Debt Rattle, September 19 2008: You just bought a country

National Photo Co. Same Shorts, But Dressed 1919
Sidney Lust girls, two of Washington, D.C., movie theater owner Sidney Lust's chorus girls

Ilargi: You just bought yourself a country. Congratulations. Yes, don the party hats!! Bring out the 'easy' dancing girls! You know you want to, and by Jolly and Jove, we all know you deserve it. Well done. Who'd have ever thunk?

Of course, like everyone else, you had your hopes and dreams as a kid, but feel free to admit it, you never thought you’d make it this far. Plus, it’s not just any country you bought, either: it gets better all the time: you thought you were buying America, but you got something much much better: you are now the proud owner of Bulgaria-on-the-Hudson.

While you’re enjoying your new riches and dancing stark naked in the streets, and good on you, mate, don’t forget to start drinking. I know it’s early, but trust me here, this is a special occasion. Very special. In fact, I strongly suggest you get as drunk as you possibly can, and as fast as humanly possible. Don’t bother with beer or some girly bubbly, this time around you got to hit the harder stuff. Trust me. And stop worrying about the hangover: your new country doesn’t either. You acquired a faith-based casino.

When I think you’re hammered enough not to feel much of anything anymore, when you're soundly immune to any and all kinds of pain and reality, I’m going to have to fill you in on a few marginal details that are marginally wrong with your recent purchase:

1. You already owned the country.
   Yes, bit of a bummer, makes you wonder where the money went that you paid for it, doesn’t it? Yeah, have a drink.
   
2. You can’t afford it.
   Come on, you knew all along that all your plastic maxed out long ago. I suggest a scotch.
   
3. It’s broke.
   What exactly were you thinking you would get in return for your investment? There’s nothing there. Drink, stop thinking, it’s a done deal.
   
4. It’s in debt so deep it’ll take the next 10 generations of your offspring to pay it off.
   Yeah, I know, this one goes straight over your head, you were just planning to enjoy it for the moment, and you’re pissed to the tits anyway, so let’s move on. You do need a refill.
   
5. It’s full of nut cases and whack jobs.
   One Flew Over The Nest, and the rest refuse to leave. That might be a bit of a downer, but I’ll let you deal with it when you get out of your stupor. Hey, you bought the place, not me.. You pour this time.
   
6. They have no laws
   Well, they have them, but the wackos in charge change them on the fly, so that’s the same as having none. And nobody protests. Yes, that’s right, open another bottle.
   
7. It’s not just financially bankrupt, it’s also morally bankrupt
   Look, wherever a bunch of losers manages to make everyone else pay for their losses, you can’t really keep up the pretense of any sort of moral standard, can you? I mean, I don’t know if this is oligarchy, or corporate fascism, ot just plain anarchy, but I do know it’s nothing to do with democracy. No, you're right, might as well pour me one as well. Make it a double.

The US government wants to get rid of people who call their banker friends on their greed and stupidity. Check, there go the short sellers. And they want to get rid of their banker friends’ gigantobehemoth debts. Check, the taxpayers now own them. Or will Congress vote no? Don’t hold your breath.

These guys are not trying to solve a crisis, they’re trying to keep their made men’s profits and shovel the losses into the public coffers. And you’re letting them do it. While everyone watches Sarah Palin’s blaring incompetence, the things that matter today, small things such as your children’s future, get ignored entirely. How long did you say you've been drinking?

What is short selling anyway ? Look, in our culture, vultures have a bad name, and maggots even more. But any biologist can tell you they have an essential function in nature. Without them you’d end up with a disease ridden world like you wouldn’t believe. Short sellers have that function: they clean up what dies.

Vultures spot dying animals, and circle above. Simple. Take them away, and you’re spreading disease. What the SEC did today obliterates the rules of nature as much as the rules of the market. Vultures don’t take on healthy animals any more than shorters take on healthy companies. They make sure companies can’t indefinitely fool you into thinking their alive and kicking. It’s not as if the media will let you know....

Yesterday I likened short selling to fielding a defense unit in a football game. It’s fine by me to change the rules of the game so that you play with attackers only, but you can’t do that in the middle of the game, and for one team only. That’s just sore loser territory, and it kills the game, and nobody will come, so you have no ticket or TV sales, and then you have no team left, nor a game.

What will happen is easy to predict: stocks will rise for a few days, perhaps spectacularly. Everyone who’s short financials has to cover their shorts, hence buy the stocks. When that’s all done, there’ll be a long eery silence, with hardly any trading, and dead hedge funds plastered all over the place. But the losers won’t have to show their dirty underwear, at least for now.

You know, I think maybe I should start drinking myself, instead of trying to assess what is going on here. I mean, what are we talking about when all the rules can be changed and turned on their heads from one moment to the other, just to make sure a bunch of fat assed born losers don’t have to pay their losses? Whatever I say can be useless in five minutes. It’s a nice day out, I’ll grab a bottle and a glass and sit in the garden. This stuff makes me despair.

It’s declaring war on your own people.



U.S. Drafts Sweeping Plan to Fight Crisis

The federal government is working on a sweeping series of programs that would represent perhaps the biggest intervention in financial markets since the 1930s, embracing the need for a comprehensive approach to the financial crisis after a series of ad hoc rescues.

At the center of the potential plan is a mechanism that would take bad assets off the balance sheets of financial companies, said people familiar with the matter, a device that echoes similar moves taken in past financial crises. The size of the entity could reach hundreds of billions of dollars, one person said. U.S. Treasury Secretary Henry Paulson will hold a 10 a.m. EDT press conference Friday to discuss a "comprehensive approach to market developments."

Meanwhile, the Treasury announced a massive program Friday to shore up the nation's money-market mutual-fund sector, responding to concerns that the global financial crisis is starting to affect those historically safe assets. The move is designed to stem an outflow of funds as consumers start to worry about even the safest of investments, a sign of how the crisis is spreading to Main Street. There is $3.4 trillion in money-market funds outstanding.

In addition, the Federal Reserve is expanding its liquidity programs, which should help money funds meet redemption demand. The initiative includes purchasing certain short-term debt obligations issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The Fed said it will also extend so-called non-recourse loans at the primary credit rate to U.S. banks to finance their purchases of high-quality asset-backed commercial paper from money-market mutual funds.

Meanwhile, the Securities and Exchange Commission proposed a temporary ban on short-selling on 799 financial stocks. The ban, which is effective immediately, is set to last for 10 days, but could be extended for up to 30 days.

Under the Treasury program, the government will insure the holdings of any eligible publicly offered money-market fund. The funds must pay a fee to participate in the program. "The program provides support to investors in funds that participate in the program and those funds will not 'break the buck,'" Treasury said in a statement, referring to the concern that arises when the net asset value of money-market funds falls below $1 per share.

The insurance program will be financed with up to $50 billion from the Treasury's Exchange Stabilization Fund, which was created in 1934. President George W. Bush had to sign off on Treasury's use of the fund. "Concerns about the net asset value of money-market funds falling below $1 have exacerbated global financial market turmoil and caused severe liquidity strains in world markets," Treasury said in a statement.

