not be underestimated,' S&P added.

In Spain, it noted that in the 12 months to January, completed house sales were down a staggering 27 percent on the previous 12 months. Sales of second-hand dwellings, representing 52 percent of total sales, fell 36 percent over the same period, while sales of new houses were down 15 percent. Total lending to home buyers fell 28 percent over the period. 'The biggest concern at this point is the lag between housing starts and the most recent trends in the market, as reflected by house price inflation and the number of actual sales,' the agency said.

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The last days of Bear Stearns

It took only a few days, a rising sense of panic - and a critical e-mail - to spell the end of the 85-year-old investment bank.

You could detect a trace of fear in his voice. Mostly he seemed stunned. It was March 6, and one of Bear Stearns's top bond executives had dialed me up unprompted. The executive had dished about competitors in the past, but he had never initiated a discussion, much less one about his own firm. Now he explained that financial institutions that he dealt with - firms he had traded with for years - were suddenly asking him whether Bear had the cash to execute their trades.

Such news had yet to surface in the press, but the investment bank's shares had dropped nearly 20% in the previous ten days, and there were murmurs that short-sellers were circling. The executive asked whether I'd heard rumors of trouble, and he tried to preempt them. "We're making money," he said. "Our counterparties are getting paid, trades are clearing, business is picking up. It doesn't seem to be the likely scenario for an investment bank's collapse."

Ten days later Bear Stearns was swallowed by J.P. Morgan Chase. But all the brouhaha over the deal - were the shares worth $2 or $10? should the Federal Reserve have intervened? - has obscured how astonishing Bear's collapse is. It's a reminder that in a business based on confidence, when that confidence evaporates, so does the business.

A reconstruction of the week before Bear Stearns agreed to be funded, and then acquired, by J.P. Morgan Chase, reveals the speed at which Bear's longtime customers and counterparties lost their faith in the investment bank and undermined its ability to continue. It also reveals a psychological gap. Bear had survived one liquidity challenge, in the summer of 2007, when two of its hedge funds cratered after the subprime mortgage collapse.

The firm had labored to repair its balance sheet and improve its financing. "Our capital position is strong," said Bear's CFO, Sam Molinaro, at an investors' conference in February. "Balance-sheet liquidity has continued to improve throughout the course of the year. We spent an awful lot of time trying to reduce our higher-risk asset categories."

However much Bear Stearns saw itself as strengthened by its struggles, customers thought otherwise, and that hastened Bear's fall. Molinaro's comments notwithstanding, some had begun inching away months earlier. Bob Sloan, whose S3 Partners finances and advises hedge funds, says he counseled clients last summer to seek other prime brokers because he saw a "30% to 35% chance" that Bear would collapse.

By March, Sloan's clients had pulled out $25 billion in assets. Others, of course, would desert only when the panic hit. And a few days would be all it took to show just how shallow the reservoir of trust for the firm was.

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Deutsche Bank cuts target on six US banks, brokers

Deutsche Bank expects large U.S. banks and brokers to record an additional loss of $50 billion in the first half of 2008 and cut its estimates on six U.S. banks and brokers, including Merrill Lynch and Lehman Brothers.

The brokerage cited "an acceleration in home price declines, lower indices and possibly newer issues with monolines, such as problems with insurance on home equity securitizations."

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U.S. MBA's Mortgage Applications Index Fell 29% Last Week

The number of mortgage applications filed in the U.S. dropped last week from the highest level in almost two months as refinancing slumped. The Mortgage Bankers Association's index of applications to buy a home or refinance a loan fell 29 percent to 688.3, from 965.9, the highest level since the first week of February.

Refinancing decreased 38 percent following an 82 percent surge a week earlier and the purchases index dropped to a five-year low. The housing downturn, now in its third year, is filtering through other parts of the economy and weakening growth. Owners may be waiting for better deals before refinancing as rates on fixed mortgages have started to come down after as the Federal Reserve pumped money into financial markets.

"The refinancing component is totally overpowering the index," Ryan Reed, a senior economist at National City Corp. in Cleveland, said before the report. "Refinancing has just been tremendously sensitive to interest rates recently." The group's refinancing gauge dropped to 2,636 from 4,255.1. The purchase measure fell 12 percent to 356, the lowest level since April 2003.

U.S. Representative Adam Putnam, the No. 3 House Republican leader, said yesterday that Bernanke told Republican leaders in a closed-door meeting that "there are still a number of issues out there that are potentially of concern, including the value of housing around the country."

