Sunday, November 16, 2008

Debt Rattle, November 16 2008: Everybody Now!


American Colony Photo Service Surrender by Christmas December 1917
Turkish Army surrenders city of Jerusalem to the British Army. The city authorities awaited the British army which was already nearby and finally the mayor (the man in the fez and carrying a cane) and the local police went out looking for advance units of the British Army in order to surrender to them. They encountered these two British soldiers who were simply out scavenging for tobacco and the mayor handed them a white flag as token of surrender. At first the two soldiers, a private and a sergeant, didn’t want to accept the surrender but the mayor and his party were insistent..


Ilargi: Now the G20 meeting is finished, we see confirmed once more what I've said all along: the whole circus was an emtpy charade from the start, and nothing was achieved. Except perhaps for one notion that stands out: the vast majority of so-called leaders (isn't that a title you need work to deserve?) understand that it's everybody for himself.

The best illustration of this is provided by the fact that all participants agreed that a lot of studying and talking is left to do, before they meet again. Which is supposed to be in April 2009 (?!). That’s half a year away. Until then, the world will supposedly stand still. May I suggest you look back 6 months, to April of this year? Try some of the media headlines in those days. It'll give you a good indication of how much change can occur in such a relatively short period, and how useless therefore an agreement like this is.

Not that there ever was any doubt, that's all just window-dressing. Sure, there are parties, and very powerful ones, that will want to push through economic "reforms" that would lead to a drastic overthrow of current relations and systems, up to and including the introduction of new -global- currencies. But there are simply too many others at the tables who have had more than enough of the negative effects of their countries' exposure to globalized markets. And who want to have more control of their domestic economies, not less, as an increasingly global system would guarantee.

The forces who are pushing for what is still called (it's getting profoundly cynical by now) free trade and free markets, as noted, are very powerful. The elite triumvirat of Wall Street, the IMF and the World Bank are busy tightening the thumbscrews on their first victims, Pakistan, Ukraine, Hungary, Iceland, as we speak. There are, however, also strong voices who wish to keep the EU alive, and somewhere down the line that will lead to irreconcilable differences. Today’s political climate makes a take-over by the IMF crowd impossible. There are too many parts of the world where such attempts would lead to violent unrest, and that includes much of Europe. Which doesn't mean they won't try, mind you.

Besides, there is too much work to be done inside the US to focus more than fleeting Bilderberger glances on the rest of the world. They're too late. It's hardly relevant anymore whether the Treasury and Fed have so far spent and committed $2 trillion or $5 trillion on their litany of bail-out programs. Either amount pales in comparison to what is yet to come, at least in demands. It will take ten years to unwind Lehman, and there are certain to be huge additional costs to arise from that stinking heap. The Fed has silently engaged in sinking way more into way more into AIG then we knew to date. A staggering additional amount will yet be dumped into the craters of Wall Street before this is over.

Still, the main story from now until Christmas -apart from a couple of million jobs lost- is that the rest of America will come knocking on any door available, demanding money. And most of those standing out in the cold will be told there is no money for them, because it has all been handed out to the banks. First come, first served. Of course, the banks will go down regardless, taking with them hundreds of billions in customer deposits for which there no longer will be FDIC guarantee funds available. At the same time, pension plans and 401k’s are being hollowed out at alarming rates, while the banks sitting still on taxpayer billions will raise mortgage and credit card rates, no matter that not doing that was -supposedly- the no.1 condition for access to the money in the first place.

States like California had already raised alarms over their financial situation, and now major cities are doing the same. Next are counties, towns, you name it. There is no way the federal government can rescue all of them, not even if they would not have given a penny to the banks. But they have. Unless we get either real careful or real angry, we might see a situation where all levels of government can only procure some cash by borrowing at exorbitant rates, like 15%-20%, from Wall Street banks, who borrow it from the Fed and Treasury at 2%. And if you have to borrow your own money back at a loss of 10% or over, believe me, you won't last long.

Meanwhile, 6000 smaller US banks now count on the fact that they will get funds from Fed/Treasury programs. And that’s just banks. Every single insurer, monoline, carmaker, airline, mortgage lender, big box store chain, media giant and a milllion other industries will be singing carols for cash. Most of them are not operating in ways that stand any chance in the new economy that will start next year, but trillions of dollars more will be thrown at those with the best lobbyists anyway.

As for a social safety net in America, you got to be kidding. You’d be much better off in Sweden. Or Germany, France, Holland.






Flurry Of Firms Apply For US Treasury Funds By Friday Deadline
The U.S. Treasury on Friday was set to receive a flood of last-minute applications from firms seeking government rescue funds by the Nov. 14 deadline. The Treasury's $250 billion capital purchase program is open only to banks and thrifts. But others, including insurers and finance companies, were hoping to receive cash injections as well. Meanwhile, many private banks, which aren't required to apply by Friday, submitted their applications anyway, for fear of being left out in the cold.

"The level of interest from businesses is very high," said Scott Talbott, senior vice president of the Financial Services Roundtable. Since the capital purchase program was announced on Oct. 14, the American Bankers Association, the largest banking trade group, has twice written to Treasury to express its deep skepticism about whether banks would participate unless Treasury provided more clarity about the program's purpose. They also asked Treasury to push back the Nov. 14 deadline to give banks more time to mull their options.

Industry doubts about the program now seem to have faded. Back-of-the envelope estimates by the bankers group suggest that 40% of the industry is interested in the program, ABA executive Wayne Abernathy said. "We have seen significant interest in the program," Treasury spokeswoman Jennifer Zuccarelli said. Under the program, Treasury purchases senior preferred shares in qualifying banks. In exchange, the banks must adhere to certain caps on executive pay and restrictions on dividend payments.

Treasury has already doled out roughly $170 billion of the capital purchase funds, leaving about $80 billion for the rest of the industry, according to industry estimates. Brian Gardner, an analyst for research firm Keefe, Bruyette & Woods, said that would be more than enough to cover all the banks that want to apply. "There's going to be money left over from the capital purchase program," he predicted.

In remarks Wednesday, Treasury Secretary Henry Paulson opened the door to allowing other companies to receive cash injections under the $700 billion Troubled Asset Relief Program, or TARP. However, he provided few details. A number of firms were seeking to acquire bank or thrift charters to qualify for the capital purchase program. In the last week, the Office of Thrift Supervision has received inquiries from a few insurers seeking to acquire a thrift charter, OTS spokesman William Ruberry said. American Express converted itself to a bank holding company earlier this week, and GMAC Financial Services said it would do the same.

Meanwhile, private or closely held banks are anxiously awaiting their turn to be considered for rescue funds, even as questions remain about how Treasury will shape the second stage of the program. Treasury has already made clear that it plans on giving private banks the opportunity to apply. The Independent Community Bankers of America hopes that more than 6,000 private banks will soon have access to the rescue funds. Robert Clarke, a senior partner with Bracewell & Giuliani's global financial services practice and a former Comptroller of the Currency, said that even though the rules of the road for private banks have yet to be laid out, about half a dozen of his community bank clients have already submitted applications to the Treasury.

"There's a tremendous amount of interest in this" among community banks, he said. "I wish they (Treasury) would go ahead and get the guidance out because there are a lot of boards and management that are stuck on hold, not knowing which way to go because they don't know what the rules of the road are going to be." Zuccarelli said Treasury expects to release more information on the process for private banks "in coming days." She added that the funds for the private banks would come out of the $250 billion capital purchase program.

There is some concern among banks that Congress will act to place more restrictions on participants in the program. Language in the securities purchase agreement between Treasury and the banks allows the department to "unilaterally amend" any part of the agreement subject to a change in federal statute. The concern has not damped interest in the program, however. "The deal is too good for them to pass up," Karen Petrou of Federal Financial Analytics, a bank consultancy, said. "If the terms change, they could repurchase the shares."

Questions still remain about how exactly Treasury will use the rest of its bailout program funds. Congress gave Treasury immediate access to the first half of the $700 billion for its rescue program. But now, most of that first $350 billion has already been committed. In addition to the $250 billion set aside for the capital purchase program, Treasury on Monday announced plans to inject $40 billion into American International Group (AIG), bringing the amount of government aid received by the insurer to around $150 billion. That leaves Treasury with immediate access to $ 60 billion of TARP funds. It would have to turn to Congress for the remaining $ 350 billion.

Paulson said Wednesday he didn't have a timeline for when he'd ask Congress to tap the last $350 billion of TARP funds. He also said Treasury had backed off its original plan to buy troubled mortgage-related assets from banks' balance sheets. Instead, it's considering ways to boost the availability of student and auto loans and credit card financing. One way would be for Treasury to invest in a Federal Reserve liquidity facility to buy securities backed by consumer loans. The consumer finance sector has come to a standstill on concerns about defaults, raising the costs of car loans, student loans and credit cards, Paulson said. In addition, Paulson outlined plans for a program to inject capital into firms outside of the banking industry through a program that could require firms to first raise private capital.