The administration had been taking a patchwork approach to the financial crisis, putting out fires as they ignited. The new moves represent an effort to take a more systematic approach, after a spiral of bad debts, credit downgrades and tumbling stocks brought down venerable names from investment bank Lehman Brothers Holdings Inc. to insurance giant American International Group Inc. Banks have grown unwilling to lend to one another, a sign of extreme stress, because financial markets work only when institutions have faith in each other's ability to meet their obligations.

Word of a coordinated government plan came first came Thursday, a day when the Federal Reserve and other major central banks offered hundreds of billions of dollars in loans to commercial banks to alleviate a deepening freeze in the world's credit markets. That step appeared to have moderate impact on lending among banks. Meanwhile, a wave of redemptions continued hitting money-market funds, causing a second large fund to shut to investors.

In Russia, officials suspended stock-market trading for the second-straight day as the Russian government promised to inject $20 billion to halt a collapse in share prices. In China, government officials directed purchases of bank shares and encouraged companies to buy their own shares in efforts to prop up a falling market.

Still, word of a possible U.S. plan to address the crisis sent the stock market soaring on Thursday, in one of its sharpest reversals in recent memory. The Dow Jones Industrial Average ended up 3.9%, the index's biggest percentage gain in nearly six years, on record New York Stock Exchange volume.

The blue-chip index finished more than 560 points above its intraday low and reclaimed about 90% of its Wednesday losses. Nasdaq composite trading also saw trading volume set a new single-day high at 3.89 billion shares. All 30 Dow component stocks closed higher, but financial companies were the biggest winners, racking up double-digit percentage gains after weeks of selling off.

Early Friday, stock futures roared higher as investors welcomed government efforts to shore up markets and clamp down on short selling. Dow futures climbed more than 300 points before the opening bell. The flurry of moves under discussion may bring the markets some breathing room, but it isn't clear whether they will amount to a long-term solution to the complex financial problems sweeping the market.

"The market wants to see a more systemic solution that doesn't leave us wondering day after day about the next institution that's the weakest link in the chain," said former Fed Board member Laurence Meyer, vice chairman of Macroeconomic Advisers, an economic research firm.

Treasury Department officials have studied a structure to buy up distressed assets for weeks, but have been reluctant to ask Congress for such authority unless they were certain it could get approved. The intensified market turmoil may have changed that political calculus, even with less than two months left until the November elections.

A big question still to be answered is how the government will value the assets it takes onto its books. One possible avenue could be some sort of auction facility, so that the government would not have to be involved in negotiating asset values with companies. Financial companies would likely take big losses.

President Bush met with Treasury Secretary Paulson, Securities and Exchange Commission Chairman Christopher Cox and Federal Reserve Chairman Ben Bernanke for 45 minutes Thursday to discuss "the serious conditions in our financial markets," said White House spokesman Tony Fratto.

Messrs. Paulson, Cox and Bernanke later addressed congressional leaders Thursday evening on their proposals. At the meeting, Mr. Bernanke began by laying out the severity of the crisis. Mr. Paulson "made the sale," said a top congressional aide. House Financial Services Committee Chairman Barney Frank, the Massachusetts Democrat, said his panel could hold a vote on the package as soon as Wednesday.

"They said they would like legislation to do it, and there was virtually unanimous agreement that there would be legislation to do it," said Mr. Frank. In a news conference after the meeting, Mr. Paulson described his effort as "an approach to deal with the systemic risk and the stresses in our capital markets." The "comprehensive" solution would deal with the souring real-estate and other illiquid assets at the heart of the financial crisis, he said.

Exactly how such an entity might be structured isn't yet clear. The possible plan isn't expected to mirror the Resolution Trust Corp., which was used from 1989 to 1995 during the savings and loan crisis to hold and sell off the assets of failed banks. Rather, a new entity might purchase assets at a steep discount from solvent financial institutions and eventually sell them back into the market.

The program may look more like the Reconstruction Finance Corporation, a Depression-era relief program formed in 1932 by President Hoover that tried to inject liquidity into the market by giving loans to banks and other businesses. According to a top congressional aide, the Treasury department wants authority to either control the program or have it be a separate division of the government.

A series of veteran policy makers, including former Treasury Secretary Lawrence Summers and former Fed Chief Paul Volcker, has pushed in recent weeks for such a government agency that would attempt a comprehensive solution to the markets crisis.
The idea would be to steady the market so that investors regain confidence in financial institutions and resume conducting business normally with them.

"By stepping in here and getting the markets to function again, the government could deliver the Sunday punch to this financial turmoil," said former Comptroller of the Currency Eugene Ludwig, who is now chief executive of Promontory Financial Group, and a big proponent for the idea. "By taking the first step and making a market the new government entity could take fear out of marketplace," he added.

Thursday, Republican nominee Sen. John McCain sought a broad expansion of government regulation over financial institutions, including the formation of a body to both assume distressed mortgages and help failing investment banks.
Saying the government cannot "wait until the system fails," Sen. McCain called for the creation of an entity that would essentially help companies sell off bad loans and other impaired assets.

It is unclear how the body, dubbed the Mortgage and Financial Institutions trust, would operate, including whether or not institutions would seek help or whether the government would intervene on its own behalf. His rival, Democratic Sen. Barack Obama of Illinois was less specific about what steps he would take, offering broader outlines of policy proposals that included a "Homeowner and Financial Support Act." The measure, which would inject capital and liquidity in the financial system, is designed to provide a more coordinated response than "the daily improvisations that have characterized policy-making over the last year."

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SEC bans short selling in 799 financial stocks

Regulator says ban is needed to protect market integrity??????!!!!!

The Securities and Exchange Commission early Friday issued an emergency order temporarily banning short selling in the shares of 799 financial institutions.

The regulator said the move was needed "to protect the integrity and quality of the securities market and strengthen investor confidence," and added it was acting in concert with the U.K.'s Financial Services Authority, which announced a similar ban on Thursday.

The ban takes effect immediately and runs until midnight on Oct. 2. The SEC said it may extend the order if it's necessary to protect investors, but it won't last more than 30 days. Financial services stocks soared in Europe following the U.K. ban, with Barclays, the bank that is buying part of Lehman Brothers, up over 30%. U.S. stock market futures also surged. Dow industrial futures jumped over 300 points and S&P 500 futures were up more than 45 points.

In pre-market trading, Goldman Sachs and Morgan Stanley were both up over 25%. "The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets," said SEC Chairman Christopher Cox in a statement.

"The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets. This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury and the Congress," he added.

Among other steps being taken, U.S. authorities are putting together a plan to move toxic assets off the balance sheets of major U.S. firms in a bid to find a longer-term solution to the credit crisis. The Treasury will also establish a temporary guarantee program to insure the holdings of U.S. money market funds that pay a fee to participate.

Alongside the bar on short selling, the SEC introduced other temporary measures requiring institutional money managers to reveal short positions in certain securities and easing restrictions on the ability of securities issuers to re-purchase their own shares. Allowing companies to more-easily buy back their own shares will help restore liquidity, the regulator argued.

Responding to the initial FSA short selling ban, Daniel Stewart & Co. analyst Justin Bates said the relief rally in shares will only be temporary. "It provides nothing more than respite, as [banks] still have deficient balance sheets which are in need of recapitalization and indeed they must still go through a painful process of deleveraging," Bates said.