Falling home values leave Americans feeling less wealthy, hurting consumer spending and pushing the economy closer to recession. Construction spending in February fell for a fifth straight month, led by a drop in residential construction, according to Commerce Department figures released yesterday. Home building will probably continue to fall as prices and sales decline.

"Our industry continues to confront a growing oversupply of new and resale homes, tight mortgage lending conditions and a highly competitive pricing environment," KB Home Chief Executive Officer Jeffrey Mezger said March 28 in a statement. "We do not anticipate meaningful improvement in these conditions in the near term.'

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Paulson Says Treasury 'Flexible' on Housing Measures

Treasury Secretary Henry Paulson indicated the Bush administration is willing to consider congressional plans to stem foreclosures by expanding government guarantees for mortgages. "I think you will continue to see flexibility as we learn and go forward," Paulson said in an interview with Bloomberg Television in Beijing. He spoke after meetings with Chinese President Hu Jintao and Vice Premier Wang Qishan, and praised them for making "very material progress" in allowing China's currency to appreciate.

Paulson's housing comments are a shift from last month, when he said proposals to use government funds were a "non- starter" and played down concern about homeowners whose houses are worth less than what they owe on their mortgages. House Financial Services Committee Chairman Barney Frank said yesterday that officials are warming to his plan to widen mortgage guarantees.

Foreclosures jumped 60 percent last month after reaching a record rate in the fourth quarter of 2007. Rising defaults on subprime mortgages have roiled global financial markets and worsened the housing slump in the U.S., threatening the first contraction in the economy since 2001. Federal Reserve Chairman Ben S. Bernanke said today the economy may contract in the first half of the year, and that a recession is possible.

The International Monetary Fund today cut its forecast for global growth this year and said there's a 25 percent chance of a world recession, citing the worst financial crisis in the U.S. since the Great Depression.

Paulson said he told Chinese officials that the U.S. economy is having "a very difficult quarter" and has "slowed down sharply." Still, he added that the IMF report "sounds a little overblown to me." Frank and Senate Banking Committee Chairman Christopher Dodd last month announced plans to have the Federal Housing Administration insure refinanced mortgages after lenders cut loan balances for certain borrowers.

Federal Reserve Chairman Ben S. Bernanke, who testifies at a congressional panel today, has urged lenders to forgive portions of mortgages for borrowers whose home values have declined. Paulson said today that "the FHA is looking for ways to have more flexible solutions, to work with those homeowners who want to stay in their homes and are underwater in their mortgages and are committed to doing what it takes to keep their homes."

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European Commission to investigate Northern Rock

The European Commission announced Wednesday an in-depth investigation into the U.K. government's support of Northern Rock under European state aid rules. The regulator said it wants more information on the U.K.'s restructuring plans for the stricken bank and also invited third parties to comment on whether the aid package for Northern Rock will put competitors at an unfair disadvantage.

"The Commission needs to open a formal investigation into U.K. measures to restructure Northern Rock to ensure legal certainty, notably in view of the large scale of the aid measures, the background of current conditions in financial markets and the risks of distortion of competition," said Competition Commissioner Neelie Kroes.

The U.K. Treasury received European approval for emergency measures it took in September and October, but a six-month time limit on those measures expired in mid-March, forcing the government to submit a longer-term restructuring proposal.
The government supported Northern Rock by guaranteeing customers' deposits and providing about 25 billion pounds of loans through the Bank of England after the credit crisis cut off the lender's normal funding channels.

The bank was later nationalized after the government failed to negotiate an attractive private-sector restructuring plan. The investigation will likely examine whether those loans were made at a reasonable market rate and whether fees the bank is paying for the deposit guarantees are enough to offset any competitive advantage.

A spokesman for the Treasury said that it had been expecting an investigation in light of the scale of state aid afforded Northern Rock and that the probe will likely run several months. The European Commission said Wednesday that the rescue measures may remain in place until the investigation is concluded.

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ECB's first six-month auction four times oversubscribed

The European Central Bank's first-ever auction of six-month funds on Wednesday saw banks bidding more than four times the €25-billion on offer as they sought cash they struggle to raise on financial markets. But market watchers said the ECB's action was unlikely to be enough to achieve its goal of reducing interbank lending rates, which eight months after the start of the credit squeeze are still way out of line with official central bank rates.

“It's more like a drop in the ocean to be honest but it's welcome,” a money market trader said. Some 177 banks bid for €103.1-billion, about $161.2-billion (U.S.), in funding, and the ECB will lend successful bidders a total of €25-billion for six months. This is the longest maturity ever offered by the ECB, which mostly lends for one-week terms with smaller sums available for three months.