U.S. Cities, Reeling From Deficits, Seek Bailout Cash
Philadelphia, Atlanta and Phoenix are asking the U.S. Treasury Department for part of the $700 billion financial rescue package to help them finance construction projects and pay bills. They seek $50 billion on behalf of cities nationally to spend on infrastructure and loans lasting as long as a year to aid cash flow. Philadelphia Mayor Michael Nutter, who is leading the effort, gave a copy of a letter detailing the request to Treasury Secretary Henry Paulson today, said Atlanta Mayor Shirley Franklin. Atlanta has laid off workers and frozen hiring and may cut essential services. "We are going to start hitting bone," Franklin said in an interview today.

Paulson said on Nov. 12 such requests are beyond the scope of the bailout. Cities' revenue has plummeted amid the turmoil on Wall Street, plunging home values and the economic slowdown. The stock market crash has also saddled pension funds with losses that will force local governments to set aside more money for retirement payments. The Bush administration has rebuffed requests to use the financial rescue plan, known as the Troubled Asset Relief Program, to help state and local governments. The Treasury rejected a plea last month by Alabama's largest county to guarantee its bonds and help it avert bankruptcy.

The mayors join a growing list of those outside Wall Street seeking money from the U.S. Treasury. Officials originally intended to buy devalued mortgage assets that left banks reeling from loses and hesitant to lend. House Financial Services Committee Chairman Barney Frank has proposed using $25 billion of the bailout money to help struggling U.S. automakers. Atlanta, which has to close a $60 million gap in its $570 million budget, laid off 350 workers in June, about 30 percent of its nonessential employees, Franklin said. A furlough program starting Dec. 1 will cut pay for the city's 4,600 employees by about 10 percent, Franklin said.

"Like most cities, we have kept up," Franklin said. "But we are saying that if it continues to unravel, we will have to cut core services and put more people on the street without jobs." New Jersey Governor Jon Corzine, who said yesterday his state's budget deficit this year had more than tripled to $1.2 billion, favors including cities in a bailout program. "As tough as it is for the states," Corzine said, "I think our municipalities and local governments have it even more so." Mayors in other cities are planning to make their own requests. San Jose, California, Mayor Chuck Reed said today the city may seek as much as $14 billion, spokeswoman Michelle McGurk said.

That amount is more than four times the city's current budget of $3.3 billion and equal to 2 percent of the federal bailout package. The city needs money to meet its pension and retirement costs and fund water-treatment and transportation projects, McGurk said. The city doesn't expect to receive the full amount but was making the request in light of similar efforts by other cities, she said. Reed made his comments following a meeting with mayors of the state's 10 biggest cities. Those cities, which include Los Angeles and San Francisco, will devise a joint request for federal assistance, McGurk said. When that request will be completed and submitted is unclear.

California Assembly Speaker Karen Bass said she is drafting a letter to President George W. Bush asking that he seek another economic stimulus package and include a special pool of money that states can tap to help pay their bills. California requires at least $5 billion, said Bass, a Democrat from Los Angeles. "When you are talking about bailing out individual industries, California is an entire state, and states should be elevated as industries are," Bass said.

California, the most populous U.S. state and with a gross domestic product that's the world's eighth largest, faces an $11.2 billion shortfall in the current fiscal year and $28 billion deficit over the next 20 months. Even if lawmakers approve Governor Arnold Schwarzenegger's proposal for $4.5 billion in tax increases and $4.5 billion in spending cuts, the state still would need a federal bailout, Bass said. Aside from tumbling tax revenue, Wall Street's credit crisis has also pushed up the cost of borrowing for state and local governments, which have sold some $2.7 trillion of bonds. As investors demanded higher returns to take on more local government debt, some governments shelved plans to borrow.

President-elect Barack Obama said during a Nov. 7 press conference that he wants to extend assistance to state and local governments. During his campaign, Obama also proposed a so-called infrastructure bank to invest $60 billion in roads, bridges and other projects.




Will the US Safety Net Catch the Economy’s Casualties?
Economists rarely agree on anything, but a great many do agree on one unfortunate matter these days: the current economic downturn is likely to develop into the worst recession since the downturn of 1981-82. The United States is a far different place. Government programs in place then to cushion and counter recessions have been scaled back sharply, raising questions about whether they are up to the task as the economic outlook darkens today Unemployment insurance is not as generous now. Yet the unemployment rate is at 6.5 percent and some forecasters say it could top 8 percent next year. It hit 10.8 percent in the early 1980s.

This is also the first severe economic slump since President Bill Clinton overhauled the welfare system and made it tougher to qualify for, and keep receiving, benefits. Many people who lose their jobs now and fall into poverty may not qualify for public assistance. Other programs designed in part to counter hard times — like job training and housing subsidies — have also been cut back. “Some of the core elements of the social safety net have eroded,” said Jacob Hacker, author of “The Great Risk Shift” and a professor of political science at the University of California at Berkeley.

“Unemployment insurance has been weak for a long time, but right now it seems to be quite anemic relative to the need,” he said. “The social safety net in general has not been kept up to date with the changing nature of the work force and the increased economic risks that working families are facing.” With a Democratic president and Congress set to be sworn in this January, many liberal groups are maneuvering to strengthen the nation’s safety net — the web of government programs, including food stamps, welfare, Social Security, Medicare and Medicaid, that are intended to cushion Americans from hardships like layoffs, disability and old age.

Two such groups — the Center for American Progress and the National Employment Law Project — issued a report on Friday making their case for expanding unemployment insurance. According to the report, tighter rules mean that just 37 percent of unemployed Americans are receiving jobless benefits today, down from 42 percent during the 1981-82 recession and 50 percent during the 1974-75 downturn. Americans today receive a maximum of 39 weeks of unemployment benefits, down from 65 weeks in the 1970s. The average weekly benefit is $293. And low-income workers — a category that tends to include women and those in part-time employment — are one-third as likely to receive unemployment insurance as higher-income workers.

Another liberal group, the Center for Budget Policy and Priorities, said that as states have imposed tougher restrictions on welfare, just 40 percent of very poor families who qualify for public assistance today actually end up receiving it, compared with 80 percent in the recessions of 1981-82 and 1990-91. Liberal economists say the deterioration of the safety net will not only mean more pain and poverty for millions of families, but a longer recession. They say spending on social programs helps to stabilize the economy and counter the downward tug of recession. But many conservative economists argue that the existing safety net is plenty large, and that in any event, it will be less effective in fighting a downturn characterized by an extraordinary credit crunch.

“Is it the case that automatic stabilizers that are in place will prevent the kind of downturn we’ve seen most recently — I think the answer is no,” said Douglas Holtz-Eakin, who was John McCain’s chief economic adviser during the presidential campaign. Mr. Holtz-Eakin said the current downturn is “an asset-bubble-driven recession,” fueled by declining housing and stock prices. The increased income that automatic stabilizers put into people’s pockets is not an antidote to an economy in which banks are scared to lend, he said.

During the Great Depression, Franklin Delano Roosevelt strived mightily to build a broad and strong safety net that included unemployment insurance and aid for families with dependent children. After Ronald Reagan took office in 1981, Washington started trimming and tightening many social programs. To boost the economy, Mr. Reagan called for smaller government, lower taxes and more self-reliance. The unemployment insurance and welfare programs were trimmed to reduce spending and discourage recipients from dawdling. But President Reagan also expanded the Earned Income Tax Credit, which gives a credit of several thousand dollars to low-income workers.

Bill Clinton presided over a further tightening of welfare, with the federal government limiting the amount of time most recipients can receive benefits and many states imposing strict work requirements. Federal housing subsidies have also been cut by nearly two-thirds since the 1980s, after inflation. But Brian Riedl, senior federal budget analyst at the conservative Heritage Foundation, said the automatic stabilizing effects of these programs remained strong. “Antipoverty spending is at its highest level in American history,” he said. “It’s topped 3 percent of gross domestic product.”

Economists say that it is sometimes hard to determine whether certain social programs fuel recessions or fight them. As 1.2 million workers have lost their job this year, for instance, many have turned to Medicaid, causing some states to spend more on health care, boosting the economy in the process. At the same time, some cash-strapped states have cut Medicaid, losing federal matching funds and slowing down the economy. Some see a similar effect with the Earned Income Tax Credit. “The E.I.T.C. is a fantastic wage subsidy program that’s been hugely effective in reducing poverty, but when jobs disappear, the E.I.T.C. doesn’t help you,” said Jared Bernstein of the Economic Policy Institute, a liberal research group. He was one of the economists invited to a meeting of President-elect Barack Obama’s top economic advisers on Nov. 7.

“When people lose their jobs, they often stop receiving E.I.T.C., and I fear that the program becomes less countercyclical and more pro-cyclical, meaning it reinforces recessionary forces,” he said. The president-elect is on record in support of an economic-stimulus package and extending unemployment benefits. But many advocacy groups are churning out reports and position papers urging him to take further steps to enhance jobless and welfare benefits. Rebecca Blank, a senior fellow at the Brookings Institution, noted that the recession of 2001 hurt factory workers most but had little effect on the low-wage jobs that many women hold.

“But this recession is really hitting those jobs, and the question is what will happen to that group of women. Is there a safety net?” she asked. Ms. Blank complained that low-wage-earning women often failed to qualify for unemployment benefits because many states do not provide such assistance to part-time workers or those who fail to work six quarters in a row. “The other safety net for this group of workers is the traditional welfare program,” Ms. Blank said. “On that front, the news is not promising at all.”