Following the move from the U.S. and U.K. watchdogs, some other regulators were also beginning to take action Friday. The Irish regulator said it has banned anyone except market makers from entering a trade with the aim of profiting from a fall in the shares of Irish banks. That move helped drive the main Irish index up nearly 14%.

The Australian Securities and Investments Commission also banned naked short selling -- where a stock is sold without making arrangement to borrow it first -- and introduced reporting requirements for other short sales, effective from Monday. Other regulators didn't change their rules, but indicated they would be taking a tougher stance of monitoring and enforcing them.

The Swiss Federal Bank Commission and SWX Swiss Exchange both issued statements emphasizing that naked short selling is not permitted and contravenes the code of conduct on market abuse. France's Autorite des Marches Financiers similarly warned anyone selling shares in France that they must deliver the stock within three days and said it will crack down on anyone breaching that rule.

A spokeswoman for Germany's regulator, the BaFin, said short selling is not banned in Germany but declined to comment on the situation for naked short selling or whether it is considering a temporary restriction. The Wall Street Journal also reported that large shareholders had already begun to cut back on their lending of shares -- a crucial element of short selling.

Among the investors reigning-in lending is Calpers, the largest U.S. public pension fund, which had stopped lending out shares of Goldman Sachs, Morgan Stanley and Wachovia Corp. even before the SEC's announcement.

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Buffett's swaps 'time bomb' goes off on Wall Street

On Main Street, insurance protects people from the effects of catastrophes. But on Wall Street, specialized insurance known as a credit default swaps are turning a bad situation into a catastrophe.

When historians write about the current crisis, much of the blame will go to the slump in the housing and mortgage markets, which triggered the losses, layoffs and liquidations sweeping the financial industry. But credit default swaps—complex derivatives originally designed to protect banks from deadbeat borrowers—are adding to the turmoil.

“This was supposedly a way to hedge risk,” says Ellen Brown, the author of the book “Web of Debt.” “I’m sure their predictive models were right as far as the risk of the things they were insuring against. But what they didn’t factor in was the risk that the sellers of this protection wouldn’t pay ... That’s what we’re seeing now.”

Ms. Brown is hardly alone in her criticism of the derivatives. Five years ago, billionaire investor Warren Buffett called them a “time bomb” and “financial weapons of mass destruction” and directed the insurance arm of his Berkshire Hathaway to exit the business. Recent events suggest Mr. Buffett was right. The collapse of Bear Stearns. The fire sale of Merrill Lynch. The meltdown at American International Group. In each case, credit default swaps played a role in the fall of these financial giants.

The latest victim is insurer AIG, which received an emergency $85 billion loan from the U.S. Federal Reserve late on Tuesday to stave off a bankruptcy. Over the last three quarters, AIG suffered $18 billion of losses tied to guarantees it wrote on mortgage-linked derivatives.

Its struggles intensified in recent weeks as losses in its own investments led to cuts in its credit ratings. Those cuts triggered clauses in the policies AIG had written that forced it to put up billions of dollars in extra collateral—billions it did not have and could not raise.

When the credit default market began back in the mid-1990s, the transactions were simpler, more transparent affairs. Not all the sellers were insurance companies like AIG—most were not. But the protection buyer usually knew the protection seller. As it grew—according to the industry’s trade group, the credit default market grew to $46 trillion by the first half of 2007 from $631 billion in 2000—all that changed.

An over-the-counter market grew up and some of the most active players became asset managers, including hedge fund managers, who bought and sold the policies like any other investment. And in those deals, they sold protection as often as they bought it—although they rarely set aside the reserves they would need if the obligation ever had to be paid.

In one notorious case, a small hedge fund agreed to insure UBS, the Swiss banking giant, from losses related to defaults on $1.3 billion of subprime mortgages for an annual premium of about $2 million. The trouble was, the hedge fund set up a subsidiary to stand behind the guarantee—and capitalized it with just $4.6 million. As long as the loans performed, the fund made a killing, raking in an annualized return of nearly 44%.

But in the summer of 2007, as home owners began to default, things got ugly. UBS demanded the hedge fund put up additional collateral. The fund balked. UBS sued. The dispute is hardly unique. Both Wachovia and Citigroup are involved in similar litigation with firms that promised to step up and act like insurers—but were not actually insurers.

“Insurance companies have armies of actuaries and deep pools of policyholders and the financial wherewithal to pay claims,” says Mike Barry, a spokesman at the Insurance Information Institute. Another problem: As hedge funds and others bought and sold these protection policies, they did not always get prior written consent from the people they were supposed to be insuring. Patrick Parkinson, the deputy director of the Fed’s research and statistic arm, calls the practice “sloppy.”

As a result, some protection buyers had trouble figuring out who was standing behind the insurance they bought. And it put investors into webs of relationships they did not understand. “This is the derivative nightmare that everyone has been warning about,” says Peter Schiff, the president of Euro Pacific Capital at the author of “Crash Proof: How to Profit From the Coming Economic Collapse.”

“They booked all these derivatives assuming bad things would never happen. It was like writing fire insurance, assuming no one is ever going to have a fire, only now they’re turning around and watching as the whole town burns down.”

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FTSE 100 surges most in history as banking shares race higher

The FTSE 100 surged the most in its history, joining a global rally, after governments around the world took decisive action in a bid to stop further banking collapses and a full-blown economic crisis.

In the UK, a ban by the Financial Services Authority on the short-selling of banking shares saw the index of blue-chip companies soar as traders scrambled to buy bank shares. Within minutes of the FTSE 100 opening in London, the shares of Britain's biggest banks were up an eye-watering amount; Barclays surged 34pc, Lloyds TSB 65pc, Royal Bank of Scotland 48pc and Bradford & Bingley was up 60pc.

By mid-morning, the FTSE was up almost 8pc, or 387 points, at 5267.2, its steepest ever rise, according to data from Bloomberg. Around the world, markets were buoyed by the US government's plan to create a fund, or 'bad bank', to house the toxic sub-prime debts that have crippled their ability to lend and led to a seizure of the financial system.

Government intervention by China and Russia saw their respective markets join the rally. "Anyone nursing a short position will have been blown away," said Simon Denham of Capital Spreads. "The huge injection of liquidity may be the final shot from the central bank armoury as it is difficult to see what else they can now do aside from forced nationalisation of stricken banks." The rally was mirrored in Europe, where Switzerland's Credit Suisse rose 13pc. In Germany, Deutsche Bank climbed 14pc.

"At the start of the week, equity investors weren't just facing a loss but an absolute loss," said Gary Dugan, chief investment officer for Europe for Merrill Lynch. "Now what they are saying is every financial institution is virtually underwritten by this proposal to drop those assets into a life boat."

Asian shares rallied, with the Shanghai Composite Index up 9.5pc at 2075.09, following the biggest one-day gain in six-years for US stocks. In the most dramatic week in financial markets for decades, it emerged that the US Treasury is planning to create a massive "bad bank" to house the hundreds of billions of dollars of failing mortgages held by most major banks.

The US government plan is believed to have been discussed yesterday by Treasury Secretary Hank Paulson at a meeting with President George W Bush, Federal Reserve chairman Ben Bernanke and Securities and Exchange Commission chairman Christopher Cox. China also took action to shore up its financial system, saying it will buy shares in the three of the biggest state-owned banks and removing a tax on buying shares.

