Debt Rattle, August 2 2008: Bouncing Down the Mountain

Alfred Palmer Big Steel November 1941
"Blast furnaces and ore at the Carnegie-Illinois Steel mills, Etna, Pennsylvania."

Ilargi: I have nothing much to say this morning. Just that going through the news this morning, there’s this chill that states everything I’ve been saying for a long time comes to pass. And now that it happens, it doesn’t even feel good.

Jobs are set to go poof! in a future scenario that’s as dark as it is pale; carmakers are so stuck in debt that they chase their own few remaining clients away; investment banks that are desperate to hide their losses will be increasingly forced to reveal them in the face of fraud charges, while they are slurping from the discount windows like a bunch of dirty wino's; the FDIC makes sure that a rising number of commercial banks are being renditioned, disappeared and never heard from again, California starts the merry-go-round of government lay-offs that will hit the US like a sledgehammer between now and Christmas, and then there's always the connoisseurs who insist the markets will start going back up any moment now.

When viewed as a panorama, it's a sad picture.


S&P Email: 'It’s Ridiculous', 'We Should Not Be Rating It'

Problems keeping up with the surging growth of mortgage-related debt products were particularly acute at Standard & Poor's Ratings Services, according to a draft version of a Securities and Exchange Commission report on bond-rating firms.

The agency's report, which included unflattering emails, was released July 8 but didn't identify the firms or individuals who wrote the emails. The SEC said that was general practice for an industry review.

Some of the most strongly worded emails from analysts questioning their own ratings came from S&P, according to a draft version of the 38-page report, which includes the firms and was reviewed by The Wall Street Journal. The unit of McGraw-Hill Cos. is the largest bond-rating firm by revenue.

In one email, an S&P analytical staffer emailed another that a mortgage or structured-finance deal was "ridiculous" and that "we should not be rating it." The other S&P staffer replied that "we rate every deal," adding that "it could be structured by cows and we would rate it."


Meanwhile, an analytical manager in the collateralized debt obligations group at S&P told a senior analytical manager in a separate email that "rating agencies continue to create" an "even bigger monster -- the CDO market. Let's hope we are all wealthy and retired by the time this house of cards falters. ;O)"

The draft report could trigger more scrutiny of how each bond-rating firm did business during the credit market's boom and bust, including how they dealt with conflicts of interest and other issues affecting the accuracy of ratings.
A McGraw-Hill spokesman said the firm wouldn't comment on specific emails.

The unredacted version of the SEC's report also shows that S&P and Moody's Corp., the industry's two biggest members, didn't add staff dealing with CDOs as fast as that business was growing. At S&P, revenue from rating the mortgage-laden bond portfolios grew more than 800% from 2002 to 2006, but related staffing doubled.

At Moody's, the comparison between revenue and staff was similar, but its growth rate in CDOs was somewhat lower than at S&P. Staffing levels have long been a hot-button issue at rating firms. Frank Raiter, a former S&P managing director who oversaw residential-mortgage ratings, said the number of deals his analysts rated rose to about nine per month before he left in 2005 -- about double the workload in 2000.

"We are short on resources," one S&P analytical manger said in an email to a senior manager in December 2004, according to the SEC report. Analysts working 60-plus hours a week were resigning and "experiencing health issues," the email added. "We are burning them out."

McGraw-Hill said S&P "has consistently invested in resources and increased its professional staff across its business lines." The firm added that the SEC found fewer staffing problems in residential mortgages and that S&P overall has more than doubled its staff since 2002. Rating firms have also said that as time passed, new deals could be rated faster because they were growing similar.

But satisfying Wall Street issuers also crept into the process. "We are meeting with your group this week to discuss adjusting criteria for rating CDO's of real-estate assets...because of the ongoing threat of losing deals," S&P commercial mortgage analyst Gale Scott wrote to colleagues in August 2004, according to the draft report and a person familiar with the situation.

Richard Gugliada, a former S&P official who replied to Ms. Scott's email, said he recalls that commercial-mortgage rating criteria were changed slightly after several meetings on the subject. Ms. Scott, who still works at S&P, couldn't be reached for comment.

In early 2007, an S&P official involved in real-estate deals stated that "our staffing issues, of course, make it difficult to deliver the value that justifies our fees." In another email, an S&P official wrote: "Just too much work, not enough people, pressure from the company, quite a bit of turnover and no coordination of the non-deal stuff they want us and our staff to do."

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Florida Bank Shuttered; SunTrust to Take Over Branches

First Priority Bank of Bradenton was closed by Florida state regulators yesterday, the eighth bank to collapse this year as lenders grapple with failed loans and writedowns stemming from a slump in home prices.

First Priority, with $259 million in assets, was turned over to the Federal Deposit Insurance Corp., the agency said in a statement. The bank's deposits were sold to SunTrust Banks, and six First Priority branches will open Monday as SunTrust offices, the FDIC said.

The pace of closings is accelerating. Banks and securities firms have reported more than $480 billion in writedowns and credit losses since 2007, when three banks were shuttered. Regulators in July closed IndyMac Bancorp, a California-based mortgage lender with $32 billion in assets, the third-largest bank seizure in U.S. history.

"The only thing sure other than death and taxes is that deposit insurance premiums will be going up as more banks fail," said Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine. He expects 300 U.S. banks to fail in the next several years, mainly because of mounting losses from real estate-related loans.

SunTrust will buy about $227 million in deposits for no premium, while acquiring about $42 million in assets, the FDIC said. The transactions will cost the U.S. deposit insurance fund an estimated $72 million, the FDIC said. The FDIC insures deposits of up to $100,000 per depositor per bank, and up to $250,000 for some retirement accounts at 8,494 institutions with $13.4 trillion in assets.

Lenders on the FDIC's "problem list" climbed to 90 in the first quarter from 76 in the fourth quarter of 2007, the agency said in May. FDIC Chairman Sheila C. Bair said 13 percent of listed banks may fail, while the remainder are nursed back to health or are sold off to healthier lenders.

Bair and Comptroller of the Currency John C. Dugan said on July 28 they expected more lenders to fail this year as the pace of shutdowns returns to more normal levels. The FDIC has closed 35 banks since October 2000. The government shut 12 banks in 2002, the highest in the period, while 2005 and 2006 had no closures.

First Priority is the first Florida bank to fail since Guaranty National Bank in Tallahassee in March 2004, the FDIC said. Bank regulators last week closed First National Bank of Nevada and California-based First Heritage Bank.

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FDIC takes control of Florida bank, fourth to fail since July 11

We all can start getting used to this: Friday is going to be Bank Failure Day in the U.S.A.

The Federal Deposit Insurance Corp. said late today that it took control of First Priority Bank of Bradenton, Fla., marking the eighth bank failure this year -- and the fourth just since July 11, when the feds seized IndyMac Bank of Pasadena.

First Priority had assets of $259 million and deposits of $227 million. And in a sign that the high-profile failure of IndyMac still hasn’t persuaded all bank depositors to keep their accounts within FDIC insurance limits, the agency estimated that First Priority had about $13 million in uninsured deposits.

SunTrust Banks Inc. of Atlanta agreed to buy First Priority’s insured deposits and to take over the bank’s six branches. But the uninsured depositors, as in IndyMac’s case, will be paid 50% of those balances upfront and then will have to wait to see what the FDIC gets as it liquidates First Priority’s assets.

The FDIC prefers to close or sell insolvent banks on Fridays and reopen them on Mondays under government control or under a new owner. FDIC Chairwoman Sheila Bair has been upfront in preparing the public -- and Congress -- for a surge in bank failures ahead, as real estate loan losses wipe out more lenders’ capital.

One week ago the agency took control of First Heritage Bank of Newport Beach and First National Bank of Nevada in Reno and turned them both over to Mutual of Omaha Bank. In those moves the uninsured depositors didn’t lose money because Mutual of Omaha agreed to assume all $3.2 billion of the banks’ deposits.