G20 Summit Presents United Front, but Offers Mostly Promises
Global leaders showed a united front against the financial crisis at an emergency summit here Saturday, but offered mostly promises of future cooperation to nudge the world out of its economic funk. Heads of the Group of 20 industrial and developing nations vowed bold action in a host of areas -- from enhanced oversight of financial markets to reform of the IMF and World Bank -- and urged governments to implement "appropriate" fiscal and monetary policies to shore up sagging economic growth.

But the group, which met for less than six hours in the National Building Museum, left most of the tough decisions to future meetings. The next one will be held before April 30, pressuring President-elect Barack Obama to confront a tangle of high-stakes economic and regulatory issues immediately after taking office. "Against this background of deteriorating economic conditions worldwide, we agreed that a broader policy response is needed, based on closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries," the G20 said in its final communique.

The Bush administration lauded the summit, which was arranged in less than a month as world leaders scrambled to keep the economic downturn from snowballing. "I don't think we could have predicted then how productive and how successful this meeting would have been," President George W. Bush told reporters following the summit. "There is more work to be done, and there will be further meetings." Japanese Prime Minister Taro Aso said the cooperation among world nations is important in limiting the depth of the financial crisis. "It does no good to simply panic in a crisis, and that is proven by the Great Depression of 1929," Aso said. "Today things are entirely different...we have a framework for cooperation."

Others agreed that the session was a good first step, but called for follow-through. The G20 has begun "to lay a productive foundation of discussion, input, and agreement. What matters now are the follow up actions," World Bank President Robert Zoellick said. "People are looking to leaders for a global, coordinated and fast response." The document, released after the summit broke up, was remarkably detailed, laying out an action plan to implement a series of "principles for reform" by the end of the first quarter of 2009. That plan called for an evaluation of how executive compensation may exacerbate cyclical trends, steps to boost the standards of credit rating agencies, greater cooperation between national and regional financial authorities, and an expansion of the Financial Stability Forum.

In addition, the plan called for more transparency in the opaque market for credit default swaps, including support for electronic trading platforms in the swaps contracts. It also called for the registration of credit ratings agencies. And it said "colleges of supervisors" will be set up to monitor the world's biggest financial institutions, with a list of firms to be compiled by the end of March. "Many of the issues discussed this weekend -- including credit rating agency reform, accounting standards convergence, and affirmation of open trade and investment -- were issues already being studied" said Tim Ryan, president of the Securities Industry and Financial Markets Association. "We hope this summit will provide additional political will to move these important issues forward,"

Expectations had been scaled back significantly in recent weeks for the first-ever G20 leaders summit, which was first dubbed "Bretton Woods II" in the hopes it would result in an overhaul of the post-World War II economic order. The downsizing of expectations was partly due to Bush's lame-duck status and the decision by Obama not to take part, though his representatives have been meeting with dignitaries on the sidelines. The emergency meeting was deemed necessary due to the urgency of the situation, with the euro zone already in recession, the U.S. widely expected to follow, and the turmoil threatening to envelop more developing countries.

After months of finger-pointing over the causes of the crisis, the G20 laid the blame at least partially on "policy-makers, regulators and supervisors, in some advanced countries, (who) did not adequately appreciate and address the risks building up in financial markets." The group vowed to help developing countries get access to financing, including ensuring the International Monetary Fund and other multilateral development banks have sufficient funding. And it said the poorest countries should have a greater voice at the World Bank and IMF.

"The devil is in details," said Sung Won Sohn, an economist at California State University. "Despite the good intentions, progress will be arduous and slow. Each nation has its own agenda complicating matters." A senior Bush administration official indicated the White House's agenda had been served by the summit, pointing to G20 pledges to improve regulatory regimes, reform the Bretton Woods institutions and reject protectionism. In recent days, Bush has pushed back against any impulse to reinvent the world financial system, warning that too much regulation would endanger the economy further. The administration official applauded the fact that the summit communique wasn't "an assault on capitalism."

Indeed, the summit communique outlined a commitment to free-market principles and warned against turning inward toward protectionism -- points the White House will view as a victories. It pledged to try to reach an agreement on the modalities which set out deals on manufacturing, agriculture and services trade for the long-stalled Doha Round by year-end and said countries will refrain from raising new barriers to trade within the next 12 months. While Bush said the leaders agreed to implement "pro-growth policies," it is unclear what that means in practice for the U.S. The White House isn't backing stimulus proposals expected to face a vote in Congress next week. Such measures likely include an extension of unemployment benefits and aid for struggling U.S. auto makers.

A White House official, asked about the summit's call for stimulus, said each country is at "a different stage," but recognizes that stimulus is a "very important part of the response." Dominique Strauss-Kahn, managing director of the International Monetary Fund, said coordinated stimulus amounting to at least 2% of global gross domestic product is required. That should provide a similar boost of 2% of GDP, if it's correctly coordinated, he said.




Japan's $1 trillion to the rescue?
Can Japan, the world's second largest economy, save the global financial system? Don't count on it. As world leaders prepare to meet in Washington Saturday to seek a way out of the financial crisis, some are casting covetous eyes in the direction of Japan's $1 trillion worth of foreign reserves as a source of salvation for troubled nations and banks. In Tokyo, too, a group of parliamentarians from the ruling Liberal Democratic Party (LDP) are pressing the government to spend some of its reserves – the second largest in the world – to win international prestige and diplomatic influence.

They are likely to be disappointed. The Japanese authorities say that while they are willing to lend some money to the International Monetary Fund (IMF), they would be happier offering advice born of their own financial crisis a decade ago than a lot of cold cash to today's victims. And though Japan's financial system is weathering the crisis better than many other rich countries, a property slump and falling exports are likely to throw the economy – already heavily burdened by debt – into a recession, denting Tokyo's ability to lead the world out of the current turmoil. The Organization for Economic Cooperation and Development (OECD) predicted Thursday that Japan's economy would shrink 0.1 percent next year, not much better than the average for its members – a 0.3 percent contraction. The US economy is expected to shrink by as much as 0.9 percent.

"We can use our reserves only to buy and sell foreign exchange to stabilize the yen," explains a senior Finance Ministry official who asked to remain anonymous. "We can't use them for anything else." That caution frustrates Kotaro Tamura, a young Turk in the LDP and former investment banker, who sees the financial crisis as "a huge opportunity for Japan." "Cash is king right now, and we have a huge cash pile" he points out. "We should invest in Korea and the US, help rescue them, and we would get economic and diplomatic returns." His enthusiasm for more creative ways of using the reserves has won a certain amount of support in financial circles. "Japan has big foreign reserves and it is worth considering how to spend them," says Hiromichi Shirakawa, Credit Suisse chief economist for Japan. "The money could finance more effective measures to underpin the international financial system."

Government officials, however, insist that Japan's reserves, 85 percent of which are invested in US Treasury bills, are not just sitting ready to be spent. The dollars were amassed, they point out, when the Bank of Japan was intervening heavily in the foreign exchange market a few years ago to stop the yen from rising in value, which would have hurt exports. The government raised the money to buy those dollars by issuing yen-denominated bonds, so the foreign reserves in dollars – an asset – are balanced by an equivalent yen debt – a liability. This makes the Finance Ministry reluctant to use the reserves in potentially risky investments, such as saving Iceland or propping up troubled US banks in return for equity.

"There is no imagination" for such a venture, says Teizo Taya, a former senior Bank of Japan official who now teaches at Rikkyo University in Tokyo. "This government does not think of itself as a hedge fund." Lending to the IMF, however, as it seeks more funds with which to bail out struggling economies, fits Japan's ambitions better: Japan is set to offer the IMF as much as $100 billion in foreign reserves, Reuters cited a government source as saying. "We see lending to the IMF as basically risk-free," Finance Minister Shoichi Nakagawa said recently. Another benefit of such loans is that Japan's money would remain in US dollars, so there would be no need to sell US treasury bills; large sales of those bonds would have a negative effect on the value of the US dollar.

"The Japanese government is still very sensitive to this," says Mr. Shirakawa. "They think they need to support the US and the dollar for national security reasons" in order not to endanger the US security umbrella in the Pacific under which Japan has sheltered for the past half century. That line of thinking also means that in the coming debate over the need for reforms in the international financial system, Tokyo will resist proposals that cast doubt on the centrality of the US dollar, he adds. "Japan would be the last country to drop support for the dollar," Shirakawa says. "The US dollar is the currency of Asia," adds Martin Schulz, an economist at the Fujitsu Research Institute in Tokyo. "You don't upset your central banker. "It is a no-no in Japanese politics to offend the United States. No one would dare think about it."

Instead, he predicts, the Japanese government will join any international initiative that the Group of 20 might agree on and contribute funds to it, "but they won't be the ones drafting significant plans or putting numbers to them." Officials here say their greatest contribution to resolving the financial crisis will be to remind other nations of the lessons Japan learned from the Asian financial crisis a decade ago. They were reflected, the Finance Ministry official says, in the principles espoused last month by the G-7 finance ministers when they agreed to take urgent steps to unfreeze credit markets, ensure banks have ready cash to lend, and reassure private depositors their money is safe.