After a week in which the UK's biggest mortgage lender HBOS had to be rescued from a collapse in its share price by a takeover, the Financial Services Authority (FSA) banned short-selling of shares in financial institutions for at least 120 days.

The FSA made the move on fears that other high street banks could follow HBOS in being targeted by short-sellers, who sell shares before they buy them in the hope of benefiting from a fall in the price. In China, the government announced plans to buy shares in the three of the biggest state-owned banks and removing a tax on buying shares.

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U.S. to Protect Money-Market Funds Against Losses

The U.S. government will set aside as much as $50 billion to temporarily protect investors from losses in money-market mutual funds caused by the meltdown of financial markets. The Treasury will insure for a year holdings of publicly offered money-market funds that pay a fee to participate in the program. Retail and institutional funds are eligible, the department said today in a statement.

Money-market funds are considered the safest investments after U.S. Treasury debt and bank deposits because they strive to guarantee that shareholders can always get all their cash back. Confidence in the $3.35 trillion industry was shaken this week when Reserve Primary Fund became the first in 14 years to break the buck, or drop below $1 a share, exposing investors to losses on debt issued by Lehman Brothers Holdings Inc.

"They're putting up a firewall," said Paul McCulley, managing director at Newport Beach, California-based Pacific Investment Management Co. "It's the ultimate nightmare to have a run on the money markets -- that is truly the Armageddon outcome -- and they're not going to allow that to happen." Investors pulled a record $89.2 billion from money-market funds on Sept. 17, according to data compiled by the Money Fund Report, a newsletter based in Westborough, Massachusetts. The withdrawals totaled a decline of 2.6 percent in money-market assets.

"Money-market funds play an important role as a savings and investment vehicle for many Americans," the department said in the statement. "They are also a fundamental source of financing for our capital markets and financial institutions. Maintaining confidence in the money-market fund industry is critical to protecting the integrity and stability of the global financial system."

The program, from which no fund has yet to draw, is eligible for all funds regulated by Rule 2a-7 of the Investment Company Act of 1940. The rule limits the funds to holding highly rated securities that mature in 13 months or less. The government will make investors whole for any losses using the Treasury's Exchange Stabilization Fund. The $50 billion fund, which was used in the bailout of Mexico in the 1990s, is one way the Treasury secretary can spend money without consent of Congress. President George W. Bush approved using the fund to insure money-market funds.

"This came just in the nick of time," Peter Crane, president of Crane Data LLC in Westborough, Massachusetts, which tracks money-market funds, said in an interview. "We were likely going to see more funds halt redemptions" and break the buck.

Bolstering confidence in money funds is more important than the danger that the move will encourage funds to make riskier investments to boost yields. "This has got moral written all over it, but as has been case throughout crisis, now is not tine to worry about moral hazard," he said.

Putnam Investments LLC said yesterday it closed its $12.3 billion institutional Putnam Prime Money Market Fund after an undisclosed amount of withdrawals. The Boston-based company said the fund closed at $1 a share and would return all cash to investors. Bank of New York Mellon Corp. said yesterday that a $22 billion institutional fund was hit by losses on Lehman, an event that jolted the money-market industry and triggered panic selling of asset-management stocks.

BNY Institutional Cash Reserves, a private fund that invests cash deposited by clients who borrow securities from BNY Mellon, fell to $0.991. BNY Mellon said it also entered into agreements with four of its Dreyfus money-market funds to support their net asset values.

State Street Corp. and Federated Investors Inc. said yesterday that none of their money-market funds had broken the buck. Lehman, once the fourth-largest U.S. investment bank, filed for Chapter 11 bankruptcy on Sept. 15. The Federal Reserve said it will lend to banks to meet demands for redemptions from money-market mutual funds and plans to buy agency debt from primary dealers to aid financial-market liquidity. The Fed said in a statement it will extend loans to banks to purchase "high- quality" asset-backed commercial paper from money market funds.

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Fed, Treasury Do What They Can Without Congress

The Federal Reserve and Treasury Department announced programs this morning to shore up money-market funds, but the more sweeping part of a proposed plan to bolster markets — a mechanism to take bad assets off financial firms’ balance sheets — may have to wait at least for a short while.

The reason is simple. The programs announced this morning by the Fed and Treasury don’t require congressional approval. The Treasury’s actions are backed by the Exchange Stabilization Fund, which is enabled by a statute that gives the president and Treasury secretary enormous latitude to act without prior consent of Congress. Meanwhile, the Fed’s lending operations fall within its traditional purview.

But the part of a rescue programs that carries the most heft is going to need backing from Congress. Treasury officials have been looking into the possibility of buying up distressed assets for weeks, but have been reluctant to ask Congress for the authority unless they were sure of approval. The market turmoil of the last week, though, has created an opening.

Last night, Treasury Secretary Henry Paulson, along with Fed Chairman Ben Bernanke and SEC Chairman Christopher Cox, addressed congressional leaders Thursday evening on their proposals. House Financial Services Committee Chairman Barney Frank, the Massachusetts Democrat, said his panel could hold a vote on the package as soon as Wednesday.

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Paulson, Bernanke Expand U.S. Power to Rescue Markets

The U.S. government moved to cleanse banks of troubled assets and halt an exodus of investors from money markets in the biggest expansion of federal power over the financial system since the Great Depression. "We're talking hundreds of billions," Treasury Secretary Henry Paulson said in a press conference. "This needs to be big enough to make a real difference and get to the heart of the problem."

The Treasury tapped all $50 billion in the country's Exchange Stabilization Fund to insure money-market mutual fund holdings, and the Federal Reserve expanded lending to commercial banks. The measures were aimed at credit markets teetering on the edge of collapse, as investors pulled a record $89.2 billion from money-market funds Sept. 17.

Paulson and Fed Chairman Ben S. Bernanke's plans, which include the removal of illiquid mortgage securities from companies' balance sheets, sent stocks from the U.K. to China soaring. The dollar gained, while two-year Treasury notes fell the most in 23 years, sending the yield up from the lowest level since mid-March.

"This is taking a giant step toward a cure and a giant step toward creating some clarity in the market," said Alan Blinder, a professor at Princeton University and a former Fed vice chairman. "This needs to be drafted very carefully. What's needed is something large and systemic."

The effort is a recognition that Paulson and Bernanke's earlier efforts failed to revive financial and housing markets. The government took over American International Group Inc., Fannie Mae and Freddie Mac in the past 12 days, a period when Lehman Brothers Holdings Inc. filed for bankruptcy and Americans pulled a record $89 billion from money-market funds.

Congressional leaders who met with Paulson and Bernanke late yesterday in Washington said they aim to pass legislation soon. The initiative is aimed at removing the devalued mortgage-linked assets at the root of the worst credit crisis since the 1930s.

Securities and Exchange Commission Chairman Christopher Cox, who attended the gathering with lawmakers, said the SEC planned to consider more rules to guarantee market liquidity. Today, the SEC temporarily banned short-selling of financial companies' shares until Oct. 2 after Morgan Stanley fell 39 percent earlier this week. The U.K. took a similar step yesterday.

Stocks surged around the world after a three-day slide earlier this week wiped about $1.9 trillion in market value from the MSCI World Index. The U.K.'s benchmark FTSE 100 index rose as much as 9.6 percent. The Standard & Poor's 500 Index climbed as much as 4.5 percent and Japan's Nikkei 225 Stock Average climbed 3.9 percent.