The average interest rate successful banks will pay the ECB is 4.61 per cent, above the 4.56 per cent expected by traders polled by Reuters on Tuesday after the auction opened. The lowest successful bid, or marginal rate, was 4.55 per cent, also above the 4.48 per cent expected by traders. Bids ranged from 2.00 per cent to 4.88 per cent.

The ECB funds, for which banks must deposit collateral, are cheaper than banks' usual unsecured market financing.
Minutes before the ECB released the auction results, six-month unsecured Euribor rates fixed for the day at 4.737 per cent, the highest since late December. The auction did little to move rates immediately. Indicative six-month prices quoted on Reuters were static at a bid-ask spread of 4.63-4.73 per cent after the auction.

“There's still definitely more liquidity needed on term. In the current environment, with the ECB still very hawkish on inflation, this auction will have relatively little impact on three-month and six-month Euribor,” said Nathalie Fillet, senior interest rate strategist for French bank BNP Paribas.

The high market rates compare with the ECB's current policy rate of 4 per cent and represent a 75 basis point risk premium over Tuesday's six-month overnight swap rate against typical premia of a handful of basis points before the start of euro zone credit market turbulence last August.

Unpleasant surprises such as the billions of euros worth of subprime-linked losses revealed by Germany's Deutsche Bank and Switzerland's UBS on Tuesday have fuelled the mistrust that has plagued interbank lending markets for months. “It's still the same problem with confidence and a shortage of liquidity. Because there are still write-downs it will take time for the markets to digest all this,” Ms. Fillet said.

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A daring culture that never fit the Swiss

UBS wanted to be more than the biggest private wealth manager. Its goal was to become a world-class investment banking and securities player too. Too bad the architects of the phenomenal growth strategy left out one crucial ingredient: risk management.

The risk management strategy, or lack thereof, was highlighted again Tuesday when the Swiss bank took another massive writedown, this time $19-billion (U.S.), raising the total to $36.3-billion since the subprime volcano erupted last autumn and showered Wall Street and beyond with fiery lava. The figure makes UBS, not Merrill Lynch or Citigroup or Morgan Stanley, the biggest victim of the subprime-related disaster. Also Tuesday, Deutsche Bank said it now expects writedowns of about $4-billion in the first quarter.

The problems at UBS started years ago, when it decided to graft investment banking and securities operations onto the world's top wealth management business, bankers said. High-risk bets became part of the culture, to the point that scant attention was paid to risk management. “The investment banking culture permeated the bank as a whole,” said Ted Wilson, senior consultant at London's Scorpio Partnership, a wealth management consultancy.

The modern UBS was formed in 1998 from the merger of Union Bank of Switzerland and Swiss Bank Corp. (SBC), creating the world's largest private bank and asset manager. The roots of the two grand old Swiss banks go back to the second half of the 19th century. Just before the merger, SBC had built a global investment banking business through the acquisitions of Dillon Read of New York and London's S.G. Warburg, then one of Europe's premier investment banking names.

In 2000, the enlarged group paid $11.8-billion for PaineWebber, one of Wall Street's biggest securities firms. At that point, UBS was a true global player in wealth and asset management, investment banking and securities trading. The UBS trading floor in Stamford, Conn., the size of three football fields, is listed as the world's largest trading floor in the Guinness Book of World Records.

There is little doubt the acquisitions triggered a personality change at UBS. While wealth management was still UBS's most important business, generating more than half of the overall profit, investment banking came a close second, with 40 per cent of the profit. That's high by Wall Street standards. Only about 5 per cent of Goldman Sachs's business comes from investment banking. Trading and asset management are the biggest divisions.

With the bull market and the housing market in full swing, UBS's strategy looked smart. That changed when the subprime crisis hit last summer and the rot in the company's mortgage-related holdings was exposed. Government of Singapore Investment Corp. came to the rescue with an injection of 11 billion Swiss francs, while an unidentified Middle East investor put up two billion Swiss francs.

Still, the losses piled up and shocked investors and analysts. Yesterday's $19-billion writedown was some $8-billion higher than the amount estimated by Merrill Lynch and Oppenheimer. The writedown will lead to an estimated first-quarter loss of 12 billion Swiss francs.