"We have been insisting on these three points," the official says. "It took us time to implement them" 10 years ago "and we know from the past, the faster the better." The speed with which the US and European authorities intervened to shore up the financial situation last month, he adds, shows that "in a philosophical sense, Japan took a leadership role." Mr. Tamura, however, would like a bit more visibility for that role. "It's an emergency now, so it's a favorable situation for Japan to build up some kind of international leadership" while making long-term profit from successful foreign investments, he argues. "But bureaucrats don't want to risk failure," he laments.




Ever-swelling coffers of illiquid assets weigh down banks
Roughly $300 billion in write-downs this year and what do financial institutions have to show for it? Ever-swelling coffers of still illiquid assets on their balance sheets. And while the Treasury Department has been pumping fresh capital into the banking system through its Troubled Asset Relief Program, it last week reneged on the part of the plan that would have actually relieved banks of their troubled assets by buying them directly.

Many markets have been left in the lurch because they continue to lack transparency, which in turn continues to keep investors at bay. That means more multibillion-dollar write-downs are undoubtedly on the way. The amount of those write-downs is as yet unknown, but many of the largest financial companies, including J.P. Morgan Chase, Citigroup and Morgan Stanley, have recently reported an increase in level three assets—the kind that do not trade and so cannot be marked to market but must be marked to management’s models. And if recent events have taught anything, it’s that models have a tendency to miss by wide margins.

More striking, perhaps, is the concurrent increase in level two assets—those that the Financial Accounting Standards Board defines as not actively traded but having “observable” inputs from the market prices of comparable securities. (Level one assets are those that are actively traded and easily valued.) In the third quarter, J.P. Morgan, for example, reported $119 billion in level three assets, measured at fair value on a recurring basis, for which it bears economic exposure. That accounted for almost 6% of recurring assets in the quarter, compared with $71 billion at the end of 2007, or less than 5% of total recurring assets. For the third quarter, its level two assets were $1.58 trillion, or 78% of recurring assets. At the end of December, those assets made up under 75% of total recurring assets.

Similarly, Citi said that its level three assets on a recurring basis as of the end of September were $157 billion, or 11.7% of total recurring assets, up from about $133 billion, or 10.3%, of such assets at the end of last year. At Morgan Stanley, level three assets at the end of the third quarter were $78.4 billion, up 7% from the second quarter. The haphazard state of the markets, where only some securities are trading hands, however cheaply and rarely, has given companies some leeway in valuation and what constitutes level two or level three assets, said Timothy Batchelor, managing director at Duff & Phelps, who helps companies with valuation. “Essentially, we’re living in a level 2.5 world,” he said.

“You’re trying to value a level three asset with the best information available,” he explained, because companies don’t like the risk of having to rely on their own assumptions to value the assets and also because the market doesn’t particularly like big jumps in level three assets. Mr. Batchelor called the third quarter a “period of transition” in which certain illiquid assets, such as auction-rate securities, were “in flux.” “As we look forward to the fourth quarter,” he said, “it will become clearer how the financial institutions are going to come out on these issues.”

The Treasury’s decision last week to walk away from its plan to buy up problem securities probably solidified the issue for many. Companies and investors waiting for Uncle Sam to kick-start the markets were disappointed. Citigroup, for example, could have sold about $79 billion worth of its assets in the now-abandoned buyback part of the TARP, Fox-Pitt analyst David Trone estimated in September. “I was hoping there would be a couple of phases to [TARP],” said Anton Schutz, president of Mendon Capital Advisors and portfolio manager of the Burnham Financial Services Fund. “I very much agree with [the Treasury] putting equity into these companies, but I still wanted to have them in the market, helping to create some price discovery.”

Mr. Schutz expects to see level three assets rise again for the banks in his portfolio in the fourth quarter, since the securitizations markets remain so poor. “So far we’ve begun to see only the best-quality assets loosen up,” he said. “It’s going to take a little time to go down the food chain.” The Treasury, which has already pledged $250 billion to banks, is apparently hoping that by giving banks more money, they’ll be able to manage their own problem assets, some of which may be illiquid now but could prove to have value in the future.

The Treasury’s current arrangement with American International Group has begun to help clear up the market for collateralized debt obligations, which is some of the most “toxic” debt out there. That’s a contrast to the CDO auctions that take place nearly every day at Annaly Capital, which handles about 70% of the auctions for CDOs that are in default. With the “worst” subprime securitizations, said Wellington Denahan, chief investment officer at the firm, the super-senior AAA tranche holder usually gets about 20 cents on the dollar.

Prices aren’t likely to improve soon without the government being involved, Ms. Denahan said, since buyers are leery after a few companies got burned, such as BlackRock, which said last month that the $15 billion in subprime and Alt-A mortgages it bought from UBS have lost 30% of their value. Still, with the wide range of value in the underlying assets, another option might be: If you can’t sell ’em, buy more. J.P. Morgan, for example, has started a fund to buy undervalued assets. “If you have a pool of conforming mortgages, not in one of the ‘crazy states’ [like Florida or California], should it be selling at 70 cents on the dollar?” asked Mr. Schutz of Mendon Capital. “It’s an opportunity to buy, if you have that capital.”




Ill Wind Blows Down Wall Street
A spate of economic data promises to paint a gray picture of the U.S. economy. After a sorry five days on Wall Street, investors will have a lot to think about as the new week opens. Problem is, the thoughts are not likely to be positive. The Dow Jones industrial average dropped 3.8% for the day on Friday, bringing it down 5.0% for the week, and the blue-chip indicator is now off a mind-boggling 35.9% for the year. The latest slippage came as the deadline for redemption notifications at many hedge funds loomed. It is thought that investors pulling money out of funds will have given notice by Friday, allowing 45 days until the end of the year.

The effect may well be overstated, but the fear of it, combined with a weakening economy seems to have been enough to set investors on edge. Hopes were not particularly high for the weekend's Group of 20 meeting, where rich and poor nations were set to meet to discuss tactics for combating the global financial crisis. As trading resumes on Monday, the Federal Reserve Bank of New York will release its Empire State index , an indicator of manufacturing conditions in New York, with analysts expecting a reading of minus 26.0.

Joe LaVorgna, chief U.S. economist at Deutsche Bank, expects it be even worse, negative 30.0. "This consistent with what we learned from the latest Institute of Supply Management survey," LaVorgna said, "which touched its lowest reading since September 1982." The Federal Reserve will also release its industrial production index on Monday, with Wall Street anticipating an 0.1% drop, though LaVorgna expects 0.5%.

On Tuesday and Wednesday the U.S. Labor Department will report Producer Price Index and the Consumer Price Index for October, respectively. Inflation, at least, doesn't seem to be a problem for the near-term. David Wyss, chief economist at Standard and Poor's, expects a pretty good looking CPI after the drop in oil, as well as the 4.7% month over month drop in the import price index, the largest one-month drop since 1988. Wall Street analysts on average are expecting the CPI to fall 0.8%, and the PPI to sink 1.5%.

Housing starts and building permits for October will be released Wednesday. "We are projecting that both will make cyclical lows, a function of the unprecedented seizing up in financial markets that caused both builders and buyers to step further away from the housing market," LaVorgna said. The Federal Reserve Open Market Committee meeting minutes from its Oct. 29 meeting, at which it cut interest rates by half a percentage point, will also be released on Wednesday.

Leading Thursday will be initial jobless claims for the week ending November 15, which are expected to edge up 4,000 to 520,000, LaVorgna said. Also on Thursday will be the Conference Board's Leading Indicators report for October, and the Philadelphia Fed survey, the mid-Atlantic version of Monday's New York report. LaVorgna predicted a decline of 0.7%, and a reading of negative 40.0, respectively.




20 Reasons Why the U.S. Consumer is Capitulating, thus Triggering the Worst U.S. Recession in Decades
Nouriel Roubini

[The] news about October retail sales (-2.8% relative to the previous month and now down in real terms for five months in a row) confirm what this forum has been arguing for a while, i.e. that the U.S. has entered its most severe consumer-led recession in decades.

At this rate of free fall in consumption real GDP growth could be a whopping 5% negative or even worse in Q4 of 2008. And this is not a temporary phenomenon as almost all of the fundamentals driving consumption are heading south on a persistent and structural basis. Consider the many severe negative factors affecting consumption. One can count at least 20 separate or complementary causes that will sharply reduce consumption in the next several years:
  1. The US consumer is shopped-out having spent for the last few years well above its means.

  2. The US consumer is saving-less as the already low household savings rate at the beginning of this decade went to zero/negative by 2006 and has now to raise to more sustainable levels.

  3. The US consumer is debt burdened with the debt to disposable income having increased from 70% in the early 1990s to 100% in 2000 and to 140% in 2008.

  4. Not only debt ratios are high and rising but debt servicing ratios are also high and rising having gone from 11% in 2000 to almost 15% now as the interest rate on mortgages and consumer debt is resetting at higher levels.

  5. The value of housing wealth is now sharply falling by over $6 trillion as home price depreciation will soon be 30% and reach a cumulative fall of over 40% by 2010. Recent estimates of this wealth effect suggest that the effect may be closer to 12-14% rather than the historical 5-7%....