The FDIC is required by law to resolve bank failures in whatever way costs its insurance fund the least amount of money. That can depend on how much an acquiring bank is willing to pay for all or part of a failed institution.

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Ilargi: For some reason, it takes the FDIC until August to reveal its June cease-and-desist orders.

FDIC warns four US banks over liquidity

The Federal Deposit Insurance Corporation revealed on Friday that it had issued warnings to four small US banks that lacked sufficient reserves to cover potential loan losses. Meanwhile, unsuspecting clients can continue depositing money in their accounts, which will subsequently be guaranteed by the FDIC. Or is that the TAF window?

The cease-and-desist orders issued in June said the four banks needed to raise more capital, expand their loss allowances and better oversee and diversify their loan portfolios. A fifth bank was cited for violating consumer protection laws.

Losses on mortages and other loans have helped bring down eight US banks this year, including one small Florida institution on Friday. Last month, Indymac, a California lender with $32bn in assets, became one of the largest banks to go under in US history. It filed for Chapter 7 bankruptcy protection on Friday.

The banks receiving cease-and-desist orders in June were MetroPacific Bank in Irvine, California; Bank Haven in Haven, Kansas; Clarkston State Bank in Clarkston, Michigan; and Hastings State Bank in Hastings, Nebraska.

Non-performing loans in Clarkston State’s portfolio nearly doubled to 4.6 per cent between the close of 2007 and the end of the first quarter of 2008, according to first-quarter earnings report released in April. Clarkston State’s chief executive, J. Grant Smith, said in a statement accompanying first quarter earnings that ”business conditions remain weak and commercial loan demand is anemic.”

The FDIC instructed the banks to reevaluate their allowances for potential losses. MetroPacific in California was also told to stop issuing credit “for speculative construction and land development purposes.”

The fifth bank – Columbus Bank and Trust in Columbus, Georgia – received a cease-and-desist order because its credit card program violated consumer protection laws.

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Future Looks Bleak For US Jobs

Although companies didn't shed as many jobs as expected in July, losses are likely to accelerate as macroeconomic weakness creeps deeper into companies across sectors.

The U.S. economy got mostly bad news on Friday as the July unemployment rate jumped to 5.7%, with young people bearing the brunt of the losses. The level was higher than expected by economists, who were looking for 5.6% on average, although the number of jobs actually lost was not as severe as expected, coming it at 51,000 instead of the predicted 72,000.

Still, coming a day after a troubling weekly unemployment report, the figures cast a pall. In an interview with Reuters on Friday, Mohamed El-Erian, the co-chief executive of Pacific Investment Management, said the credit crisis "morphed into a deepening economic weakness" that he expects will accelerate. "We now have three balance sheets all coming under pressure at the same time: housing, consumers and the financial sector," he said.

"Overall, the pace of employment growth indicates the economy is settling into a troubling malaise," said Peter Morici, a professor at the University of Maryland School of Business and a columnist for Forbes.com. Even though the economic stimulus plan boosted consumer spending in May and enabled gross domestic product to increase 1.9% in the second quarter, retail sales fell in June and aren't likely to rebound in July.

"Ford and General Motors have announced further production cutbacks, automakers are having difficulties securing credit to finance auto leases, builders have a 10-month supply of unsold new homes, and prices for existing homes fall month after month," Morici said.

Bond yields extended their recent decline as recession fears outweighed concern about inflation. The 10-year Treasury, the bellwether for the world's credit markets, returned 3.96% Friday morning, down from 3.98% late Thursday and 4.11% at the end of last week. Stocks moved lower, with the major averages shedding 0.5% to 1.0%, and the dollar fell to 107.54 yen from 107.89. The euro, however, slipped to $1.5562 from $1.5599.

July's results bring 2008's tally of job losses to 463,000. The Labor Department also revised previous unemployment numbers, saying fewer jobs were lost in May and June than previously thought. In May, 47,000 jobs were lost, not 62,000, as reported. June's report originally said 62,000 jobs were lost but the number was closer to 51,000.

Teenagers and young adults were the hardest hit in July, with the largest surge in job losses seen among 16-to-24-year-olds. As expected, manufacturing and construction sectors had the most job losses. Manufacturing jobs were down by 35,000, bringing total job losses over the past 12 months to 383,000 and the construction industry shed 22,000 jobs in July for losses of 557,000 since construction employment peaked in September 2006.

Although health care and mining companies added jobs during July with additions of 33,000 and 10,000, respectively, Robert Dye, a senior economist at PNC Financial Services Group, expressed concern that losses are creeping deeper across all sectors.

"What concerns me about the report is the number of different industries that are reporting job losses now," Dye said, adding that losses now stretch outside of obvious sectors, like home building. "Labor market weakness is starting to spread from one industry to the next and is going to accelerating in the coming months. Combined with the weak housing market, the economy will continue limping through the rest of this year and into the next year."

In July, the average workweek slipped to 33.6 hours, down by 0.1 hour while the manufacturing workweek and factory overtime was unchanged from June at 41.0 hours and 3.8 hours, respectively. Dye said the figures show that employers are keeping a tight lid on overtime as a cost-cutting strategy.

Efforts to keep down costs also explained the drop in teen labor, Dye said, since fewer companies could afford to hire temporary or summer help. Average hourly earnings gained 6 cents, or 0.3%, during the month.

On Friday, the Institute for Supply Management said factory activity held up in June as the weak dollar made exports cheaper for foreign buyers. The index dipped slightly to 50.0 from 50.2 in June and was better than the pullback of 49.3 projected by economists. Before June, the index came in under 50 for four consecutive months, with 50 indicating growth. Economists said soaring commodity costs could pressure future manufacturing growth.

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Lehman Shopping Mortgage Securities

In a move similar to what Merrill Lynch has done, Lehman Brothers' CEO Dick Fuld is trying to shop tens of billions of dollars in mortgage securities on its balance sheet in order to reduce leverage at the embattled investment bank, The Post has learned.

Lehman is engaged in talks with prospective buyers about offloading some $30 billion in commercial mortgage assets and other hard-to-value securities that have dogged its balance sheet for months and ultimately resulted in the demotion of Chief Financial Officer Erin Callan and President Joseph Gregory.

The sales talks, which are described as preliminary, involve Lehman selling some of its risky assets to a domestic or foreign entity and perhaps providing funding for the sale. More specifics could not be learned.

At the same time, speculation has emerged that Lazard has been hired to advise Lehman. Exactly what the boutique advisory firm has been hired to do could not be learned. The moves follow Merrill Lynch's announcement to jettison roughly $30 billion in vexing mortgage debt to Lone Star Funds for 22 cents on the dollar.

Merrill is also financing 75 percent of the transaction. Lehman's Fuld has been tirelessly trying to restore confidence in his firm as its stock has been whipsawed. Yesterday the firm's shares closed at $17.34, down 4.8 percent and down more than 70 percent for the year.

The faltering stock price has hurt morale and sparked talk within Lehman about a sale of its well-performing asset management business Neuberger Berman - a move Fuld is loath to do given his efforts to diversify his 185-year-old franchise.

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Lehman in Talks to Sell Soured Debt to BlackRock

Troubled investment bank Lehman Brothers is in talks to sell its CDOs and mortgage related assets to money management powerhouse Blackrock, CNBC has learned.

The deal comes as Lehmangrapples with the growing likelihood that it will announce another big writedown of bad debt on its books; analysts have estimated that Lehman's writedown for the third quarter could be around $3 billion.

In June CNBC first reported that Lehman Brothers executives met with officials at BlackRock , including its CEO Larry Fink about the possible sale of the CDOs, or collateralized debt obligations, and other soured securities.

Since then Lehman's financial condition has deteriorated with the firm announcing massive writedowns, losses and the need to raise capital. People close to Lehman say the firm has also weighed selling a piece or all of its money-management subsidiary Neuberger & Berman.