Two-year Treasury note yields climbed 39 basis points, or 0.39 percentage point, the most since February 1985, to 2.09 percent at 10:23 a.m. in New York, according to BGCantor Market Data. Yields on 10-year notes increased 18 basis points to 3.73 percent.

Options that U.S. officials are considering include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff. They spoke on condition of anonymity because the plans may change.

Another possibility is using Fannie and Freddie, the federally chartered mortgage-finance companies seized by the government last week, to buy assets, one of the people said.

"We will try to put a bill together and do it fairly quickly," House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said after the meeting. "We are not in a position to give you any specifics right now" on the proposals, he said when asked about the potential cost.

The likelihood of the government taking on yet more devalued assets, after the seizures of Fannie, Freddie and AIG and the earlier assumption by the Fed of $29 billion of Bear Stearns Cos. investments, may spur concern about its own balance sheet.

The Treasury has pledged to buy up to $200 billion of Fannie and Freddie stock to keep them solvent, while the Fed agreed Sept. 16 to an $85 billion bridge loan to AIG. The Treasury also plans to buy $5 billion of mortgage-backed debt this month under an emergency program.

"It sounds like there's going to be a giant dumpster for illiquid assets," said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which oversees $22 billion in assets. "It brings up the more troubling question of whether the U.S. government is big enough to take on this whole problem, relative" to the size of the American economy, he said.

Senator Richard Shelby of Alabama and some other Republicans have criticized the takeovers of AIG, Fannie and Freddie for imposing a potentially high cost on taxpayers. "This could be the biggest bailout in the history of the country and could ultimately cost $500 billion to $1 trillion," Shelby, the top Republican on the Senate Banking Committee, said in a Bloomberg Television interview today. "Congress is not going to rubber stamp something."

Still, Representative John Boehner, the head of the Republicans in the House, told reporters after the meeting with Paulson and Bernanke that he was "hopeful that in the coming days we'll have a proposal that will pass this Congress."
Senator Charles Schumer of New York, a Democrat who chairs the congressional Joint Economic Committee, warned yesterday against leaving the Fed with an expanding role for addressing the credit crisis.

"It's hard for them to do monetary policy, which is their primary task, and then run all these businesses," Schumer said yesterday in Washington.

The Treasury the past two days announced $200 billion in special bill sales to help the Fed expand its balance sheet. The U.S. central bank extended a record $59.8 billion in loans to investment banks and $33.4 billion to commercial banks as of Sept. 17. The Fed yesterday also joined its counterparts from around the world to pump $180 billion into global money markets.

An increasing number of lawmakers are advocating a stronger response to the crisis sparked by record homeowner defaults.
Schumer proposed an agency to inject capital into troubled financial companies in exchange for rewriting mortgages to make them more affordable. It would be modeled on the Great Depression-era Reconstruction Finance Corp., he said.

Others have floated a type of Resolution Trust Corp., which was a 1990s fund to manage devalued assets from failed savings and loans. Citigroup Inc., JPMorgan, Bank of America Corp., Goldman Sachs Group Inc., Merrill Lynch & Co. and Lehman Brothers alone had more than $500 billion of so-called Level 3 assets as of June 30, according to data in a Sept. 15 report from New York-based bond research firm CreditSights Inc. The holders of these assets say their values can only be determined through internal models because of illiquid markets.

Senator Christopher Dodd, who chairs the Senate Banking Committee, said it was a "sober" gathering. The plan would likely come from the Treasury and Fed this weekend and "nothing is more important than this," Dodd said.

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Stage is set for largest DOW gain in history

Are you guys ready for some record breaking?

It's looking like the sweeping government control of the markets is making people happy. Apparently to them, a 'free market' is just something to gloat to your neighbors about, but when it comes down to the dirty- you beg for big brother to come and clean it up for you.

This was perfectly demonstrated yesterday, with a huge 410 gain in the DOW once it was publicized that our economy is falling more and more under state control- stick it to those evil short sellers! People seemed to really like that news.

So that brings us to today. If you look at the premarket data, it's looking like it's going to be quite a green day on wall street:

S&P 500 +63.70 1253.30

NASDAQ +66.75 1776.25

Dow Jones +418.00 11335.00

Now, the current record for the biggest DOW gain day in history was on March 16, 2000, when the DOW closed at +499.19 which translated to a gain of 4.93%. Today, 499.19 does not seem like a difficult target to breach.

Although if we talk percentages, 4.98% of today's market is 565 pts. And if you look at percentage gains through it's history, you'll find that +4.98% was not actually the largest single day percentage gain in the DOW's history- not even close! That record was set on March 15, 1933 with a whopping 15.34%! That was at the end of the famous Great Depression bear market.

And- more recently, on October 21, 1987 the DOW gained a respectable 10.15%. So, what will it be today?

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Ilargi: Nate Hagens called last night when the SEC measure was first reported. He has a good overview of his reaction on the Oil Drum. Do go see it.

Well, they did it

Well, they did it, though as expected a watered down version limited to only financial stocks. Other wrinkles will require short sellers to publicly disclose their positions and easing restrictions on securities issuers repurchasing their securities. But the damage is done I am afraid.

Who is going to want to short stocks now, even non-financial ones, at risk of future rule changes at any point (for example, if we had a 40% selloff in plastics stocks due to deteriorating fundamentals in the plastics industry)?

Expect massive lawsuits from state class action from retirees invested in SKF as a hedge - expect strong language as analysts on CNBC and other network that understand the implications of this move fight back. This will cause the SEC to further backpedal on this rule, perhaps publicly stressing that current shorts don't need to cover, etc..

What the SEC fails to realize is that there will be a mini-exodus from the business in the next 2 weeks before quarter end and a mass exodus from the business by year end due to lack of confidence, which up til now Paulson and crew continued to convey to the larger players.

The end result now will be far worse than some of our banks going under (which will happen anyways due to deteriorating company fundamentals) - the end result will be a lack of confidence in the financial system. Some late night calls and I understand they are really after 2-3 high profile hedge funds and people are going to jail - but what a cost...

While I was in the near term peaking camp due to rising marginal costs, Peak Oil is now a thing of the past. There will never be a year where we produce more than we do in 2008, and if things fall fast, then 2008 still may not catch 2005. The lack of confidence in our financial system will eliminate any chance we had of offsetting depletion with new production and new technology. You can bank on it.

P.S. Note to Hillary Clinton, Chuck Shumer and Christopher Cox - let's remember to not disallow ALL short selling, because short selling of oil futures gives American's lower gas prices!!!!

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Faux Gold

Spraying the entire planetary banking system with epic funny money funds has produced the desired effect: everyone is giddy with joy that the US government has taken on epic amounts of bad debts so they can be 'cleansed' from the system not by simply ruining the bottom line of all those investment banks but by being SOLD wholesale to the US government.

Which is going bankrupt, itself. This sad state of affairs is ignored by the gnomes who are delighted to keep their profits while unloading their bad deals onto someone else. Everyone hopes that this largess will refuel the global banking/trade bubble. And alas, it will succeed....for a very short while.