  6. Mortgage equity withdrawal (MEW) is collapsing from $700 billion annualized in 2005 to less than $20 in Q2 of this year. Thus, with falling housing wealth and collapsing MEW US households cannot use their homes anymore as ATM machines borrowing against them.

  7. The value of the equity wealth of US households has fallen by almost 50%, another ugly wealth effect on consumption.

  8. The credit crunch is becoming more severe as the recent Q2 flow of funds data and the Fed Loan Officers’ Survey suggests: it is spreading from sub-prime to near prime to prime mortgages and home equity loans; and from mortgages to credit cards, auto loans and student loans. Both the price and the quantity of credit are sharply tightening.

  9. Consumer confidence is down to levels not seen since the 1973-75 and 1980-82 recessions.

  10. Real wage growth and real income growth has been stagnant in the last few years as income and wealth inequality has been rising. And now with GDP and real incomes falling real consumption will fall sharply.

  11. The Fed is reaching the zero-bound on interest rates as the economy gets close to deflation given the slack in goods, labor and commodity markets. Deflation means that consumers will postpone consumption as future prices are lower than current prices, as real rates are positive and rising and as debt deflation increases the real value of the households nominal debts

  12. Employment has been falling for 10 months in a row and the rate of job losses is now accelerating... In this cycle job losses have been so far “only” slightly over 1 million while labor market conditions are severely worsening based on all forward looking indicators...Massive job losses and concerns about job losses will further dampen current and expected income and further contract consumption.

  13. Tax rebates of over $100 billion failed to stimulate real consumption earlier in 2008. Only 25% of the tax rebate was spent as US consumers are worried about jobs and need to use funds to pay their credit card and mortgage....another general tax rebate would be as ineffective as the first one in boosting consumption.

  14. The 1990-91 and 2001 recessions were not global; this time around the IMF is forecasting a global recession for 2009.

  15. The recent rise in inflation – that is only now slowing down – reduced real incomes even further for lower income households who spend more than the average households on gas, transportation, energy and food. The recent sharp fall in gasoline and energy prices will increase real incomes by a modest amount (about $150 billion) but the losses of real disposable income and thus falling consumption from other sources (wealth, income, debt servicing ratios) are much larger and more significant.

  16. The trade weighted fall in the value of the U.S. dollar since 2002 has worsened the terms of trade of the US and reduced further real disposable income and the purchasing power of US consumers over foreign goods.

  17. With consumption being over 71% of GDP a sharp and persistent contraction of consumption all the way through at least Q4 of 2009 implies a more severe recession than otherwise. Consumption did not fall even a single quarter in the 2001 recession and one has to go back to 1990-91 to see a single quarter of negative consumption growth...

  18. Monetary easing will not stimulate durable consumption and demand for residential housing as demand for such capital goods becomes interest rate insensitive when there is a glut of capital goods; monetary policy becomes like pushing on a string. In the previous recession the Fed cut the Fed Funds rate from 6.5% to 1% and long rates fell by 200bps. In spite of that capex spending of the corporate sector fell by 4% of GDP between 2000 and 2004 as there was a glut of tech capital goods and it took years to work out such a glut. Today there is a glut of housing, consumer durables and autos/motor vehicles; so it will take years to work out this glut...

  19. While policy rates are sharply falling the nominal and real rates faced by households are rising rather than falling.... together with less availability of credit are severely dampening the ability of households to borrow and spend.

  20. To bring back the household savings rate to the level of a decade ago (about 6% of GDP) consumption will have to fall – relative to current GDP levels – by almost a trillion dollar. If all of this adjustment were to occur in 12 months GDP would contract directly by 7% and indirectly (including the further collapse of residential and corporate capex spending in a severe recession) by 10%, an exemplification of the Keynesian “paradox of thrift”. If such an adjustment were to occur over 24 months rather than 12 months you would still have negative GDP growth of 5% for two years in a row with a cumulative fall in GDP from its peak of 10% (note that in the worst US recession since WWII such cumulative fall in GDP was only 3.7% in 1957-58).

    One can thus only hope that this adjustment of consumption and savings rates occurs only slowly over time – four years rather than two. Even in that scenario the cumulative fall of GDP could be of the order of 4-5%, i.e. the worst US recession since WWII. Note that the cumulative fall in GDP in the 2001 recession was only 0.4% and in the 1990-9 recession was only 1.3%. So, the current recession may end up being three times as long and at least three times as deep (in terms of output contraction) than the last two and worse than any other post WWII recession.




Inside the AIG-Fed swap meet
The new federal bailout plan for American International Group gives the insurance giant the chance at last to shed many of the credit default swaps that have burned a huge hole in its balance sheet. In the process, the revised bailout could help banks and other investors get out from under the collateralized debt obligations that have done the same to them, since the swaps in question cover those instruments.

It all now rests on the success of a special-purpose entity that AIG and the Federal Reserve Bank of New York plan to create to purchase those CDOs on which AIG wrote CDS protection, enabling those derivatives contracts to be extinguished. While the floundering insurer is clearly getting a sweet deal, since taxpayers will end up footing most of the bill, the new plan is hardly foolproof, since finding CDO holders could be a daunting task. Also, AIG will terminate only a portion of its total CDS portfolio. Under the new plan, unveiled last Monday, AIG will supply up to $5 billion in subordinated funding and the Fed up to $30 billion in senior funding to the new SPE, which will be dubbed CDO LLC.

With that money, the Fed plans to buy the super-senior tranches of multisector CDOs—packages of securities backed by credit card and auto-loan receivables as well as residential and commercial mortgages—from investors who also hold CDS on those investments. By doing so, they have the opportunity to cancel the CDS. CDO LLC will keep the purchased CDOs until they mature, AIG said. The plan is supposed to prevent AIG from continually posting collateral on the CDS if the CDOs keep losing value. In turn, it will stop cutting into AIG’s equity and credit ratings, according to AIG.

The insurance company said the plan is to buy as much as $70 billion worth of such super-senior CDO tranches on which AIG has written CDS through its subsidiary AIG Financial Products. The funding level will ultimately depend on counterparty participation. “Their intent [to terminate the CDS contracts] only works if the person has a matching CDS and CDO,” said Donn Vickrey, chief analyst at Gradient Analytics, of the potential CDO sellers. AIG actually doesn’t technically need to purchase the underlying CDOs to cancel the CDS contracts. It could simply move the CDS into the SPE or just purchase the CDS back to terminate the contracts, he noted.

But that alone would harm banks and others holding CDOs. So by dangling taxpayer money before those AIG counterparties, the Fed would compensate them for the loss of CDS protection. “The Federal Reserve, and its rather substantial influence, will be the driver of the negotiations with the counterparties, and we would expect that they will have substantially more success with those discussions than we had,” Edward Liddy, chairman and chief executive of AIG, said in a conference call last week.

In fact, the price could be quite attractive to CDO holders. AIG has already posted about $35 billion in collateral for the $70 billion in CDS the holders bought on their CDOs. Whether they would get to keep that or return it and have it added to another $35 billion coming from AIG and the Fed, CDO holders would get more or less the other 50 cents on the dollar that’s due them under the contracts and be made whole. “Although management indicated that there will be room for negotiation on the settlement of these liabilities, the facility provides for settlement at or very close to par,” Thomas Walsh, a Barclays Capital Research analyst, wrote in a report last week.

As a result, Mr. Walsh added, “this is a significant positive for CDO holders that were previously facing an impaired counterparty, AIG, and significant asset write-downs in unwinding multisector CDO exposure at currently depressed market values.” Although large banks in the U.S. and Europe created CDOs, investors generally weren’t interested in buying super-senior tranches because they carried a low yield due to their initial safety. Since banks couldn’t sell them, they ended up keeping them on balance sheet and buying protection through CDS sold by AIG, for instance. There are other positive aspects for AIG besides getting rid of its riskiest CDS, which represented less than 25% of its CDS portfolio but accounted for about 95% of write-downs.

While AIG’s exposure to the CDOs held in CDO LLC will be limited to its $5 billion investment in the SPE, it still could experience losses from declines in market value of multisector CDOs that occurred before the entity was established. And while those represent only 25% or so of the CDS portfolio that will be terminated, AIGFP still has on its balance sheet at least another $300 billion worth of other CDS that it has underwritten against corporate debt and residential mortgages. Analysts say those could begin to deteriorate soon. “Segments of AIGFP’s portfolio of CDS contracts that are not part of the AIGFP securitization plan could generate material cash and/or capital needs under various scenarios,” Fitch wrote last week.

Moody’s Investors Service echoed that concern: “The company also faces the daunting task of unwinding the remaining operations of AIGFP—beyond the multisector component of the CDS portfolio,” it wrote. “The costs and timing of this likely prolonged and complex unwinding process are difficult to estimate, but could be substantial.” In short, the government bailout of AIG and its counterparties could be a long way from over




A Rescue Plan Without Taxpayer Money
Hello, taxpayers. Worried about the fate of the $350 billion that the government has asked you to fork over so far to help rescue financiers from themselves? Last week, Treasury Secretary Henry M. Paulson Jr. gave you every errant golfer’s favorite response: Oops! Mulligan! While the government still declines to say exactly how it has spent your funds, or who all the beneficiaries are, Mr. Paulson conceded that his huge capital injection hasn’t persuaded banks to lend more money.