These sources say that private equity firms are still interested is snapping up Neuberger buts its unclear if Lehman will ultimate sell because Neuberger is considered a "core asset" and the firm may be downgraded if it unloads even a piece of a business that produces steady revenues.

In terms of a potential deal with Blackrock, its unclear exactly how that would look. The New York Post reported that Lehman is interested in unloading its CDOs to an unnamed party in the same fashion as Merrill, which financed 75% of its recent sale of CDOs to hedge fund Loan Star, meaning it lent Loan Star most of the money to buy the securities.

Merrill agreed to sell $30.6 billion of CDOs to an affiliate of Lone Star  for just $6.7 billion, or about 22 cents on the dollar. Merrill, meanwhile, is weighing whether to make an official filing with the SEC about the asset sales

The filing, which could come as early as Monday, would provide new details about the sale of the CDOs, which has drawn considerable criticism over its structure, including the sale of troubled mortgage paper for just pennies on the dollar.

So far Merrill has only issued a press release on the deal, but after the filing is made, senior merrill officials are expected to start making public statements about why the deal is good for the firm.

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Stressed banks borrow record amount from Fed

Banks borrowed a record amount of funds from the Federal Reserve in the latest week as the year old credit crisis took a persistent toll, while the commercial paper market continued to contract, signaling tough conditions for short term borrowers.

Banks' primary credit borrowings averaged $17.45 billion per day in the latest week, the second straight week this had hit a record and up from $16.38 billion the previous week, Fed data showed on Thursday. "It shows there's a shortage of liquidity in the system," said Christopher Low, chief economist at FTN Financial in New York.

Secondary credit the Fed extended, which is usually taken out by banks in need of emergency cash, rose to $89 million in the latest week, from $34 million the week before. Although these numbers are still very small compared with primary credit, "What that tells you is that there's an increasing number of banks that the Fed is classifying as 'unsound' or inadequately capitalized," Low said.

Analysts may watch the trend of secondary credit closely, given the travails of U.S. regional and smaller banks and the likelihood that a continued decline in house prices and rise in foreclosures and bad loans will deepen the difficulties of the banking sector for many months or years.

Some analysts ascribed the overall rise in demand to use the Fed's short term discount window borrowing facilities to a mix of factors. "I am sure there are troubled banks trying to tap the window," said Michael Feroli, U.S. economist with JPMorgan in New York.

But he added: "more and more banks are trying to take advantage of the pure economic advantage of borrowing at a cheap rate and you are seeing a gradual fading away of the stigma of using the discount window." The Fed's main discount rate is 2.25 percent.

Meanwhile, the U.S. commercial paper market, a vital source of short-term funding for daily operations at many companies, fell $16.0 billion to $1.728 trillion, the lowest level outstanding in two years, from $1.744 trillion the previous week, Federal Reserve data showed on Thursday.

"The panic of last year is over. It's more orderly now, but the financial stresses remain and there will be more difficulties to come," said John Canavan, market analyst at research company Stone & McCarthy in Princeton, New Jersey. Part of the overall decline was attributable to asset-backed commercial paper, a subsector that has been eroded by the slide of housing and mortgage-related securities.

U.S. asset-backed commercial paper outstanding fell by $6.1 billion after rising $4.7 billion the previous week. U.S. asset-backed commercial paper outstanding declined to a total $743.9 billion in the latest week from $750.0 billion the previous week.

"The asset-backed outstanding continues to creep a little lower," Canavan said. "No one is willing to touch the asset-backed commercial paper because people are concerned about the intrinsic value of the underlying issues, mortgage-related securities."

Foreign central banks, who own over a quarter of marketable Treasuries, were net buyers of U.S. government bonds in the latest week, but were net sellers of agency securities, Federal Reserve data showed on Thursday. Foreign institutions sold securities from government-sponsored agencies like Fannie Mae and Freddie Mac, subtracting $2.39 billion from those holdings, which now stand at $981.69 billion.

The breakdown showed overseas central banks bought $17.89 billion in Treasury debt, bringing the total to $1.395 trillion. The interbank cost of borrowing three-month dollar funds posted its biggest fall in a month on Thursday, according to the British Bankers' Association, a day after central banks announced more liquidity boosting measures.

The London 3-month dollar-denominated interbank offered rate was fixed at 2.79125 percent versus 2.80063 percent the previous session. U.S. primary dealers borrowed a modest $3 million from the U.S. central bank's Primary Dealer Credit Facility in the latest week, versus an average of zero per day the week before.

Dealers took $28.1 billion in Treasuries of the $50 billion the Federal Reserve offered at its weekly Term Securities Lending Facility auction on Thursday, not covering the total amount on offer, but still a sign of hefty demand. Cash strapped financial institutions can convert the Treasuries temporarily into short term cash loans in the repurchase market in order to shore up balance sheets depleted by the credit crisis.

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Ilargi: Somewhere in between the charges filed by Andrew Cuomo against investments banks like Citi and UBS, there is a question popping up.

The FASB may have let itself be intimated into delaying fair accountancy rules for another year, but can the banks keep hiding trillions of dollars in Level 3 and off balance assets in the face of criminal fraud proceedings?

Citigroup Faces Fraud Charges From New York Attorney General

The office of New York Attorney General Andrew Cuomo said Friday it plans to imminently charge Citigroup's Global Markets and Citi Smith Barney units with fraudulently marketing auction-rate securities and destroying documents that were supoenaed by the state.

According to Cuomo's office, Citigroup has repeatedly and persistently committed fraud by making material misrepresentations and omissions in its underwriting and distribution of auction-rate securities by marketing them as very safe and liquid investments.

Earlier this week, Cuomo's office filed similar charges against rival investment bank UBS for similiar reasons.
An investigation by the attorney general revealed that the bank didn't comply with legal obligations under New York state law when it destroyed certain documents and telephone conversations tied to the marketing, sale and distribution of the auction-rate securities.

Earlier Friday, the U.S. Securities and Exchange Commission said it had opened a formal probe into possible violations of federal securities laws in connection with the sale of auction-rate securities. The largest U.S. bank by assets also said it is responding to subpoenas from state agencies, including those in Massachusetts, New York and Texas, concerning the securities.

Regulators are examining whether banks and brokerages nationwide misrepresented the safety of auction-rate securities to investors. The $330 billion market normally lets municipal issuers borrow money long-term but at lower, short-term rates. Some of the market remains frozen after a February meltdown in which brokerages quit their role as buyers of last resort.

Separately, Citigroup said it is cooperating with information requests from governmental and self-regulatory agencies regarding several bank-managed hedge funds, including Falcon Two, ASTA and MAT Five.
Citigroup disclosed the various regulatory actions in its quarterly report filed with the SEC.

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UBS defectors claim clients were concerned

UBS wealth management bankers who quit for start-up rival Vestra Wealth have said they left because their clients believed investments with UBS were put at risk by the bank's huge sub-prime losses.

The comments, presented as evidence in a High Court battle between UBS and Vestra, will touch a raw nerve because activist investor Luqman Arnold has built up a 2.5pc stake in UBS in a move many feel could eventually lead to a split between the Swiss bank's highly profitable wealth management arm and its sub-prime hit investment banking arm.

UBS is suing Vestra and a number of former UBS fund managers who have left for the Goldman Sachs-backed start-up. The bank has asked the High Court for an injunction to prevent the executives from poaching valuable clients and a judgment is expected on Monday.

As part of their evidence the defendants - Vestra, its founder David Scott and four key former UBS bankers - submitted testimony from the 52 UBS employees who have defected.

In an email submitted to the court, UBS Wealth Management investment director Sanjay Rijhsinghani, said: "The problems UBS was facing because of the writedowns caused by sub-prime losses had damaged UBS' reputation to the extent that a number of my clients were concerned about the 'safety' of their funds."