The worst may or may not be over. Certainly the investors who bought a few months ago, after the first big writedown, thought they were in the clear. The shares sank like a rock since then, leading some investors to fear UBS was a Bear Stearns in the making. In the past 12 months, the shares lost 80 per cent of their value before closing 12.3 per cent higher in Zurich yesterday, at 32.40 Swiss francs, giving the company a market value of 67 billion Swiss francs.

Judging from the share rise yesterday, investors couldn't be happier about the vanishing mortgage position. They might also like UBS's strategy, announced along with the writedown: “The new leadership of the investment bank will further focus on resizing the business in accordance with the current market opportunities, including strategic reductions in all major cost categories.”

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UK mortgage approvals fall by 40%

The number of mortgages approved for people buying a home has fallen by nearly 40% during the past year, figures show. Just 73,000 home loans were approved for people moving house during February, compared with 120,000 in the same month of 2007, the Bank of England said.

The total was the second lowest since July 1995, after mortgage approvals dipped to 72,000 in December. Building societies continued to benefit from savers looking for safe havens for their cash, with people saving £1.35 billion with them during February, the highest amount for that month since February 1997.

The sector has seen high levels of inflows since last summer, when a combination of the problems at Northern Rock and the competitive rates they were offering made building societies attractive homes for consumers' money. But net mortgage lending by building societies was more subdued, increasing by just £974 million during February, compared with more than £1.4 billion in both the previous month and February last year.

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UK: Property fears grow as lenders shut doors

Fears over the state of the British property market deepened today as mortgage companies closed the doors on borrowers, and builders stopped new developments. Experts said that there is now a strong likelihood that more banks and building societies will raise their interest rates or stop offering new mortgages. Borrowers will also not reap the benefits of official interest rate cuts, expected next week, analysts warned.

NatWest, parent Royal Bank of Scotland and Kent Reliance Building Society have become the first lending institutions to raise mortgage rates for existing customers. First Direct, the internet banking offshoot of HSBC became the first major mortgage lender to say it had closed its doors to new customers because it had done so much business since the start of the year.

The different moves follow the warning from Ron Sandler, chairman of nationalised bank Northern Rock, that part of his attempts to rescue the former building society will include encouraging or forcing as many as six out of 10 of its existing borrowers to shift to another lender when their fixed-rate mortgage deals come to an end.

City watchdog the Financial Services Authority has predicted that 1.4m homeowners will have to replace their existing discounted fixed-rate mortgage deals this year and is spending over £2 million on an advertising campaign to help people make the right move. Major banks and building societies have raised their rates for new borrowers in recent days.

They are still finding it difficult to raise all the money they would like to from the wholesale markets as the continued credit crunch makes banks reluctant to lend to each other. Libor, the rate at which banks lend to each other, remains more than three-quarters of a point above the Bank of England base rate. That makes it much harder for banks and building societies to turn a profit.

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Wagging The Dog

It is absolutely clear that the "acquisition" of Bear avoided triggering Bear Stearns related credit default swaps and swaps against CDO, SIV, etc. positions they may have held (assuming a potential Bear BK would have forced a mark to market event), which would indeed have happened had Bear formally entered bankruptcy and their bonds/debt became potentially very meaningfully impaired.

There is simply no question whatsoever in our minds that this was the key reason a theoretical acquisition of Bear HAD to happen. Remember the details. JPM took out Bear for a couple of hundred million at the headline $2 per share initial offer level, but concurrently announced it was going to need to charge off about $6 billion as a result of the so-called acquisition.

Even at the ultimate $10 level (which is basically shut up money offered to help prevent litigation, which might also have led to asset price discovery) JPM was "telling" us Bear was worth far less than zero by the charge-off number alone.

Of course the truth simply had to be that if Bear had filed bankruptcy and the credit default swaps written against their bonds/debt/asset positions had been triggered, the credit default swap liabilities in the market would have been well north of a $6 billion hit to whomever had written those Bear specific CDS contracts. Well north.

And that simply could not have been allowed to happen. By the way, just as an item of curiosity:

JP Morgan has exposure to over 55% of the total banking system credit default swaps outstanding.

Are we connecting the dots clearly enough for you?

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Ilargi: See, I like Asia Times, and I’d like to see an intelligent piece on a conspiracy against gold. But Chan Akya is so out of any clue on so many issues, it’s hard to figure where to start. I’ll pick two:

1. ”something of value that central bankers couldn't manipulate for their own dirty ends, namely gold”. D’oh.. gold is the one thing they can and will manipulate. They have tons of it still in their vaults. Try again. For that matter, the article starts off with "The full-scale attack on gold by global central banks". Nuff said.
   