When he first peddled the “troubled asset relief program” in September as a solution to the credit mess, he urged Congress to back the plan posthaste. But on Thursday, he scotched his idea of using even more of your billions to buy rotten mortgage assets from banks. Looking on the bright side, there is something to be said for flexible responses to a complicated financial crisis. But now that the original TARP design has been toe-tagged, and because there’s still another $350 billion left for Mr. Paulson to deploy, perhaps it’s time to consider actually attacking the root of the problem: falling home prices and rising delinquencies and defaults.

Since the $700 billion TARP was funded, it has been used solely to shore up banks and other financial institutions. (An irreverent friend calls it The Act Rewarding Plutocrats.) Treasury officials did move closer to helping consumers with a new plan floated last week aimed at offering $50 billion in loans to companies that issue credit cards, make student loans and finance car purchases. Kind of interesting, isn’t it, that troubled homeowners are missing from the list of TARP beneficiaries and left to fend for themselves?

To be sure, private efforts to modify mortgages have increased recently; Citigroup, JPMorgan Chase and Bank of America have all announced plans to restructure troubled borrowers’ loans. So have Fannie Mae and Freddie Mac. But these efforts are limited to loans that these institutions hold. They don’t address the millions of loans sitting in securitization pools, those profitable instruments cobbled together by Wall Street that are collapsing en masse. Wall Street engineering has created an epic problem: restructuring loans bundled into pools of securities is much thornier than simply changing the terms of individual loans residing inside individual banks.

Not only do such changes require the approval of hard-to-identify investors who essentially control the mortgages, but also many pools were designed with rules that limit the numbers of loans that can be modified. Securitization trusts hold $1.5 trillion of subprime and alt-A loans. As of late August, according to figures from the Securities Industry and Financial Markets Association, roughly $400 billion of the loans were delinquent and $1.1 trillion were current on interest and principal payments. But that latter group of loans could become troubled as well if more borrowers become unable to pay (which rising unemployment figures suggest might be the case).

To make matters worse, many borrowers will face severe interest rate resets on their adjustable-rate mortgages next year and beyond. A new report from Demos, a public policy research group in New York, points out that millions of mortgages are ticking toward a possible explosion. The report, citing data from First American CoreLogic, a real estate research firm, says $250 billion in loans will reset in 2009 and $700 billion in 2010 and after. If left on their own financially, many of these borrowers will be forced into foreclosure. Still, there are many smart ideas floating around about how to solve the twin problems posed by securitizations and resetting mortgages.

One interesting idea was conceived by two veteran investment managers, Thomas H. Patrick, co-founder of New Vernon Capital, and Mac Taylor, a principal of the Verum Capital Group. They propose refinancing all $1.1 trillion of the loans in securitization pools that are still performing but that may soon face punishing interest rate resets. Homeowners whose loans are in these pools would receive newly issued loans with fixed interest rates, currently 6.14 percent, and 30-year terms. Under this plan, Fannie Mae and Freddie Mac would issue debt to pay off the outstanding principal on the loans and then guarantee the new ones.

Voilà: Investors who own the underlying interests in the mortgages would be fully repaid and the securitizations would be closed out. “Our proposal is based upon the fundamental principle that the only way to ameliorate the problem is to somehow improve the underlying collateral,” says Mr. Patrick. “It rewards those homeowners who have paid their mortgages and have demonstrated financial responsibility.” Currently, with everyone worried about more losses, the securitizations are trading at rock-bottom levels.

Because big banks and other financial institutions hold most of the securities, refinancing the $1.1 trillion in securitized loans would provide big capital infusions to many of the entities the Treasury is trying to help with TARP, Mr. Patrick said. But while TARP involves direct payment of taxpayer money to banks, the Patrick-Taylor plan would create losses for taxpayers only if the refinanced loans took a hit later on. There’s another benefit. Remember all those complicated products like collateralized debt obligations and credit default swaps that have been scaring the pants off people and causing some financial giants to look into the abyss?

Well, the Patrick-Taylor plan would reinflate the value of C.D.O.’s made out of bundled mortgages. And firms that sold C.D.S.’s as insurance against mortgage defaults would also get a boost (the biggest bailout recipient, the American International Group, for example, has been struggling to pay billions of dollars in collateral on weakening C.D.S.’s). The investment managers reckon that their plan would give the financial system an immediate capital infusion of about $385 billion. That’s their estimate of the difference between the value at which depressed mortgage securities are now valued — 65 cents on the dollar — and par value.

If the assigned value of those assets drops even lower than 65 cents, then the financial benefit to the banks of the Patrick-Taylor plan would be greater. In return for all of this financial aid tied to the $1.1 trillion of securitized mortgage loans that are still current, the Patrick-Taylor plan would require banks to buy the $400 billion in delinquent securitized loans at full value. The banks would have to absorb any losses they incur when selling the underlying mortgages. But that’s a small price to pay for getting out from under this albatross.

It is impossible to predict how much financial institutions might lose on that $400 billion. But it is likely to be less than the losses they will suffer if they sit idly by while defaults and delinquencies accelerate. Because the program would provide such a boost to the banks, Mr. Patrick said, these institutions should be required to absorb a portion of possible losses on the $1.1 trillion in healthy loans guaranteed by Fannie and Freddie. The Treasury should be able to bludgeon them into eating some of these losses, Mr. Patrick argued.

“This set of securities is what started the fire: it’s what brought down Merrill Lynch, Lehman Brothers and Bear Stearns,” Mr. Patrick said. “You can’t deal with the securities in their current framework, and you can’t solve the problem one mortgage at a time. If we eliminate these securities, strip away the complex structure, we can fix the banking system.” Under the Patrick-Taylor plan, homeowners would also be helped. Future delinquencies might be reduced, and the downward spiral of home prices could be curbed. Worth at least a moment of our leaders’ consideration, don’t you think? At the very least, it’s better than a mulligan.




Big banks reaping big tax breaks
Some of the nation’s biggest banks are in for a windfall – on top of the $700 billion government bailout – thanks to a new tax policy quietly issued by the Treasury Department. The notice gives big tax breaks to companies that acquire struggling banks hit hard by the mortgage crisis. In some cases, the tax breaks could exceed the cost of acquiring the banks, according to analyses by private tax experts. The change could cost the Treasury as much as $140 billion by enabling firms that acquire struggling banks to use more losses incurred by those banks to offset their own taxable profits.

Wells Fargo & Co., which made a bid to acquire Wachovia Corp., just days after the notice was issued, stands to reap about $20 billion in additional tax savings because of the change, according to the analyses. Wells Fargo paid $14.8 billion in a stock deal to buy Wachovia. The notice was issued Sept. 30 as Congress debated the $700 billion bailout plan. Some members of Congress are upset that such a sweeping tax change was issued with no public hearings or congressional input.

“I am concerned that the notice, which was never debated by Congress, could end up costing taxpayers tens of billions of more dollars on top of the hundreds of billions of dollars already approved by Congress in the financial rescue plan,” Sen. Charles Schumer, D-N.Y., said in a letter this month to Treasury Secretary Henry Paulson. Treasury Department spokesman Andrew DeSouza said the notice was issued to provide tax guidance to firms involved in bank takeovers at a time when numerous financial institutions are struggling and their value can be difficult to determine.

He said it wasn’t aimed at any one specific taxpayer or transaction. “Treasury has worked very hard at expediting tax guidance to provide clarity regarding uncertain tax issues relating to the financial markets,” DeSouza said. “This guidance was developed over many weeks by Treasury and the IRS and was not requested by any outside institution. This was broad guidance.” Some tax lawyers on Monday questioned the legality of the notice, but DeSouza said it is authorized under the department’s regulatory authority.

When one bank acquires another, it is allowed under tax law to use some of the unrecognized losses of the bank it acquires to offset its own revenues for tax purposes. That lowers the tax liability of the merged bank. Before the notice was issued, the merged bank could write off only a limited amount of the losses. The notice removed those restrictions. In some cases, banks can qualify for refunds of taxes paid in previous years through writing off losses of the banks they acquire, said Robert Willens, a corporate tax lawyer in New York. DeSouza said the Treasury Department did not issue a formal estimate on the cost to taxpayers.




Obama Says Paulson May Be Disappointed by Parts of Rescue Plan
President-elect Barack Obama said Treasury Secretary Henry Paulson may be disappointed with some aspects of the federal government's $700 billion bailout of the banking industry. "Hank Paulson has worked tirelessly under some very difficult circumstances," Obama said in an hourlong interview to be aired on "60 Minutes" tomorrow night, according to excerpts released by CBS News.

"I think Hank would be the first one to acknowledge that probably not everything that's been done has worked the way he had hoped it would work." Obama said he has assigned someone on his presidential transition team who "interacts" with Paulson daily. "We are getting the information that's required, and we're making suggestions in some circumstances about how we think they might approach some of these problems," Obama said.

Obama also said the government must do more to help distressed homeowners. "We have not focused on foreclosures and what's happening to homeowners as much as I would like," Obama said, according to the excerpts. He called for setting up "a negotiation between banks and borrowers so that people can stay in their homes."