UBS investment director James Allan said in another email: "With the sub-prime crisis exposure and the uncertainty of our exact losses we were given very little to defend our position in a very nervous environment, clients and introducers were becoming very concerned about UBS."

The bank's lawyers argued in court yesterday that there was a considerable disconnect between the reasons given by defectors to the court for leaving UBS and their real reasons for quitting, citing specifically discrepancies between written testimony from one banker Richard Wayne-Wynne and comments made by him in a telephone conversation recorded by UBS.

UBS has already written off $37bn (£18.6bn) in sub-prime losses and conceded this month it could be forced to make yet more writedowns. UBS declined to comment on the allegations, but said: "This legal action is to ensure that certain senior departing employees abide by contractual obligations.

"Our strategy remains unchanged and UBS continues to be fully committed to offering all clients a personalised discretionary investment service."

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UBS: Auction-Rates Securities Collapse

Ever since the auction-rate securities mess erupted six months ago, the same story has echoed across Wall Street. The way UBS and other banks tell it, the $330 billion market functioned for years without a hitch, providing big corporations and wealthy investors with a highly liquid alternative to cash.

Then, without warning, it imploded in February, leaving tens of thousands of investors with huge losses if they tapped their accounts—assuming they could get the money at all. But a BusinessWeek analysis, based on court documents and interviews with regulators, investors, and financial advisers, reveals that there were serious flaws in the market long before it seized up.

Last summer's credit crunch, which scared off investors from all manner of debt, only exacerbated the problems. There could be legal consequences for UBS, which is being sued for fraud by regulators in Massachusetts and New York.

UBS, one of the biggest underwriters of the securities, says the cases are without merit and that e-mails cited in the suits are taken out of context. (On July 30, UBS settled a separate investigation by the Massachusetts Attorney General into sales of the securities to the state's municipalities.)


Over the years, auction-rate securities became popular among investors looking for cash-like options with slightly higher yields than money-market funds and certificates of deposit. The investments—in reality, long-term bonds—were considered more like short-term debt because they could usually be sold at weekly or monthly auctions.

Until February, UBS and other banks kept auctions from failing by stepping in to buy any unpurchased securities. But when buyers fled amid the credit crunch, the bank bought more than it could handle. The Massachusetts suit alleges that despite the turmoil, UBS continued to hype the investments as high quality, pushing in-house brokers to sell them.

"UBS categorically rejects any claim that the firm engaged in a widespread campaign to move…inventory from the firm's own books and into private client accounts," says a UBS spokeswoman.

Like other customers, the First Lutheran Church of Greensboro, N.C., wanted a safe place to stash some money. After raising $500,000 to build new classrooms and an addition, church leaders invested the money in auction-rate securities on the recommendation of their UBS broker, a member of the parish. "UBS told us they'd put the money in conservative investments to preserve our principal," says church president Andrew Chamberlin.

But when officials tried to withdraw money in May, the bank told them the funds were frozen. "We believe at the time the Church made the…investments, the purchases were suitable," a UBS lawyer told First Lutheran in a June 20 letter. "However, as a result of unprecedented instability in the…markets, there recently have been numerous…auction failures."

Court documents suggest, however, that UBS may have known about problems with the securities months, and even years, before the market disintegrated. UBS, Citigroup, Merrill Lynch, and others, which collected huge fees for running the auctions, habitually intervened: When enough buyers didn't show up, firms bought the leftovers to keep the auctions going.

From January 2006 through February 2008, UBS bought securities at 88% of the 30,000 auctions it ran for towns and student loan authorities. In 2006, the Securities & Exchange Commission fined 15 other brokerages, including Citi and Merrill, $13 million for failing to disclose that they sometimes supported the auctions. Citi and Merrill declined to comment. When the credit crisis struck, the banks started to choke on the securities they once readily consumed.

By August 2007, UBS's inventory had swelled to $3 billion, from $1 billion five months earlier, according to the New York suit. The mounting inventory raised red flags among UBS's risk managers. "There is little tolerance for increased inventory firm-wide," one wrote on Aug. 15 to David Shulman, head of the group that ran UBS's auctions. Shulman, who has been placed on leave, according to a person familiar with the situation, could not be reached.

With UBS's stockpile growing, Shulman acted quickly to find buyers among the retail clients served by the bank's wealth management division. According to e-mails, he helped organize a conference call with more than 850 brokers on Aug. 22 to promote the product.

"We have encouraged our [wealth management] partners to mobilize troops internally…so we can move more product through the system," he wrote that same day to colleagues in the municipal bond and risk groups. "This is our best and most effective way of hedging our exposure."

Only hours earlier, Shulman had moved to cut his personal exposure. E-mails show that UBS's compliance department cleared him to sell $475,000 worth of auction-rate securities from his own account.

The outside pressures increased in October when manufacturer Potash Corp. of Saskatchewan, telecom equipment maker Ciena, U.S. Airways Group, and other companies announced losses on their securities. Auditors, too, began expressing concern about the market, prompting corporate clients at UBS to try to dump their investments.

"I have to do a conference call with another client [chief financial officer] who wants to sell all his [auction-rate securities] because his auditor [PricewaterhouseCoopers] is telling him there are problems…and to get out now," a UBS employee told Shulman in an Oct. 31 e-mail. "I expect other clients to call." Shulman forwarded the note to UBS's chief operating officer, saying "this is a huge albatross."

The worries grew. On Dec. 13, five days before First Lutheran made its final, $100,000 investment, UBS staffers sent a flurry of e-mails to their boss, Shulman, warning that "the auction product does not work" and "the entire book [of securities] needs to be restructured out of auctions."

Shulman and others redoubled efforts to sell the investments. In December, he O.K.'d a new deal for auction-rate securities backed by student loans. Shulman also urged several colleagues to "press your relationships within [wealth management] and cash management group harder now more than ever…to do what we need to move this paper as well as current inventory."

Despite such actions, UBS held almost $7 billion of the securities by January, according to the New York suit. When Goldman Sachs, Piper Jaffray, and others stopped buying them in February, UBS did the same. Within days, the market ground to a halt.
Six months later, many investors, particularly those who owned bonds backed by student loans, are still trying to recoup their money.

Some issuers and firms have agreed to buy back the securities. On July 15, UBS announced a plan to acquire up to $3.5 billion of the investments at full value, a deal that doesn't include the student-loan securities. New York Attorney General Andrew Cuomo wants the bank to buy back all $25 billion of the auction-rate securities owned by UBS customers.

First Lutheran's funds, meanwhile, remain frozen. The church rejected an offer from UBS to borrow against the securities. Had they accepted the loan, church members would have given up their right to sue. First Lutheran has filed complaints with Massachusetts and North Carolina regulators. "We were hoodwinked," says Fritz Apple, a 71-year-old parishioner. "They shouldn't have done this, not to a church."

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Ilargi: How long till state governors also get access to the Fed discount windows?

Arnold Schwarzenegger lays off 10,000 California workers to ease budget crisis

Arnold Schwarzenegger, the governor of California, delivered on his threat to lay off thousands of state employees on Thursday when he signed an executive order in an attempt to solve the state's budget crisis.

The move, dismissed by critics as a gesture to force legislators to reach a compromise on how to resolve the state's $15bn budget deficit, left more than 10,000 part-time and temporary employees without work yesterday. The order also reduced the pay of up to 200,000 state employees to the federal minimum wage of $6.55 an hour, below California's minimum.

"I have a responsibility to make sure that our state has enough money to pay its bills," the Republican governor said as he signed the order at a press conference in the state capital, Sacramento. "It is a terrible situation to be in. I don't think any governor wants to be in this situation ... But this is really the only way out at this point."

Critics, including the state controller John Chiang, a Democrat, disagree. Chiang, the state official who issues pay cheques, has said he will pay employees normally, arguing that Schwarzenegger does not have the legal authority to summarily reduce employees' pay.