The ideology of 'free trade' and 'the US is the top economy' continues unabated. Far from changing gears and changing course, the US continues to try to restart the faltering status quo. This status quo is simple: the US allows and encourages imports while paying for this by going deep into debt to all other nations.

Every time it seems that we have reached an upper limit to the amount of debt we can take on, it goes up. Just like Congress has voted time and again to raise the fake debt ceiling, the US people are encouraged to pile on more and more debts. This is very easy to do until one cannot pay interest on the accumulated debts.

The concept of credit cards is to have people run up purchases to the max and then stay there, paying interest on purchases that never, ever get paid off. This is 'eternal debt' and the US is relentlessly heading towards this condition vis a vis the world. We have to keep turning over our debts so we never pay off any of the principal. Indeed, paying this off will cause world markets to collapse.

Money is often talked about as if it is water. This is why we say, 'red ink', for example. It once referred to the color of the ink to denote negative numbers. No one uses it this way today. They put () around red ink or a minus sign. But the mental image of floods of red ink pouring across the land is a very good image.

'Liquidity' is another word bankers use a lot to describe money. This is why our goofy central bankers talked about spraying money across the banking system and thus, restoring liquidity. This reminds me of one of Zeus' sexual escapades. He wanted to have sex with Danaë. She was locked in a chamber by her father. Zeus became a shower of gold and rained down upon her and thus, impregnated her. Note the dark chamber part of this myth.

Bernanke and Paulson are playing Zeus here. Using the vast powers of the Federal Reserve that really, really has no more reserves except for Fort Knox gold and that was used as 'swaps' yesterday, they are using this shower of swap gold to restart the dead banking system.

The goofy idea here is, if we have the US suck up all bad credit, the bankers will be free to offer credit to people who are swimming in a sea of red ink due to going too deep in debt. Got that? We will increase the ability to create more loans by having the US public eat all the bad debts. The banking gnomes will be free again! To lend money they make out of thin air!

They can do this FOREVER if they can since it is easy to write loans. You just pull out your red ink pen and start scribbling.

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Putnam, Mellon Spur 'Oh, My God' Withdrawals From Money Market

Before yesterday, Shiela Bialka, a retired dance and drama teacher in Laguna Woods, California, said she hadn't thought about shifting money out of her money- market account.

Then she learned that Boston-based Putnam Investments LLC closed its $12.3 billion institutional Putnam Prime Money Market Fund and a similar fund run by Bank of New York Mellon Corp. had fallen to less than $1 a share. It mostly recovered amid a broad stock market rally yesterday. "Oh, my God," said Bialka, 74, whose money is with Fidelity Investments. "Now I think I will move it. I wasn't concerned before. Now, I am."

Advisers say larger companies, such as Boston-based Fidelity, have more resources to prop up their money-market funds. Still, fears over potential losses in the low-risk investment accounts have become the latest source of angst for investors as they adjust their portfolios and lifestyles to the tremors of Wall Street.

Investors pulled a record $89.2 billion from money-market funds on Sept. 17, according to data compiled by the Money Fund Report, a newsletter based in Westborough, Massachusetts. The withdrawals totaled a decline of 2.6 percent in money-market assets.

The redemptions were an abrupt departure from a trend that had seen assets in money-market funds increase nearly 14 percent, to $3.58 trillion, from January to the beginning of September, according to data compiled by IMoneyNet Inc., the research firm that publishes the Money Fund Report.

"Your typical day doesn't include outflows," said Peter Crane, president of Crane Data LLC, which tracks money-market funds. This week, shareholders pulled more than 60 percent of the assets from Reserve Primary Fund, which on Wednesday became the first money-market fund in 14 years to expose investors to losses.

Financial advisers around the country said they are fielding more calls from clients buffeted by events including the failure of Lehman Brothers Holdings Inc. and the sale of Merrill Lynch & Co. to Bank of America Corp. Now, brokers, say, clients are worried about their funds in money-market accounts, traditional safe havens.

"People are asking if their cash is safe," said Cary Carbonaro, president and founder of Family Financial Research, an advisory service based in Huntington, New York and Clermont, Florida. "I've been telling them yes, but they're still scared. It's bad out there. Really bad."

Investors have already started withdrawing funds from money markets in the Phoenix area, said Rich Kerr, branch manager of the Charles Schwab Corp. office in Chandler, Arizona. The experience of Reserve Primary, he said, "has stimulated a greater degree of conversation."

Though stocks rallied the most in six years Thursday as the Dow Jones Industrial Average jumped 617 points from its low of the day, investors remained jittery over the recent volatility. Marci Fenske, an air resources technician for the state of California, said she overheard a woman in a restaurant tell her friends that she redeemed all her assets and buried the money in her backyard.

Carl Mueller, 48, an actor in Los Angeles, said he has begun shopping at a 99-cent store to save money. Chris Calle, 27, a project manager for a concrete company in Dallas, said he has started buying off-label goods at the grocery store.
Ruth May, 75, a retired travel agent in Laguna Woods, said whenever she feels panicky, she calls her financial adviser.

"He tells me to calm down and take a walk with the cat," she said. Mark Berg, president of Timothy Financial Counsel, Inc. in Wheaton, Illinois, said one of his customers, a single mother, decided to trade houses for vacations rather than spend on a traditional getaway. "People are beginning to be a little more creative in how to moderate the way they live," Berg said. "So, her vacation is essentially free."

Carbonaro said, "The biggest question I hear from my clients is, `Should we liquidate everything?"' She said she has been so shaken by recent events on Wall Street that she wakes up in the middle of the night to check foreign markets.
"This is way more than anyone expected," she said. "It's incredibly taxing, psychologically and emotionally."

Bialka said she has already altered her routines to accommodate the worsening economy. She said she cooks at home more, rather than go to restaurants, and worries that any future bad news might require bigger changes. "Next thing, I'll have to stop going to the theater and wearing the latest styles," she said. "I might have to start shopping at thrift shops."

Fenske, 64, said she was sitting alone at Carol's Restaurant in West Sacramento, California, when a group of elderly women at a nearby table were discussing how much money they had been losing in the financial markets. She said she heard one woman, whom she didn't know, complain that she "can't take any more hits" and told her friends, "I turned everything I had into cash, put it in a lock box and buried it under the shed near the sewer line."

"I was horrified that somebody else might have heard her," Fenske said. "The placed was crammed. I told her to go home and move it."

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Crisis Exposes Flaws in U.S. Economy, Tarnishes Image

The rapid-fire rescues of financial firms may end up tarnishing America's free-market reputation as the moves expose defects in the U.S. economy, undermining its standing with foreign buyers of the dollar and U.S. Treasury securities.
The government's actions might add hundreds of billions to a budget deficit already expected to hit a record next year.

The salvage operations, which include Tuesday's takeover of American International Group Inc., also raise questions about the U.S. commitment to a free-market economy that, until recently, was the envy of the world. America's credit "profile is now weaker because contingent risks have become actual risks to the U.S. government," said John Chambers, managing director of sovereign ratings at Standard & Poor's in New York.

The result: Foreign investors may demand higher compensation for providing the money the U.S. government and economy depend on. That, in turn, could translate into lower living standards for Americans as borrowing costs are pushed higher and the dollar is pulled lower.