2. ”..no one really wants to live in Europe, not even the Europeans”.Never been, apparently. Believe me, 99.9999% of EU citizens wouldn’t trade for anything in the world, and that can’t be said for Americans. Where does the author get this wisdom? I don’t know. What I do know is that after this , one might as well stop reading.

A conspiracy against gold

The full-scale attack on gold by global central banks officially began with the provision of swap lines by the Bank of England and the European Central Bank (ECB) to the US Federal Reserve in the days following the rescue of Bear Stearns. In effect, the emergency provision of liquidity to the financial system has been aimed at re-inflating the US economy by creating exactly the same kind of unnecessary and irresponsible lending that caused the latest mess.

There are necessarily two elements to this story that must be understood separately: first, the need to preserve the US status quo as is being suggested by the world's central banks, and second, the mechanisms aimed at restoring the purchasing power of fiat currencies - in effect pushing gold off its perch.

As I have written in recent articles, the death of the US dollar as the global reserve currency elicited a search for suitable alternatives, with the putative contender the euro being dismissed pretty much out of hand by most people.

Into this vacuum, investors globally found that the sole store of purchasing power was something of value that central bankers couldn't manipulate for their own dirty ends, namely gold. That created a huge problem of sorts for the global economy, because a collapse of faith in fiat currencies - so called because their value rests entirely on a stated nominal denomination rather than any notion of intrinsic purchasing power - also means the unwinding of the global financial system. Simple translation: these central bankers would no longer have any power through their inane market policies to wreak destruction willy-nilly.

A secondary and perhaps more lethal result of investors flocking to a fixed-value currency like gold would be to reduce the velocity of the global financial system to essentially zero as gold doesn't lend itself to value manipulation.

In the finance-based economy of the US and Britain, if not the rest of Europe, this collapse in monetary system velocity would be the equivalent of a thousand bank runs: simultaneously. This was the key stake that the US was playing for, ie to avoid a complete destruction of risk-taking in the economy that would in turn paralyze the unreal economy of excessive consumption that underpinned it.

What did Europe have to fear from all this - after all, wouldn't the destruction of the US system of capitalism provide a boost for its own alternate method, namely market socialism? Why then should the ECB and others help the Fed instead of letting it slide to its own doom?

The answer is that no one really wants to live in Europe, not even the Europeans: thanks in equal part to the stupidly high tax rates and low economic dynamism prevalent in these economies. These explain the low birth rates across the continent, which have pushed most countries (eg Italy, Spain, Germany as well as all the Scandinavian countries) into sub-replacement demographic trends.

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Why Rescues Don't Work

"...Just like natural organisms, the financial system must have death to evolve into a better form..."

Now that he’s wearing some sort of do-good government hat, even Hank Paulson is not thinking straight. Regulate in New York and finance goes to Toronto. Regulate in London, it goes to Frankfurt or Paris - and since Toronto, Frankfurt and Paris are run by the same nervous bureaucrat-types, we can reckon soon enough that the entire financial markets will be hosted out of Singapore and Shanghai.

There they will accept the risks as well as the rewards, to their very considerable long-term benefit. You simply cannot enjoy being the financial center of the world but start bleating for government bailout whenever asset prices dip a few percent. As Paulson is demonstrating, the regulatory price for being bailed out is far too high.

We must all grow up and take a full measure of punishment. The banks must take theirs. Let the shareholders and depositors take theirs too. Just like natural organisms the financial system must have death to evolve into a better form. Paulson's plan is a dressed-up confiscation of the profits of the cautious, and a transfer of those profits straight back to unreconstructed gamblers in the worst offending banks. This is very unwise.

In these difficult times, profit (or more accurately the avoidance of loss) should be benefiting those who troubled to understand the risks in the system, and avoided them. But Paulson's plan is currency creation, and a devaluation of the good quality assets owned by the cautious. He fails to understand that unless the system occasionally rewards caution there is no reason ever to be cautious again.

The market works better without these rescues. Only by appropriate economic reward to the cautious, when they are right and everyone else is wrong, will caution sit well beside risk-taking in the financial system. The real threat to New York's and London's continued dominance of the world's future financial system is government regulation itself

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Ilargi: What we feel about the main media’s coverage of the economy should be clear by now. Still, when CNN starts criticizing government employment numbers, pay attention. When it “confirms” a recession, you know we’ve already entered a depression.