Referring to the employees as "the innocent victims of a political struggle", Chiang declared: "The state of California, the elected leadership, cannot put the important public servants of California in harm's way. We put people first, we make sure we protect their interests, and that's why I have to tell the governor, with all due respect, I am not going to comply with this order."
Unions also declared their intention to challenge the order in court.

California, the nation's largest state and one of the world's largest economies, regularly fails to agree a budget by the annual July 1 deadline. Officials from the governor's office claimed the lay-offs could save the state up to $100m a month, while the pay cuts would save up to $1.2bn a month if applied to all 200,000 eligible workers.

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Ilargi: Oh well, so there’s a few hundred billion extra that’s at risk. Who’s counting anymore? When it comes to big money, it’s time to focus on the big picture.

I wouldn’t worry too much about it; there’s always the TAF and sister windows. If they can’t get the money to you and your community in time today, they will take it from your future account, and hand it out now. Works like a charm. All Ponzi creativity does.

Billions in tax deposits uninsured

Your bank account is insured up to $100,000, but you still have a lot at stake in the event of a major failure: hundreds of billions of state and local tax dollars in accounts nationwide that are not insured by the Federal Deposit Insurance Corp.

Losses aren't likely, says a state official, but government treasurers are keeping a close eye on the funds.
Franklin County currently has $300 million of taxpayer money in banks; the city of Columbus easily has tens of millions; and local school districts hundreds of millions more, officials said.

By Ohio law, the uninsured portions of these accounts are backed by collateral purchased by the banks. But many might be backed by bonds of agencies that are in trouble themselves, namely government-sponsored mortgage behemoths Fannie Mae and Freddie Mac.

President Bush signed into law yesterday an emergency rescue bill that allows the Treasury Department to use federal money to prop up the teetering giants, which a former Federal Reserve Bank official recently called "insolvent." After the biggest bank failure in decades, plunging stock prices for financial institutions, descending home values and rising foreclosures, the FDIC has launched a new advertising campaign to reassure bank customers.

The message: Don't worry. You're covered up to $100,000. "Given recent events, we've stepped up our public-education efforts," said spokesman Andrew Gray. He said now is a good time for people to assess their bank accounts, make sure they understand insurance limits and make changes accordingly.

The fact that such a campaign is even needed "kind of makes you wonder what's going on, doesn't it?" said South-Western schools Treasurer Hugh Garside. "If this all goes bad, I think it's going to all go bad for everybody."

No agency tracks how much of government bank accounts are backed or the type of collateral, said Pam Grandon, an attorney who supervises bank examiners for the Ohio Department of Commerce, Division of Financial Institutions. But the securitization system would work unless two major problems occurred simultaneously: banks fail and their various collateral funds lose significant value, Grandon said.

"It would have to be a moment in time -- a perfect storm coming together," she said. Despite the protections offered by the FDIC and collateral requirements, Jim Phillips moved quickly last week to pull $3 million of school money from Home Savings and Loan after the bank said deteriorating business conditions forced it to drop all public accounts by Aug. 11.

This spooked Phillips, treasurer of the South Range schools near Youngstown. "The concern was I didn't know what was going on, and it comes down to the hassle factor," Phillips said. "If something were to happen, that's going to be legal expenses to me, because I don't know what to do" to collect on the collateral.

Garside said he is not overly concerned about the safety of his district's accounts, but he recently began planning for how to meet payrolls if one of its banks got into trouble. Like most public agencies, South-Western spreads its money across numerous banks and has other investments it could sell in a crisis, he said.

In 2006, FDIC-insured commercial banks held $289.7 billion in cash for state and local governments nationwide, of which only 24 percent was insured, according to an FDIC report issued this year. The report noted that collateralized accounts carry risks: The collateral could lose value before it's sold to repay account holders or it could be missing because of bank fraud.

To illustrate this point, the FDIC cited the 2002 failure of an Ohio bank, Oakwood Deposit Bank near Toledo, which collapsed in an embezzlement scandal. "Some municipal depositors discovered that (Oakwood's) collateral securing their deposits was valued at significantly less than agreed, while other depositors found that the bank had pledged the same collateral multiple times," the FDIC report says.

Adding to the complexity, banks can pool collateral backing multiple customers and accounts together, leaving claimants to fight it out in court over who gets what, officials said. "If the bank would fail, you have to track down the collateral," said Becky Jenkins, treasurer of Olentangy schools.

That's why last year the Olentangy schools started using a program called Certificate of Deposit Account Registry Service, which takes the district's roughly $40 million in bank deposits and spreads it across hundreds of banks nationwide.

Jenkins believes the method is safer than collateralizing the deposits. "It's all broken up to $100,000 or less, so it's all FDIC insured," she said.

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The United States national debt limit has become a joke

The recently passed housing rescue bill, along with hundreds of pages related to the massive housing bailout, also included a provision to increase the cap on the National Debt. It was certainly not the only random pork barrel provision completely unrelated to housing, but it is one that deserves special attention.

SEC. 3083. INCREASE IN STATUTORY LIMIT ON THE PUBLIC DEBT. Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $10,615,000,000,000.

The provision in section 3083 raises the ceiling on the United States national debt to $10.615 trillion by $800 billion dollars. The debt ceiling was previously set at $9.8 trillion dollars. The current national debt, as of July 30, is $9.54 trillion dollars, which stands under the limit of both the $9.8 trillion mark and the newly increased $10.6 trillion mark. To understand what the national debt ceiling is requires a brief look into history.

The United States first went into debt in 1790 as a result of Revolutionary War debts. And prior to World War I, the United States needed approval from congress every time it wanted to borrow money from the public. Because of the frequent overspending beyond tax revenues, and the resultant borrowing, it was thought impractical to require approval for every bond sale. So in 1917 the second liberty bond act placed a ceiling on the national debt.

Any treasury operations that required increasing the debt could be performed without congressional approval, as long as the total outstanding national debt remained underneath the legally binding debt ceiling. The initial debt ceiling went in place at only $7.5 billion dollars, and has been increased countless times since.

The entire use of the term debt ceiling has been reduced to an anachronism. Our government continually spends more then it takes in from taxes, and when they get close to the preset maximum debt, they just increase the ceiling. But they are so embarrassed by the insanity of the ceiling, they are forced to hide the ceiling increase in unrelated housing bailout bills.

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Ilargi: A sign of the times, and an ominous one. The carmakers, losing sales hand over feet, should come with incentives to boost those sales. But their financial situation forces them to do the opposite. It will become much more expensive to purchase or lease a new car, which will drive down sales even much more; Detroit is caught in a feedback spiral.

U.S. Vehicle Sales Fall 13.2% Amid High Gas Prices and Tight Credit

Vehicle sales in the United States fell last month to their lowest level in 16 years, as consumers continued to shun large trucks because of high gas prices, and tight credit kept less creditworthy customers off lots.

Sales were down 13.2 percent, at a time when the companies had expected to begin seeing an improvement.
Instead, the five largest automakers each reported sales declines on Friday.

Sales fell 26.1 percent at General Motors, the largest car company, while Chrysler, which used to be the third-largest, reported a 28.8 percent decline and came within a few thousand sales of falling to sixth place. The Ford Motor Company posted a 14.7 percent decline.

Together, the three Detroit automakers accounted for just 42.7 percent of the vehicle market last month, selling about 150,000 fewer vehicles than they had a year earlier. The declines in the United States market affected foreign automakers too.

Toyota Motor reported an 11.9 percent decline, while Honda, which builds fewer trucks than its rivals and was the only large automaker to report a sales increase for the first half of the year, said its July sales decreased 1.6 percent. Nissan’s sales rose 8.5 percent on strong demand for its small cars.

As recently as this spring, executives in Detroit forecast that auto sales would rebound in the second half of 2008, as consumers spent their federal rebate checks and overcame difficulties in the housing market. But the July sales figures suggest that will not be the case.