There's not much evidence that any of this is happening yet. The yield on the 10-year Treasury note fell to 3.4 percent yesterday from 3.9 percent two months earlier as investors sought refuge from the recent turmoil in financial markets. The U.S. currency, meanwhile, has strengthened to $1.43 per euro from $1.59 on July 17.

Yet in what may be a sign that the complacency won't last, the cost to hedge against losses on U.S. government debt rose to a record yesterday after the Federal Reserve's rescue of insurance giant AIG. Benchmark 10-year credit-default swaps on Treasuries increased 4 basis points to 30, more than double those on government debt sold by Austria, Finland or Sweden, according to BNP Paribas SA.

Until now, the U.S. has enjoyed a special status among investors, thanks to the size of its economy, the power of its military and the depth of its financial markets. The dollar supplanted the British pound as the world's reserve currency after World War II, enabling America to borrow freely from abroad and run up big trade deficits. All this fed the country's sense that the U.S. was exceptional, destined to be the global political and economic leader.

America can no longer take its privileged position for granted. It has already lost some of its diplomatic luster because of President George W. Bush's go-it-alone foreign policy and the invasion of Iraq.

The successful introduction of the euro a decade ago has created a rival for the dollar as the world's main currency for trade and investment. The rapid growth of emerging markets, particularly China, has also undercut America's attractiveness to the world's financiers.

That's why the ongoing financial turmoil is so dangerous. The meltdown has created "a crisis of confidence in the U.S. government," said Jim Leach, a former Republican U.S. congressman from Iowa who is now a professor at Princeton University in New Jersey. "The twin pinions of American strength -- our politics and our finance -- are under the gun today."

Estimates of the eventual price the U.S. government will have to pay to end the credit crisis vary widely, ranging as high as $2 trillion. Many are lower than that, at roughly a half-trillion dollars -- equal to about 4 percent of gross domestic product. Kenneth Rogoff, an economics professor at Harvard, wrote in the Financial Times today that the U.S. may have to spend between $1 trillion and $2 trillion.

While such a bill would be more than twice what the U.S. paid in today's dollars to resolve the savings-and-loan crisis in the early 1990s, budget experts said it would be manageable to finance on its own. The trouble is, the federal government already faces liabilities in the tens of trillions of dollars as baby boomers retire and begin collecting Social Security and medical benefits.

Joshua Rosner, an analyst with research firm Graham Fisher & Co. in New York, said the costs are unclear partly because the Treasury is effectively keeping some of them off the government's balance sheet by parking them at the Fed. That's the same sort of practice that got Citigroup Inc. and other banks in trouble during the now year-old credit crisis.

Fed Chairman Ben S. Bernanke and his colleagues committed $29 billion to back the takeover of Bear Stearns Group by JPMorgan Chase & Co. in March. Treasury Secretary Henry Paulson followed with a pledge this month of as much as $100 billion each for Fannie Mae and Freddie Mac to ensure that the two mortgage companies continue supporting the battered housing market. The Fed then kicked in an additional $85 billion this week for AIG.

Harvey Pitt, chief executive officer of Kalorama Partners in Washington and former chairman of the Securities & Exchange Commission, argued the rescues would help reassure foreign investors that the U.S. isn't prepared to accept a free-fall in financial markets. The bailouts, unfortunately, also do something else: They highlight the fragility of the U.S. financial system.

"The foreigners are torn right now," said Mohammed El- Erian, co-chief executive officer of Pacific Investment Management Co. in Newport Beach, California. "On the one hand, they are stunned by what is happening to the U.S. financial system. On the other, they are impressed that we are getting a policy response that is relatively fast."

Sovereign-wealth funds invested just $900 million in new capital in U.S. and European financial institutions so far this quarter. That's down from $6.43 billion in the second quarter, $19.7 billion in the first and $28.5 billion in the final quarter of last year, according to data compiled by Bloomberg News.

Nobel Prize-winning economist Joseph Stiglitz said that the haphazard nature of the bailouts may discourage investors from putting money in the U.S. because it increases uncertainty about who will survive and who will fail.

"We used to believe that America was a country or a government that was based on the rule of law," the Columbia University professor said in a Sept. 16 interview on Bloomberg Radio. "Today, we appear to be a law of discretion. Who gets bailed out seems to be totally up to the discretion of Paulson, of Bernanke."

William Poole, a senior economic adviser at Merk Investments LLC and former St. Louis Fed president, said in a Bloomberg Television interview yesterday that the market system would be hurt by increased regulation in the wake of the rescues.

"It is likely that we will see a much heavier regulatory hand that, in the end, is going to saddle lots of companies with unnecessary costs and damage our market system," said Poole, a Bloomberg News contributor. Foreigners' appetite for investing in the U.S. may also be tempered by the impact of the crisis on the economy. Allen Sinai, chief economist at Decision Economics in New York, said the U.S. is in for an extended recession as the financial- services industry -- a major source of increased productivity growth in the past -- consolidates.

"The federal government assumes that it can borrow whatever it wants from foreign lenders at low interest rates for as long as it wants," said David Walker, former comptroller of the U.S. Government Accountability Office who's now head of the Peter G. Peterson Foundation in New York. "That's an imprudent assumption."

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European Central Banks Add $71 Billion to Ease Credit Squeeze

Europe's main central banks lent $71 billion as part of a coordinated effort with the U.S. Federal Reserve to ease a credit squeeze.

The European Central Bank poured $40 billion dollars into the markets while the Bank of England allotted $20.8 billion out of $40 billion offered and the Swiss National Bank added $10bn. The ECB's and the SNB's auctions were oversubscribed. The Fed yesterday almost quadrupled to $247 billion the amount of dollars central banks can auction around the world.

Stocks from London to Shanghai recouped some of the losses from four straight days of declines after the U.S. government started planning new laws to halt the credit-market meltdown and financial regulators cracked down on short sellers.
The U.S. government's "proposals finally address the root cause of the problem," said James Nixon, an economist at Societe Generale SA in London. "The economic impact at this stage is difficult to gauge, but the boost in sentiment, as seen by the stocks rallies this morning, cannot be overstated."

Europe's Dow Jones Stoxx 600 Index rose the most since data for the index began in 1987. Russia's RTS Index jumped 16 percent after a two-day suspension and President Dmitry Medvedev's pledge of $20 billion to prop up the market. The MSCI Asia-Pacific Index rebounded from a three-year low.

Money-market rates tumbled today on the coordinated efforts between central banks and lawmakers. The London interbank offered rate, or Libor, for overnight dollar loans fell 59 basis points to 3.25 percent today, after sliding 119 basis points yesterday, according to British Bankers' Association data.

When Lehman Brothers Holdings Inc. filed for bankruptcy this week it was the latest casualty in the yearlong credit crisis sparked by record loan defaults on mortgages to U.S. households with a poor credit history. More than $19 trillion was wiped off global stock-market value since Oct. 31 as more than $500 billion in credit losses and writedowns at banks pushed the world economy toward a recession.

U.S. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke yesterday proposed moving troubled assets from the balance sheets of American financial companies into a new institution. The initiative is aimed at removing the devalued mortgage-linked assets at the root of the worst credit crisis since the Great Depression. The Treasury said today it will use as much as $50 billion to insure money-market mutual holdings.

Financial regulators in the U.S. and U.K., attorneys general in New York, Texas and Connecticut, and the three largest U.S. pension funds began cracking down on short sellers this week. Short sellers try to profit by betting stock prices will fall. In a short sale, traders borrow shares from their broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference.