The underemployment rate is rising

Don't be fooled by the relatively low 4.8% unemployment rate. Other measures, such as the number of people only working part-time, are a sign of recession.

An unemployment rate at 5% used to be called full employment. Today it's considered the sign of a recession. When the Labor Department gives its March employment report this Friday, it's important to keep in mind that the relatively low unemployment rate isn't telling the whole story about the weakness of the U.S. labor market.

Economists surveyed by Briefing.com are forecasting a loss of 50,000 jobs from the nation's payrolls in the month. That would mark the third straight month of job declines. The unemployment rate is expected to jump to 5.0% from 4.8% in February. But some economists point to other readings, which show that the market is much weaker than the unemployment rate would suggest.

For one, there has been an increasing number of people who want to work full time who are only able to find part-time jobs. There is also a rise in the number of those who have stopped looking for jobs because they've become discouraged by the weak market. Finally, there has been a decline in the number of employees working as independent contractors.

"You do see indicators of a softer market than just the raw [unemployment] numbers," said Bill DeMario, chief operating officer of Ajilon Professional Staffing, a unit of staffing giant Adecco. "To some degree, we've already experienced some of the impact of a slowing economy." According to the February jobs report, there were 565,000 more part-time workers who wanted full-time jobs than a year ago. That's a 21.1% jump in the number of those who are under-employed.

In addition, a rapidly increasing number of people are being forced to take more than one job. There were 161,000 more workers in February who held more than one part-time job than there were in January. One economist said this is a further indication of how bad the market is. "Basically, this is a sign that we're in a recession," said David Wyss, chief economist for Standard & Poor's.

Wyss said another sign of the weakened market is the steady decrease in the past year in the number of temporary employees in the business and professional services sectors. There has been a loss of more than 100,000 jobs in this category in the past 12 months. "This is a leading indicator, since these are very often the first employees cut," said Wyss.

With all this in mind, the headline unemployment rate might not be the best way to judge how the overall labor market is doing. That's because the unemployment rate calculates only the percentage of workers who describe themselves as unemployed, divided by the number of those potential workers counted in the labor force. So under-employed people don't show up as unemployed.

Also not showing up as unemployed are those who want a job but are no longer counted as being in the labor force for a variety of reasons. The number of people fitting this category rose by more than a half-million between November and February. And if you look at the number of people out of work in addition to part-time workers who want full-time jobs as well as people not searching for a job at the moment, a far more alarming picture emerges.

Keith Hall, the commissioner of the Bureau of Labor Statistics, which prepares the monthly jobs reports, said in Congressional testimony last month that this broader measure stood at 8.9% in February, up from 8.1% a year ago.
"We've clearly had a broad weakening in the labor market," Hall said.

What's more, the somewhat confusing way that the government collects data about the job market may also mask how bad conditions are right now. The unemployment rate is calculated by a survey taken among members of the general public, the so-called household survey. But the payrolls number is derived from a survey of employers.

The household survey shows the number of job losses over the past three months was 654,000 compared to a loss of only 44,000 jobs according to the payroll survey during the same period.

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'Marked slowdown' worldwide will help curb inflationary pressure: Bank of Canada

A “marked slowdown” in global growth will ensure that rising food and energy prices won't prompt widespread inflation around the world, the Bank of Canada says. In a speech on Wednesday morning in London, Ont., senior deputy governor Paul Jenkins said that inflationary pressure seen in the United States, the United Kingdom, Europe and emerging markets is mainly restricted to food and energy prices.

“With global economic growth slowing, it is unlikely that the higher prices of food and energy will spill over into prices and costs more generally, but this risk is something central banks are watching closely,” he said. Indeed, a slowdown in global growth was probably necessary to prevent the world economy from overheating, he said.

“What we are now confronting is a marked slowdown in global economic growth, emanating primarily from the sharp correction under way in the U.S. housing market and the associated tightening in credit conditions linked to the collapse of the U.S. subprime-mortgage market,” he said. “It's important to note that some slowing in global economic growth was necessary.”

The Bank of Canada has cut its key interest rate repeatedly over the past few months, and economists expect the cuts to continue as the U.S. slowdown drags on. The Canadian central bank is also struggling to figure out how to make sure money markets remain liquid at a time when the global financial crisis has made financial institutions reluctant to lend to each other.

Generally, Canada's credit squeeze has not been as severe as in the United States or Europe. But on Monday and Tuesday this week, the bank has intervened heavily in the overnight market to inject liquidity. And economists have been warning that markets for some corporate lending have been increasingly illiquid in Canada.