In fact, the industry’s annualized sales rate of 12.55 million was its lowest since April 1992, showing that the market is continuing to deteriorate. Soaring borrowing costs for the automakers’ financing arms and other lenders have led to higher automotive loan rates and tighter credit standards, which have cut sharply into sales.

G.M. said it is losing 10,000 sales a month that it used to get from customers with below-average credit ratings.
“In the next several months, or even the next year I would say, the unfolding credit situation that customers are facing in dealerships will take center stage,” said James D. Farley, Ford’s marketing chief. “A lot more creativity has to take place in the finance and insurance office to sell a car now.”

Meanwhile, leases are becoming significantly harder to obtain, with Chrysler no longer offering leases through its financing arm. G.M. and Ford said on Friday that they will cut back on leasing but remain committed to that business.

Falling sales of sport utility vehicles and pickup trucks have caused resale values of those vehicles to plummet, and that has turned many leases into huge money losers for the automakers. Unprofitable leases led to write-downs of $2.1 billion for Ford and $716 million for G.M.’s financing arm, the General Motors Acceptance Corporation, which it partly owns. GMAC this week halted subsidies for leases in Canada.

“All the risk, all the liability and all the expense is being put onto the consumer with this move away from leasing,” said Rebecca Lindland, an analyst with the research firm Global Insight. “There may be unintended consequences to this move, and they may be unpleasantly surprised that consumers walk away and go someplace else.”

About 20 percent of customers lease vehicles, according to J. D. Power & Associates’ Power Information Network. Mark LaNeve, G.M.’s vice president for North American sales and marketing, said G.M. hoped to cut leasing so that it accounted for between 10 and 15 percent of its business.

“It’s a move that we have to make to reduce our risk in the marketplace,” said Mr. LaNeve. “If the industry can see its way through this, it’s going to give us much higher quality of sale and a much higher profit per vehicle.” Chrysler said Friday that it would offer 72-month financing deals so that customers could buy a car with monthly payments similar to leases to ease the transition away from leasing.

Ford estimated that total light vehicle sales this year would be 13.7 million to 14.2 million, a considerable drop from the first half’s annualized rate of 15 million. In 2007, automakers sold more than 16.1 million vehicles in the United States.

Ford said that its car sales were up 7.8 percent last month, but that sales of S.U.V.’s, a segment that used to generate huge profits for all three Detroit automakers, plunged 54.4 percent. G.M. sold 18.9 percent fewer cars and 34.7 percent fewer light trucks. At Toyota, car sales were roughly flat because of shortages of some models, while sales of pickup trucks and S.U.V.’s dropped 27 percent.

Summer is typically a strong season for the automakers, as they unload their remaining inventory from the old model year and begin selling new vehicles. But $4-a-gallon gas and a sluggish economy have kept many consumers who might normally be in the market for a new car away from dealerships.

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Automakers Race Time as Their Cash Runs Low

The downturn in the American auto industry is rapidly becoming a full-blown fight for survival among Detroit’s big automakers.

With the combination of high gas prices and a weak economy crippling vehicle sales, the resources of General Motors and the Ford Motor Company are being stretched to the limit. Both companies have undergone major revampings in recent years, yet they continue to post huge losses. And even as they burn through their cash reserves and slash more costs to stay afloat, the future looks tenuous.

In the latest sign of the deepening troubles, G.M. reported a stunning second-quarter loss of $15.5 billion on Friday because of a continuing fall in United States sales and charges for job cuts, plant closings and the falling value of trucks and sport utility vehicles.

That followed a loss of $8.7 billion reported last week by Ford. Overall sales fell by 13 percent in July. Chrysler, the smallest of the three Detroit auto companies, is privately owned by Cerberus Capital Management and does not report financial results.

The losses stem from a freefall in sales and a shift by consumers away from bigger vehicles that were once G.M.’s and Ford’s most profitable products. G.M. and Ford had expected economic conditions to improve in the second half of this year, but now are forecasting an even more dismal sales environment.

Neither company appears in immediate danger of failure. But analysts say Detroit is in a race against time.
“Things are pretty bad, and the river is getting deeper, faster and wider,” said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. “The question is, can they get to other side before the cash runs out?”

American automakers have decided — critics would say, belatedly — to shift production from trucks and sport utility vehicles to smaller, more gas-efficient cars, including hybrids. But it takes time to switch equipment for production. And it is unclear whether the automakers have sufficient cash to remain solvent until their new vehicle lines are ready for customers.

The overall United States auto industry is headed for its worst year in more than a decade. Sales so far this year have fallen 10 percent from 2007, including a 13 percent decline in the month of July. The market has been tough for nearly every automaker including Toyota, whose sales fell 11.9 percent in July. But the Detroit companies have been hit the hardest.

Sales at G.M. dropped 26.1 percent in July, 14.7 percent at Ford, and 28.8 percent at Chrysler. And the three companies’ combined United States market share hit an all-time low of about 43 percent during the month.
G.M. ended the quarter with $21 billion in cash reserves, which would be considered a healthy financial cushion in normal times.

But the automaker is burning through more than $1 billion in cash each month, a worrisome indicator that has prompted some investors to speculate about the potential for G.M. to go bankrupt. One indication of a loss of faith is that the company’s bonds were trading on Friday at 48 cents on the dollar.

Trying to fight such doubts on Wall Street and elsewhere, Rick Wagoner, G.M.’s chairman, last month outlined a broad program of cost cuts, asset sales and debt offerings intended to increase the company’s liquidity by $15 billion.

The moves temporarily calmed fears on Wall Street about a possible bankruptcy filing, and injected a renewed sense of urgency among G.M. executives. Compounding Detroit’s problems is the rush by consumers to buy small cars and the collapse in sales of pickups and sport utility vehicles that historically provided the bulk of the profits at G.M., Ford and Chrysler.

Ford last week announced that it would radically shift much of its North American production from trucks to cars, and bring six of its European models to the United States market. G.M. had already laid plans to make more cars and car-based crossover vehicles, while downsizing its truck production.

But the question facing Detroit is how it can continue to finance its operations and product programs until the market rebounds and its new models hit the showrooms. “This is almost like evolution, and the survival of the fittest,” said Jesse Toprak, chief industry analyst for the automobile research Web site Edmunds.com. “They are on the right path to make fuel-efficient cars, but it’s going to take time.”

G.M., Ford and Chrysler have already gone through wrenching revampings and eliminated more than 100,000 manufacturing jobs in the United States since 2006.

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Credit crunch leaves Alliance & Leicester's profits in tatters

The credit crunch all but wiped out Alliance & Leicester profits in the first half as it suffered a £209m writedown on “toxic” assets and a £70m increase in its funding costs.
 
The bank, which has agreed a £1.26bn takeover by Santander – the Spanish owner of high street rival Abbey, reported a collapse in pre-tax profits from £290m to just £1.8m for the six months to June. A&L’s figures also revealed that commercial customers had withdrawn £1.3bn of deposits in the past six months, in contrast with the £800m placed with the bank by retail customers.

Commercial balances fell from £7.5bn to £6.2bn, while retail deposits rose to £24.1bn. A&L said: “The reduction [in commercial balances] primarily reflects the credit policies of customers whose policies require them to deposit funds at AA rated institutions.”

Moody’s downgraded the bank from AA to A in April. A&L has been one of the worst casualties of the credit crunch. Earlier this year, it warned that securing sufficient funding to meet its obligations into the first half of 2009 would cost an extra £150m.

At the same time, it revealed plans to shrink its loan book to strengthen its capital position. Funding costs were £70m higher in the first half and its facilities have been extended into the third quarter of 2009.
The bank has reduced its asset base by £2bn to £77bn in the past six months, with the mortgage book shrinking by £2.1bn to £40.6bn and customer loans down by £1.6bn as it seeks to cut its dependence on wholesale funding.