CBS also reported that Obama said during the interview that he would name a Republican to his Cabinet. A number of influential congressional Democrats and the military favor the idea of asking Defense Secretary Robert Gates to remain for an interim period. As the new president focuses on the financial crisis, they argue, this would offer continuity. "He's done an extraordinary job," Senator Jack Reed, a Rhode Island Democrat, said of Gates earlier this month. "I would hope that in some capacity he could continue to serve."




Obama Urges Congress to Make 'Down Payment' on Economic Rescue
President-elect Barack Obama urged Congress to extend unemployment benefits as part of a "down payment" on a U.S. economic rescue plan as world leaders meet in Washington today to fight the global recession. Extended assistance "for the more than 1 million Americans who will have exhausted their unemployment insurance by the end of this year" is an immediate priority, Obama said in the Democratic Party's weekly radio address.

Economic figures released in the past week show the number of people collecting unemployment benefits is the highest since 1983, and that retail sales plunged in October by the most in almost two decades. Consumer spending accounts for about two- thirds of the economy. Congress, which is reconvening in the week ahead, should also "pass at least a down payment on a rescue plan that will create jobs, relieve the squeeze on families, and help get the economy growing again," Obama said. "If Congress does not pass an immediate plan that gives the economy the boost it needs, I will make it my first order of business as president."

Democratic leaders have been pushing for months for a second economic stimulus package of at least $100 billion, amid signs the $168 billion stimulus package in February hasn't stopped the nation from sinking into a recession. President George W. Bush and congressional Republicans have resisted further aid. Obama said he welcomed Bush's decision to convene to the Group of 20 economic summit "because our global economic crisis requires a coordinated global response." "Make no mistake: this is the greatest economic challenge of our times," Obama said.

The president-elect, who is organizing his administration, isn't attending the G-20 meeting, sending former Secretary of State Madeleine Albright and former Republican Representative Jim Leach to meet delegations instead. "As we act in concert with other nations, we must also act immediately here at home to address America's own economic crisis," Obama said today. "If this financial crisis has taught us anything, it's that we cannot have a thriving Wall Street while Main Street suffers -- in this country, we rise or fall as one nation; as one people."

For the longer term, Obama today said he would push for increased spending on infrastructure, renewable energy, health care and education in the U.S. In the House of Representatives, New York's Charles Rangel -- chairman of the Ways and Means Committee, which oversees tax policy -- said he's revising a proposal to reduce corporate tax rates to 28 percent from the current rate of 35 percent to accommodate Obama's agenda. Rangel made his comments on Bloomberg Television's "Money and Politics" program.

The Senate, meantime, may take up a $25 billion bailout for automakers as early as Monday during a post-election lame-duck session in which Senate Majority Leader Harry Reid also will seek to provide more unemployment benefits. In a separate development, Obama's office announced today that he will "will continue to record and make available the Democratic radio addresses on video when he is in the White House." Previous presidents used only radio to distribute the weekly speech.




Auto industry survival in hands of Congress
A Congress, burned before by bailouts, returns to work this week to consider a once almost-unthinkable pitch: Put up billions of dollars in taxpayer-backed loans, and we just might save the domestic auto industry. Equally remarkable is the response by some members of Congress: We'll have to get back to you.

It's a deal Detroit's automakers are anxious to close, with weak vehicle sales, high costs, frozen credit lines and dwindling cash reserves calling into question whether they can survive much longer without government help. But it largely depends on the automakers and their supporters convincing skittish lawmakers that the economy at large depends on the bailout and that -- perhaps most importantly -- the United States won't be throwing good money after bad. "It's a loan, it's a bridge loan," said General Motors spokesman Tony Cervone. "The fact is we're looking at a short-term liquidity crisis that needs a bridge loan."

What promises to be one of the most consequential weeks in U.S. automaking history begins Monday, when legislation tying up to $25 billion in loans to an unemployment insurance extension is expected to be introduced in the Senate. House Speaker Nancy Pelosi on Saturday rejected the White House's demand that the money come from retooling loans meant to build fuel-efficient models, saying automakers should get aid from the $700-billion financial bailout. The tenor of several GOP senators has been one of wait-and-see reluctance, and there is always the chance of compromises being reached before the legislation is introduced. Many of the details remained under debate Saturday, including whether the bill would provide less than $25 billion or offer a more temporary solution.

"It sure would be helpful to actually see the bill before commenting on it," Senate Minority Leader Mitch McConnell of Kentucky said Friday. That means automakers and their supporters -- including the Michigan delegation -- may have to react on the fly as withering criticisms are raised and the week's special session centers squarely on the auto industry, its failures and its future viability. That effort continues today with one of the chief architects of the bill, Democratic Sen. Carl Levin of Michigan, going on NBC's "Meet the Press." Alabama Republican Sen. Richard Shelby will be making the rounds of today's talk shows in opposition.

On Tuesday, expect chiefs from General Motors Corp., Ford Motor Co. and Chrysler LLC --as well as the UAW -- to testify before a Senate committee; on Wednesday, they will be in the House, talking to another panel. The special session is expected to conclude by the end of the week. Unlike the $1.2-billion bailout of Chrysler nearly 30 years ago, there is no Lee Iacocca to act as chief salesman. And even if there were, the auto industry doesn't enjoy the sway in Congress it once did. As momentum grew in the Senate in 2007 to raise fuel economy standards for the first time since 1975, Detroit's automakers stopped short of unifying behind an alternative plan, contending that a target of 35 miles per gallon by 2020 was unreasonable. In the past, that position -- along with the Detroit Three's vaunted lobbying corps -- might have been enough to scuttle the deal, but it passed the Senate 65-27.

Automakers regrouped in the House, but the final compromise kept the 35-m.p.g. target set in the Senate. To add insult to injury, the day after the Nov. 4 election, Democratic Rep. John Dingell of Dearborn -- the longest-serving active member of the House and a stalwart ally of the automakers -- was challenged for his chairmanship of the Energy and Commerce Committee by California Democrat Henry Waxman, a staunch supporter of tougher standards for vehicle makers. The challenge is expected to be settled this week by the House Democratic Caucus. Perhaps the biggest battle for automakers, though, is one of verbiage. The word "bailout" doesn't seem to go over too well with constituents, particularly after a $700-billion rescue plan for the financial industry.

That bill was voted down in the House the first time around this fall, though it later was passed. And although several Republican senators voted for that bailout, the auto bill is far less certain. What few comments have come out of most GOP senators' offices have tracked the White House's belief that $25 billion approved earlier to retool auto plants for more fuel-efficient cars should be speeded up to address automakers' concerns. The White House said Friday the financial industry bailout should not be used to help automakers. "The problem with government bailouts of any private organization is people have to be able to figure out where it stops," said Charles Trzcinka, chair of the finance department at Indiana University's Kelley School of Business. "Everyone knows you can't save every company in the world."

On top of that, expect plenty of complaints that the domestic automakers got into this position themselves. Said Shelby: "The Big Three's financial straits are not the product of our current economic downturn, but instead are the legacy of the uncompetitive structure of their manufacturing and labor force. "I do not support the use of U.S. taxpayer dollars to reward the mismanagement of Detroit-based auto manufacturers in such a way that allows them to continue and compound their ongoing mistakes," he said.

Automakers do have many arguments in their favor, however -- chief among them reports from the Ann Arbor-based Center for Automotive Research that 1 in every 10 jobs is directly or indirectly affected by the automobile industry and the failure of the three Detroit automakers could result in the loss of 3 million jobs in the first year. With that in mind, the lobbying effort involves not only Detroit's automakers but the National Association of Manufacturers and the U.S. Chamber of Commerce, whose executive vice president for government affairs, Bruce Josten, reminded Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke that the auto industry is among the largest purchasers of steel, glass, rubber, plastics and computer chips.

The clear message being: If the economy's not in a recession now (and it may well be), wait until one of the major automakers fails. "The first issue is, let's stabilize the patient," Josten said. "You've got a very destablized patient, I don't have to tell you." There also were signs that Americans seemed to understand the importance of the auto industry on the economy. Although a Gallup poll early last week indicated only 1 of every 5 respondents felt it was critical or very important to provide loans or other help to the auto industry, that was from a list of various suggestions, including tax reductions, regulations on financial institutions and the like.

A poll commissioned by GM and performed by Peter D. Hart Research Associates focusing solely on the auto industry showed that 55% of respondents approved of providing loans and 30% opposed the idea. Said Hart: "If the American people could walk into Congress with a vote next week, it wouldn't be close." As it is, Democratic Sen. Debbie Stabenow of Michigan said Friday that supporters needed to turn about a dozen Republicans, and faced a tough slog to convince opponents of the automakers' plight -- and why the government should help. "There is so much misinformation and misperception based on years past that doesn't apply anymore to what the industry is doing," she said.




Big Three, Wall Street directors are double dippers
As the auto industry presses Congress for a bailout, a handful of directors at General Motors and Ford Motor could either help or hurt their companies’ chances. They are extremely well positioned—yet at the same time they may be perceived as being partly responsible for the problems. Several directors have connections with Wall Street firms, so they are effectively straddling the two industries slammed hardest by the economic downturn and seeking the most government aid.