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Ilargi: While 99.9% of Canadians will assure you there is no subprime crisis in the country, the central bank prepares to buy useless paper.

Bank of Canada moves to accept new risks

The Bank of Canada has embarked on a series of quiet but fundamental policy changes in response to the global credit crisis - changes that will enhance its flexibility, but could also expose it to more risk. A proposed amendment now before the House of Commons would substantially increase the power of the governor of the Bank of Canada by allowing the central bank to buy or sell any security or financial instrument from anyone, if the governor decides that there is a "severe and unusual stress on a financial market or the financial system."

The proposed change to the Bank of Canada Act, laid out in the budget package now before Parliament, could expose the central bank to more risk by allowing it to accept riskier securities as collateral. It highlights a problem facing central banks globally as they grapple with the crisis in financial markets: Banks are trying to find a balance between stabilizing markets, on the one hand, and bailing them out of the consequences of bad decisions, on the other.

At next week's meeting of the Group of Seven industrialized countries, the Financial Stability Forum - a group of central bankers and other financial authorities - is to make recommendations on managing the current crisis. It may list such extreme steps as bank bailouts and public mortgage repurchases, a report in the Financial Times says.

Other, less extreme proposals could include expanding central banks' liquidity support operations and offering emergency liquidity to institutions. By contrast with some of these measures, at first glance, Ottawa's budget amendment seems merely to remove outdated references to old-fashioned securities that are no longer used often as collateral.

But the amendment does not impose limits on what will be accepted as collateral, leaving the door wide open for the central bank to accept anything it wants. "It would offer the governor of the bank a fairly wide open authority to do what they need to do in a broad range of situations," said Finn Poschmann, director of research at the C.D. Howe Institute.

The amount of risk the bank takes on is tied to the types of collateral it opts to accept as part of its job of keeping money markets liquid and on an even keel. In the U.S., the debate has been brought to a head by the Federal Reserve's heavy involvement in the rescue of Bear Stearns. There is already mounting pressure from financial institutions on the central bank to take full advantage. That's because if the central bank accepts risky securities as collateral, the move would automatically create more solid markets for such securities.

That prospect worries more conservative Bank of Canada officials along with some analysts. "I'm concerned about the central bank taking on poor-quality assets," said Christopher Ragan, professor of economics at McGill University in Montreal and a former special adviser to the Bank of Canada. The bank is not taking this change lightly, Mr. Ragan said. "I'm queasy about it, and they're queasy about it."

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Ilargi: Yes, you’re right, these are the same folks who are working on the biggest leveraged buy-out in history, the $51 billion BCE deal.

Teachers short by $12.7-billion

Members of the Ontario Teachers Pension Plan could end up facing a cut in benefits or an increase in pension payments as the fund faces a $12.7-billion shortfall that requires a planned fix this year. The amount of the shortfall was released Tuesday in the pension plan's financial results for 2007, which also showed its assets rising by $4.7-billion to $108.5-billion as of Dec. 31, 2007.

The plan's co-sponsors, the Ontario Teachers' Federation and the provincial government, must file a balanced funding valuation with regulators by Sept. 30. They are working on potential solutions for eliminating the shortfall with input from Teachers, which invests the plan's assets and administers pensions for its members. “This isn't unusual stuff,” Jim Leech, chief executive officer of Teachers, said in an interview Tuesday.

“Put simply, a declining proportion of the plan's members now bear increasing responsibility for keeping it fully funded. All defined benefit pension plans worldwide face this challenge,” he said in Teachers' news release. The culprits for the plan's shortfall include falling interest rates and increased life expectancy of the plan's members, Mr. Leech said.

When interest rates decrease, the assumed cost of future pensions rises. For example, the average yearly pension per plan member is $41,000. When real interest rates are at 2 per cent, the total cost of that pension is $855,000, Mr. Leech said. When rates rise to 5 per cent, that cost drops to $585,000, he said. Pension costs are also rising as retirees and their spouses live longer. On average, teachers now work for 25 years, and receive benefits for about 36 years.

Making up the deficit has become more difficult due to the shrinking proportion of working teachers to retirees. The ratio of active plan members to pensioners has fallen to 1.6 to 1, compared to four working teachers for every pensioner 15 years ago.

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ABCP investors didn’t see pain coming

Layne Arthur does not have the heart to tell his dad what has happened to the proceeds from the sale of his family farm. He invested the cash -- about $434,000 -- into non-bank asset-backed commercial paper (ABCP), and has now joined the ranks of about 1,800 to 2,000 retail investors fretting about what will come of their investments.