The lender has £44bn of wholesale funding liabilities and just £30.3bn of customer deposits. Chief executive David Bennett reiterated that the board had decided to accept Santander’s offer, which was made as A&L shares traded at a record low, because it offered “certainty in uncertain times”.

He cited the “risk that further shocks to the financial system could generate further adverse sentiment towards financial groups like A&L”. “This sort of adverse sentiment can be indiscriminate,” he added. “The board believes we are potentially vulnerable to risks of external events further eroding shareholder value.”

Despite its funding problems and the writedowns in the treasury portfolio of “toxic” structured credit assets, analysts said A&L produced a robust set of figures. Citigroup said the numbers were “slightly better than expected” and there was “nothing to dissuade Santander” from proceeding with its bid.

Operating profits excluding one-off items were £301m against £295m for the same period last year. Group impairment charges were up from £56m to just £62.2m for the half, with “mortgage asset quality remaining excellent”.

Mortgage provisions rose from zero to £7m while bad debts in unsecured lending fell from £42m to £36m. At the end of June, 2,787 mortgage accounts were over three months in arrears – an increase of 419, representing just 0.61pc of the book and less than half the industry average of 1.34pc.

Operating profits in retail banking were 2pc higher at £211m, and up 14pc at the commercial bank at £89m. The bank said it “continues to be well capitalised” with a core tier one capital ratio of 6.5pc. After paying the planned 18p dividend on October 6, the core tier one ratio will drop to 6.2pc but remain among the industry’s best.

The capital position comes despite the problems in its treasury portfolio, which made an operating loss of £272m after a £143m impairment loss charge, a £66m reduction in the fair value of treasury investments and the £70m of strategic funding costs.

Redundancy costs also jumped from £1m to £14m. Mr Bennett said: “Alliance & Leicester’s underlying business is in good shape... but our financial results have been significantly affected by treasury losses in the first four months of the year and by high funding costs.”

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Ilargi: Yeah, that’s relly great, the West propaganda automatons don’t miss a beat either, do they? "....intensifying fears that Moscow wants to use food exports as a diplomatic weapon.."

That’s like accusing the Kremlin of plagiarism, of acting too much like the US and EU in the past 50 years. Tell me again, FT, who made the Doha talks fail? Must have been India and China, right?

Moscow to seize grain export controls

Russia plans to form a state grain trading company to control up to half of the country’s cereal exports, intensifying fears that Moscow wants to use food exports as a diplomatic weapon in the same way as Gazprom has manipulated natural gas sales.

The move by Moscow, the world’s fifth-biggest exporter of cereals, has been sharply criticised by US agriculture diplomats as a “giant step back” to the Soviet era. The decision to control food exports is the latest sign of how soaring food prices are reshaping the agriculture industry.

The recreation of Soviet-style state trading will aggravate anxieties of food-importing countries about their dependence on the international market, which has been severely disrupted this year after exporters, including Russia, imposed prohibitive foreign sales duties or export bans.

Western diplomats and agriculture industry officials said Russia intended to transform its Agency for the Regulation of Food Markets into a state trader, controlling between 40 and 50 per cent of Russia’s cereal exports within the next three years. The company would take over government interests in 28 important storage depots and export terminals, including the country’s biggest at the Black Sea port of Novorossiysk.

The plan, pending governmental approval, could be implemented before the year’s end, diplomats said. An internal report of the US agriculture department said that if the new entity had a dominant hold over the export market, it would jeopardise “a vibrant private grain trading sector”.

“Essentially, [it will be] the latest in a series of industry renationalisations, and a reversal of what till now has been one of Russia’s privatisation success stories,” the report said. Dmitry Medvedev, Russian president, emphasised at the last G8 summit the need for government involvement in foodstuffs trading, calling for a “grain summit” next year in Moscow to discuss “pricing policies and stabilisation measures”.

Russia’s former state-owned grain trading system was dismantled after the Soviet Union fell in the 1990s. Roskhleboprodukt, successor to the Soviet-era Ministry of Grain Products, has declined in importance. Exportkhleb, the foreign grain trading arm, was privatised.

The plans resemble action by Russia to form national champions in energy, aircraft, weapons and metals. It is unclear what role will remain for the commercial traders that dominate the grain export market. “This is not a second Yukos,” said Andrei Sizov, a managing director at Sovecon, a leading Russian consultancy analysing agriculture. “I believe the shares [of the state company] will be managed jointly with private owners or they will be bought on market-based conditions.”

Another expert, on condition of anonymity, said to form the company – combined with its ownership of the export terminals – “would be bad for the entire development of the market”. The value of Russia’s grain exports last season hit $3.5bn, and analysts forecast it would double in the next five years as Moscow aims to increase its grain exports to at least 25m tonnes from last season’s 13m tonnes.

Moscow’s move to create a state grain trading comes as Australia deregulates its grain export market, which has been controlled by the 70-year-old wheat export monopoly operated by AWB.

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Unthinkable Truth; Undeniable Reality

 The truth may be unthinkable, but the reality is undeniable:
Much of our nation's financial structure is collapsing, and our government's only response is phony money, bogus bailouts and a litany of false promises.

Ben Bernanke, Henry Paulson, the FDIC and the U.S. Congress say they can do it all.

They say they can save bankrupt brokers like Bear Stearns ... take over recently failed banks like IndyMac Bank and First National of Nevada ... prop up insolvent mortgage giants like Fannie Mae and Freddie Mac ... refinance millions of defaulting mortgages ... dish out hundreds of billions in tax rebates ... and still have enough cash in the kitty to cover the next round of financial collapses.

They say their unbridled money printing won't devalue the U.S. dollar. They say their unlimited pledge to guarantee junk mortgage bonds won't sabotage the credit of the U.S. Treasury. They say their blank checks to private companies won't rip off U.S. taxpayers.

They'd have you believe they can outlaw the cycle of boom and bust ... repeal the law of supply and demand ... even freeze the march of time. In the real world, of course, no government in history has ever been able to do anything of the kind, and they know it.

In the real world, their "solution" is part of the problem, and they know that too. They know that wealth is generated from work — not from the paper money they're printing. They understand the hazards of indulging the most daring debtors and rescuing the most reckless risk-takers.

They know darn well the fatal flaws of the course they've chosen. But they proceed to pursue it anyhow. Why? Because, behind the façade of their feel-good happy talk and beneath the thin veneer of their Pollyanna optimism, nearly every single one of our leaders — including Bernanke and Paulson, Democrats and Republicans — is really a gloom-and-doom pessimist in disguise.

They are pessimists inasmuch as they have little faith in America's ability to confront hard times. They greatly underestimate our ability to cope and adapt. They think we can't handle the truth. I disagree. In the Great Depression, our parents and grandparents faced the unthinkable truth and created a stronger country as a result.

They confronted the truth again during World War II and helped create a better world in its aftermath. I believe we can do that too. We have the resources. We have the knowledge. And we have the added benefit of hindsight. But before we move forward, we must admit five irrefutable facts:

Irrefutable fact #1: Ours is a debt-addicted society,and weeding out the bad debts is the first step toward true recovery.
Irrefutable fact #2: By far the biggest pile-up of debts is in mortgages — $14.7 trillion, according to the Federal Reserve's latest Flow of Funds report.
Irrefutable fact #3: Among those mortgages, a quarter to a third could go bad: Their terms are high risk for both borrower and lender. Their collateral is shaky. Most should never have been created in the first place.
Irrefutable fact #4: When bad debts go into default, there is no free lunch. Somebody has to pay the price. The only question is: Who?
Irrefutable fact #5: The overwhelming bulk of the bad mortgages were created to help Americans move into homes that were priced far above their means. But the only way to correct this problem is to let natural market forces drive home prices back down to much lower levels.

Do most of our leaders have the wisdom and moral fiber to confess to these truths? Not yet. But in the not-too-distant future, they will have no other choice.