The ECB offered commercial banks extra euro funding overnight three times this week after the cost of borrowing in euros rose. The Bank of England and the SNB also held additional liquidity rounds in their own currencies this week. Central banks in Japan and Australia have pumped some $113 billion into money markets this week.

Dollar swap lines between the Fed and other central banks were first established in December when officials joined forces to boost dollar liquidity around the world after interest-rate reductions in the U.S., the U.K. and Canada failed to ease concerns about bank lending. The Fed increased its link with the ECB in July.

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Russian markets rally, causing another trading halt

Russian stocks rallied as much as 26% Friday, causing the markets' regulator to halt trading once again on the two main stock exchanges, as investor sentiment was boosted by a series of government measures aimed at stemming the country's financial turmoil.

The Russian markets joined a broad surge in global stock markets, which were buoyed by hopes that the U.S. government would hammer out a broad-ranging plan to fix the global financial crisis. In Moscow, the two main stock exchanges, the RTS and the Micex, suspended trading for several hours Friday due to an order from Federal Financial Markets Service, the markets' regulator, after stocks surged over 20%.

The dollar-denominated RTS stock index was last up 20%, while the ruble-denominated Micex index was last up 26%.
The latest trading halt follows several suspensions this week precipitated by steep sell-offs. Trading on the Micex and the RTS was closed Thursday, as the Russian government rolled out a package of market-stabilization measures, including a pledge that $20 billion would be injected into the stock market.

Despite Friday's rally in Russian equities, the local markets remain deeply in the red for the year after several weeks of fierce selling by domestic and foreign investors. The RTS stock index has tumbled about 45% this year, making it one of the worst performers in the world. In London trading, shares of oil giant Lukoil rallied 21%, while Gazprom soared 20% and Rosneft surged 29%. Shares of VTB Bank soared 31%.

In a note to investors, J.P. Morgan Chase analysts said state injections of capital would be particularly supportive of major Russian blue chips such as Sberbank, Rosneft and Gazprom, but they cautioned that real-estate-related stocks will still face liquidity problems. The analysts also cautioned that emergency measures in Russia are "not a magic wand."

However, Standard & Poor's Ratings Services cut the outlook on Russia's credit rating to stable from positive Friday, citing in part an "ambivalent official policy" toward shareholders' property rights.

"The outlook revision is based on growing uncertainty regarding Russia's economic policy response as the liquidity crisis in its financial markets has deepened," Standard & Poor's credit analyst Frank Gill said. "The situation is exacerbated by rising downside risk to Russia's terms of trade as the world economy flirts with recession."

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Isuzu Denies Talks to Buy GM's Commercial Truck Unit

Isuzu Motors Ltd., Japan's largest maker of light-duty trucks, denied a report that it's in talks with General Motors Corp. to buy the U.S. company's commercial truck operations. "We haven't heard about the talks," Naoki Ariizumi, a spokesman at Isuzu, said today by phone.

Detroit-based GM contacted Isuzu in mid-September to sound out the possible acquisition, Nikkei English News reported, citing unidentified people close to the matter. The deal is estimated to be worth tens of billions of yen, Nikkei said. GM is also considering selling part of its 60 percent stake in DMAX Ltd., a diesel-engine joint venture with Isuzu in the U.S., the report said. The two companies may reach an agreement as early as the end of the year, the report said.

GM, which has lost $69.8 billion since 2004, is trying to increase liquidity by $4 billion to $7 billion through the end of next year with asset sales and new debt as U.S. economic conditions worsen. Isuzu and GM have kept business ties including jointly operating diesel engine factories in the U.S. and Poland after dissolving their 35-year equity alliance in 2006.

Isuzu surged 11 percent to 336 yen at the 3 p.m. close on the Tokyo Stock Exchange. GM was unchanged at $11.40 in New York Stock Exchange composite trading yesterday.

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Process to genetically engineer animals gets green light

The Food and Drug Administration on Thursday opened the way for a bevy of genetically engineered salmon, cows and other animals to leap from the laboratory to the marketplace, unveiling an approval process that would treat the modified creatures like drugs.

The guidelines for the first time make explicit the regulatory hoops companies would have to jump through to sell engineered salmon that grow twice as fast as wild fish; pigs with high levels of healthy omega-3 fatty acids in their meat; or goats that produce beneficial proteins, such as insulin, in their milk.


"It's about time the federal government has acknowledged that these animals are on its doorstep and need to be regulated to ensure their safety," said Greg Jaffe, biotechnology director at the Center for Science in the Public Interest in Washington.

Many experts, however, say the proposed regulations may not go far enough to protect the public. In particular, they argue that the approval process would be highly secretive to guard the commercial interests of the companies involved, and that the new rules do not place sufficient weight on the potential environmental effect of what many consider to be Frankenstein animals.

Animals can't be treated exactly like drugs, said Jaydee Hanson, a policy analyst at the Center for Food Safety in Washington. "Drugs don't go out and breed with each other. When a drug gets loose, you figure you can control it. When a bull gets loose, it would be harder to corral." The animals are genetically modified for a variety of purposes.

Some are designed to be more disease-resistant, such as the cow that is not susceptible to mad cow disease. Others are more nutritious or grow faster, enhancing profits. Researchers are considering modified animals as sources of organs for human transplants.

Another idea involves so-called biopharm animals, which would be used to produce drugs such as insulin. "There are very compelling and real benefits for humans and animals" from genetic engineering, said William Flynn of the FDA's Center for Veterinary Medicine. "But we must show that they are safe before they enter the marketplace."

The new regulations do not cover cloned animals, most pets or research animals. The FDA has already determined that clones -- genetic replicas -- are safe. Pets and research animals are unlikely to enter the food chain. Only one genetically engineered animal is now being sold in the United States, the glow-in-the-dark zebra fish for aquariums. The FDA approved it because it is not eaten and its need for warm water effectively precludes its escape into the wild.

The first product likely to be sold under the new rules is a genetically engineered Atlantic salmon produced by Aqua Bounty Technologies Inc. of Waltham, Mass. Inserted genes from two other fish allow it to reach full size in 18 months rather than the normal 30.

Aqua Bounty, along with other biotechnology companies, has been pushing the FDA to establish guidelines and hopes to win approval next year. Technically, it is not the modified animals but the added DNA segments that are considered drugs.

Realistically, however, the only way to regulate the property-changing DNA is to regulate the animal, said Eric Flamm, a policy advisor at the agency. That regulation will require demonstration that the modified animal itself is healthy and that a food or drug produced from it is safe for human use. The new rules do not envision feeding the products to humans in the equivalent of clinical trials for drugs.

Once an animal product has been approved, its labeling may or may not reflect its origin, the FDA said. If the composition of meat or other food has been changed, such as by increasing its content of omega-3 fats, that will be put on its label. But if the animal simply grows faster or is more environmentally friendly without changes in composition, no mention of its genetically engineered origin is considered necessary.

The lack of labeling concerns consumer advocacy groups. Jean Halloran, director of food policy initiatives at Consumers Union, called it "incomprehensible." "Consumers have the right to know if the ham, bacon or pork chops they are buying . . . have been engineered with mouse genes," she said.

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