"It was a third-generation farm that I sold," Mr. Arthur said outside a meeting room in a downtown Calgary hotel, the fourth stop of the cross-country tour by Bay Street lawyer Purdy Crawford and his "restructuring" committee attempting to salvage value from the failed financial products. "I haven't had the heart to tell my dad," Mr Arthur said. "It would break his heart."

The committee held Edmonton and Calgary meetings on the tour that includes distributing tonnes of telephone directory-sized information books explaining the market for ABCP and the rescue plan. The tour concludes today in Vancouver. Mr. Arthur, who also attended the investor meeting in Edmonton in the morning, is not only frustrated by the losses he and others will likely take because of the frozen market, but also because he thinks the major institutional investors -- as well as Mr. Crawford's committee -- are making it difficult for retail investors to unite.

"They are doing their damnest to make sure this thing passes" said Mr. Arthur, part of a group trying to collect the names of individual investors and handing out information outside of the meetings.Mr. Arthur, an ex-trucker, said the group has asked Mr. Crawford's committee, Cannacord Capital Inc., and Credential Securities Inc., for a list of retail investors holding ABCP, to no avail.

The certificates gave off no whiff of risk until the moment they failed because they only paid at best a fraction of a percentage point more interest than conventional savings deposits, agreed Peter Myers. "I was told it was triple-A rated and guaranteed by the banks," said the 64-year-old engineer, adding the financial crisis that halted ABCP withdrawals froze his "substantial" retirement nest egg.

Retail investors own an estimated $127 million in ABCP, or less than four-tenths of 1% of a total $35-billion in frozen certificates representing money-market assets from real estate mortgages to receivable balances owing on credit cards and auto lease contracts. But the personal savings group will have clout in a vote on the restructuring plan April 25, said committee member Stephen Halperin, a Toronto lawyer.

The court-supervised process requires approval by a double majority representing two-thirds of total ABCP face value and 50% plus one of its owners by head count. "A note holder who has $1,000 invested has the same vote as a note holder who has $1-billion invested," and personal investors "vastly outnumber" institutional and corporate owners, Mr. Halperin said.

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Ilargi: NOTE: the vote on the Crawford plan, scheduled for April 26, is already set for delay, like every single date in this "mess process".

ABCP: Investor confusion reigns

The high-profile committee that's seeking investor support for its plan to salvage Canada's frozen $32-billion commercial paper market is bumping up against a troublesome, and potentially costly, barrier — investors just don't understand the thing.

The nearly 400-page document and accompanying slideshow that lay out details of the plan to swap the moribund paper for new bonds make it "way too complex," said Vladimir Salyzyn, a retired economics professor from the University of Alberta who now has roughly $900,000 from the sale of his farm stuck in third-party asset-backed commercial paper (ABCP). "I've got a Bachelor of Commerce degree, I've got a PhD in economics. Maybe I'm getting a little senile with age, but not that much," the 78-year-old said with a smile following an investor meeting in Edmonton.

He walked away from the meeting still undecided about whether he will vote for the committee's plan. Investors in Calgary had a similar reaction. "They've swamped us with a lot of information," said John Szpecht, a Calgary engineer, who holds about $25,000 of ABCP with his wife. "I'm trying to look for the pros and cons, and right now I'm not coming up with very many pros."

The committee's chair, Purdy Crawford, is hosting the investor meetings across Canada as he works to convince more than 1,800 individual holders who together have about $400-million of ABCP to vote in favour of the plan at a meeting that's currently scheduled for April 25. He needs a majority, or the plan to fix the whole $32-billion market will fail, causing what Mr. Crawford says will be major losses.

At the outset of yesterday morning's meeting in Edmonton, Mr. Crawford told investors that he'd heard from their counterparts in Toronto and Montreal on Monday — "with considerable justification probably" — that the documents are too complicated. He noted the irony: The committee had been so focused on providing transparency to the market that it may have bogged the documents down in detail. Part of the reason the third-party ABCP market crumbled in August was that investors did not know exactly what the commercial paper was, and what assets lay underneath its esoteric structure.

As Mr. Crawford's committee worked to restructure the sector, it tried to focus on gathering a plethora of information to give investors. While the vote on the plan is currently set for April 25, that date is flexible if the judge who is now overseeing the court-supervised restructuring process approves. Mr. Crawford has suggested he'd be willing to consider asking for an extension of the vote if investors feel they need more time to digest the plan.

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