Reason: America's housing marketplace is bigger than any government; its power, greater than any law. It is the single largest asset class in the world. It packs the most powerful forces of supply and demand ever assembled in history.

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Despite Stagnant Wages, Feds Still Fear Wage Spiral

The surges this year in oil and food prices could not have come at a worse moment for the typical American worker, who has not had a raise to speak of in this decade.

Workers’ leverage is gone. Companies are not creating jobs. Unions that negotiated big wage increases in the 1970s are shadows of their former selves. Cost-of-living adjustments, once commonplace, have disappeared. And the movement of jobs offshore, or the threat of it, has conditioned workers to not even ask for a raise, fearing they will join the millions already laid off.

Still, the Federal Reserve’s policy makers — its governors and the presidents of its regional banks — are convinced that wage pressures could emerge unexpectedly. That concern, and the idea that wage pressures could lead to yet higher prices and a rising inflation rate, showed up in half-a-dozen interviews with policy makers over the last week.

The policy makers assume that rational human beings, faced with higher prices, eventually demand and get higher pay, despite their apparent lack of leverage. They have built that assumption into their economic models, but they differ sharply on how quickly the wage pressure could resurface, an issue they will once again debate at their next meeting, on Tuesday.

“The power to bargain for higher wages, a power that we assume was dismantled, may not be so feeble,” said Richard W. Fisher, president of the Federal Reserve Bank of Dallas, who is the most certain of all that a wage-price spiral is imminent. If the Fed anticipates a reawakening, organized labor itself certainly does not.

“Real wages, adjusted for inflation, are falling, and there is no sign at all of any change in direction,” said Ronald Blackwell, chief economist for the A.F.L.-C.I.O., offering a view shared by Nigel Gault, chief domestic economist for Global Insight, a Wall Street firm, who argues that if prices go up, people will expect not a raise, but “their standard of living to go down.”

The issue to be debated by policy makers, who recently finished slashing interest rates in response to the credit crisis and the economic downturn, is how quickly wage pressures could resurface. In the Fed’s playbook, employers would grant raises in response to the pressure and then seek to recover the costs of those raises by jacking up prices for a range of everyday items.

Their price increases would be followed, again according to the Fed’s playbook, with another round of wage increases, to be followed in turn by another round of price increases, setting off a wage-price spiral that would be difficult for the Fed to undo.

Just such a spiral drove up the inflation rate in the 1970s, during the first great oil price surge, and it haunts the policy makers to this day. Paul Volcker, then the Fed chairman, finally broke the spiral by pushing interest rates ever higher, precipitating the harsh 1981-2 recession.

Inflation and wage demands have remained relatively subdued ever since, but that cannot last in the teeth of another oil price shock, in the view of the current policy makers, who see themselves as Mr. Volcker’s spiritual heirs.

Some policy makers are much more convinced than others that a modern-day version of the 1970s experience is not only possible but imminent, and they insist that interest rates must go up now to snuff it out, even at the expense of further weakening an already damaged economy.

Mr. Fisher, who has voted at past meetings to raise rates, sometimes casting a lone vote, argued in an interview that wages are rising for others around the world, particularly in Asia, and “American workers will react” by demanding higher pay for themselves.

“I am concerned,” he said, “that at some point they will have to be accommodated because they can’t afford the rising costs of gasoline, food, utilities” and other everyday expenses. That view finds support among economists on Wall Street and at think tanks in Washington.

“If American households are losing ground to inflation,” said Adam S. Posen, deputy director of the Peterson Institute for International Economics in Washington, “and they can’t resort to automatic cost-of-living adjustments or union power, they’ll find some other way, through their demands on the political process and through their expectations.”

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For Stocks, August Likely To Be Anything But Calm

A typical August involves low volume and lackluster moves for the stock market, but with the amount of variables on Wall Street now, high volatility should make this month anything but typical.

Investors and traders hungry for anything to hang their hopes on are expected to be watching market developments closely in August for anything on which to capitalize.

Financials, the most critical sector in the market right now, are circling around a bottom while their depressed cousin, the housing industry, also looks for a capitulation point. And with both parties slated to hold presidential nominating conventions later in the month, the next 30 days are likely to blaze a trail into autumn.

"Anticipation," was the word Dave Rovelli, head of US equity trading at Boston-based Canaccord Adams, used to describe the market mood. "There's definitely a mindset change. People are anticipating getting out of this doldrum and there's a lot of money on the sidelines. People have gotten killed and they can't afford to miss the move."

The Volatility Index has held at relatively benign levels in the low 20s for much of the summer. But in 2007 the VIX crossed the 30 threshold as the credit crisis moved into full swing, after being in the low teens the previous year. A likely upswing in the Vix, analysts say, promises an unpredictable time ahead.

In a normal market, talking about a big move either way for August would be wishful thinking. Historically the month is the second-worst of the year, behind only September. The Dow typically loses 0.1 percent during the month, while the S&P 500 gains 0.1 percent and the Nasdaq finishes up 0.3 percent, according to the Stock Trader's Almanac.

The numbers, though, are often better during presidential election years, when the Dow gains 1.4 percent, the S&P improves 1.8 percent and the Nasdaq shoots up a sizzling 2.8 percent. On the flip side, market players would be best served to stay in bed on the first trading day of the month, which has seen stocks drop in eight of the past 10 years.

"I agree that August is usually slow, but I don't think it's going to be slow this year," Rovelli says. "People have lost too much money. They can't miss too many opportunities. I think it's going to be active."

Of course "active" and "up" are too different concepts. Rovelli and others say the market could well bounce along the bottom overall, with substantial spikes in between. Market analysts and advisers see a number of dynamics pushing the market as the summer closes, some of them not so positive.

The political conventions, for instance, could produce a wave of negativity as Democrats stress the faltering economy and Republicans try to put a happy face on both inflationary pressures and the war in Iraq.

"The political rhetoric that we'll hear out of the convention from the Democratic side will harp a lot about what's gone wrong, from higher oil to the weak US economy. So that's not going to help us," says John Massey, senior vice president and portfolio manager at AIG Sun America Asset Management.

"From the Republican side, they'll try to talk about the successes in Iraq and Afghanistan from a defense standpoint. I'm not sure that's positive. They'll try to stay clear of the weak economy." At the same time, there are geopolitical tensions in Iraq, Nigeria and elsewhere, and signs that the economy is slowing in China, which is hosting the summer Olympics.

"There's so much going on," says Nadav Baum, managing director of investments at BPU Investment Management in Pittsburgh. "You've got geopolitical action going on, you've got oil issues going on, you've got election things going on. With all that activity, you're going to get major swings."

The expected volatility could be just the thing investors can take advantage of to make money in such an unusual environment. "Certainly the fact that volumes tend to be lower in August means volatility will be key," says John Massey. "We invest for the long term, so volatility gives us the opportunity to reduce risk and buy assets a little bit more cheaply."

Massey is overweight in health care, consumer staples and technology and underweight in consumer discretionary and financials, as he's not sold that the worst has passed for banks. And there are those who are stressing old reliable diversity as a way to weather the end-of-summer storm.

"What's happening to people is they're really starting to look at how all this stuff in the external world is affecting their internal world," says Julie Murphy Casserly, president of JMC Wealth Management in Chicago. "This is the time for people to buy when so many people are running. I still say that you should buy in a diversified portfolio, the intention of more so looking at large-cap focus."

Indeed, there is anticipation that if the market can get some good news--a continued accounting in the financial industry and a drop in energy prices paramount--the market can use its August activity to establish a positive focus heading into the remainder of the year.

"My feeling is as long as we continue to get some decent moves on earnings the market might surprise people. When everyone thinks it's going to go one way it usually goes the opposite," says Baum, who sees the market in a trading range but with big spikes in between. "You're going to see us continue to bounce in these wild ranges."

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