GM’s 14-member board includes four directors who also advise or sit on the boards of financial services firms that have received bailout funds: Erskine Bowles serves at Morgan Stanley, Armando Codina at Merrill Lynch, John Bryan at Goldman Sachs and E. Neville Isdell at SunTrust. In addition, director Eckhard Pfeiffer is a member of an advisory board at Deutsche Bank, which has so far refused bailout funds.

Meanwhile, at Ford, Gerald Shaheen also sits on the board of National City, which is likely to be acquired by PNC later this year. John Thornton was the chief operating officer at Goldman Sachs until 2003. And John R.H. Bond, who last month resigned from Ford’s board, served as CEO of HSBC in the 1990s and is now a senior adviser to private equity firm Kohlberg Kravis Roberts. Privately held Chrysler does not disclose who sits on its board.

While automakers tried to increase their ties to Wall Street as they moved more into financing operations, the connections could be a liability for those double-dipping directors, as shareholder anger swells over poor performance in both industries. It’s unclear whether their dual roles will help automakers carve out a slice of the bailout pie. According to Warren Batts, a board member at Methode Electronics, which makes components for automotive manufacturers, the Detroit-Wall Street connection gives automakers no extra leverage with the federal government in seeking bailout funding, and could in fact weaken the automakers’ case. “They are out there with a tin cup looking for money from Uncle Sam twice,” he said.

That said, GM may have an advantage in obtaining federal funds, however slight. Board member Mr. Bryan, formerly CEO of Sara Lee, is reportedly good friends with Treasury Secretary Henry Paulson; he served on Goldman’s board while Mr. Paulson was CEO there a few years ago. Mr. Bowles also likely has political contacts with the incoming administration, having served as White House chief of staff for President Clinton. Ford has some influential members as well. Mr. Bond—who retired last month from the board, but who will remain in touch as an unpaid consultant to Ford’s executive chairman—has been tapped by the British government to advise the European Union on the current economic crisis.

According to GM spokeswoman Renee Rashid-Merem, the company has not specifically sought out directors with financial experience or connections. She also noted that under GM bylaws, no director can sit on more than four boards. She declined to comment on the role of the automaker’s directors in lobbying for bailout protection. Denny Beresford, a director at Fannie Mae, whose board has ceased meeting since the federal government took control in September, said corporate boards often look for “portfolio directors,” or those with multifaceted experience, rather than only former CEOs or single-industry executives. Those who sit on the boards at Wall Street firms could help with finance-related business decisions, he said.

Both GM and Ford now have roughly average governance ratings overall but have been flagged for poor internal controls and accounting problems, according to John Jarrett, research director at Governance Metrics International. He noted that the boards at both companies are made up of mostly independent directors—a good thing, according to governance experts. However, some of the directors at the automakers have been targeted for poor stewardship. Proxy Governance in April of this year recommended a vote against Mr. Codina for his role on Merrill Lynch’s compensation committee; 13% of shareholders voted against him. Mr. Codina also sits on GM’s compensation committee, as do Messrs. Bryan (the committee chair) and Bowles. All three sit on the compensation committees at their respective Wall Street firms as well.

Executive compensation in both industries has been criticized by some shareholders for being too high. “In some ways, [the interconnectivity] is part of a larger problem of the U.S. economy relying on some of the same faces to run boards,” said Stephen Davis, director of the Millstein Center on Corporate Governance at Yale University. He said the big issue now will be whether—if automakers receive assistance—the government changes the makeup of the current boards. He noted that the Obama administration would likely insist on taking a more active ownership role, as in the case of Fannie Mae and Freddie Mac.

“The people who are on the finance-type, Wall Street-type company boards are the most interconnected of any kind of director because everybody wants somebody like that on their board,” said Nell Minow of the Corporate Library, which has been critical of interlocking boards. However, she said that having Wall Street connections is not necessarily a bad thing. It may not be if it gains automakers the same bailout provisions that Wall Street has received.

Despite the Treasury’s reluctance to bail out Detroit—Mr. Paulson said last week that the $700 billion relief fund would not be used on automakers—the chances for a deal seem to be growing, though it may not come until after the new administration is in. Rep. Barney Frank (D-Mass.), who chairs the House Financial Services Committee, has said he is considering legislation to provide $25 billion in loans to the Big Three.




Bush Presses Congress to Pass Separate Auto Rescue Bill
The Bush administration is “actively calling on Congress” to pass legislation next week that would accelerate getting loans to the troubled U.S. auto industry without using money from the financial-markets rescue plan, White House spokeswoman Dana Perino said.

The administration wants Congress to amend existing legislation providing $25 billion in loans to automakers to “help accelerate much needed funds” to companies that show “long-term viability” and a “willingness to make tough decisions,” Perino said. Perino emphasized the administration opposes using money out of the $700 billion rescue package for financial institutions for the industry, a move being pushed by some Democrats in Congress pushing

“While we’ve sought a bipartisan path forward using existing legislation, it’s become clear that congressional Democrats are choosing a path that would only lead to partisan gridlock with a focus on only on TARP,” she said, using the term for the Troubled Asset Relief Program. The public has “very little appetite” for using the program, she said.




Saving Detroit From Itself
We have seen a lot of posturing, but we haven’t heard a lot of sense in the debate over whether the government should spend even more to bail out Detroit’s foundering automakers. Senator Richard Shelby, a Republican of Alabama, is wrong when he says that the troubles of the Big Three are “not a national problem.” The Detroit companies support nearly 250,000 workers and more than a million retirees and dependents, as well as millions of workers at part makers and dealerships. A messy bankruptcy filing by any of the big car companies, in the midst of this recession, would likely cost the government and the economy more than trying to keep them afloat.

At the same time, Congressional Democrats and President-elect Barack Obama, who are pushing for many billions worth of emergency aid for the nation’s least-competent carmakers, must ensure that tough conditions are attached to any rescue package. If not, the money will surely be wasted. This goes beyond firing top management, forbidding the payment of dividends to stockholders and putting limits on executive pay — all necessary steps. The government should insist on a complete restructuring of any company it pours billions of public funds into. All three car companies have been hamstrung by the legacy costs of providing pensions and health care to hundreds of thousands of retirees. But Detroit’s problems are mostly of its own making.

The automakers hitched their fate to gas-guzzling trucks, and they obstinately refused to acknowledge that oil is a finite resource and that burning it limitlessly is harming the planet. They lobbied strenuously against tighter fuel-efficiency standards. That wrongheadedness did them in as gas prices spiked and consumers flocked to energy-efficient cars made by Toyota and Honda. It makes no sense at all to give these companies billions just so they can struggle on for a few more months down this disastrous path. Before it approves any bailout package, Congress must insist that any company receiving government money must commit to a specific plan to improve energy efficiency.

The average fuel efficiency of the American auto fleet peaked at 25.9 miles per gallon in 1987 and then leveled off as gas prices fell and the automakers churned out more sport-utility vehicles and pickups. Last year, Detroit managed to extract a promise of $25 billion in subsidized loans from Congress in exchange for a new target of 35 m.p.g. by 2020. But the industry can do better. If Detroit were willing to make smaller cars, as European companies do, it could probably achieve a fleet-wide average of 50 m.p.g. by 2020. The companies also are struggling under a mountain of debt. And any restructuring would mean that creditors would have to swallow a loss or accept equity — as under a regular bankruptcy filing. Restructuring would likely require more plant closures and layoffs.

Rescued car companies would almost certainly have to re-open labor agreements on pay and benefits. These steps would be painful for many workers. But they also are necessary. Even then, there is no guarantee that these companies will survive after years of failed management. We are sure they won’t if they don’t make sweeping changes in the way they do business. If Congress is going to take the risk and invest billions more of the taxpayers’ money in the companies, it must insist on those changes.




Stimulate Car Buyers, Not Car Makers
Should Uncle Sam save General Motors, Ford and Chrysler from bankruptcy? In normal times, most mainstream economists (and many mainstream legislators) would probably say no. But with financial markets in turmoil and the economy on the cusp of a nasty recession, these are hardly normal times. In any event, Congress and President-elect Barack Obama are committed to spending billions to keep the Big Three afloat.

What's not been decided, however, is how that money should be spent. A radical change in perspective could spare the nation a lot of grief down the road. Rather than subsidizing the auto makers directly (and almost certainly sucking Washington into their management), why not give Americans the financial incentive to accelerate purchases of cars and light trucks? The consumer-subsidy approach would be a less wasteful route to the desired end, as well as one that would leave a less toxic legacy of market intervention once the economy has recovered.

While the details of the bailout have yet to be hammered out, all signs point to loan guarantees conditioned on concessions from the stakeholders -- perhaps cuts in union and white-collar compensation, surely restructured bank debt, and maybe a shotgun wedding between Chrysler and GM. This would keep the industry alive and most of its workers employed -- for a while. However, even if the industry recovers with a lot of help from its friends, the price will be high. At best, the arrangement will inevitably tighten the all-too-cozy relationship between Washington and Detroit in matters of technology, pensions, fuel efficiency and environmental regulation, as well as opening the door to bailouts of equally worthy industries in distress. At worst, it will suck the taxpayers into the next automobile crisis, and the next.

Since a big fiscal-stimulus package for fighting the recession -- some combination of tax cuts, extended unemployment compensation, infrastructure grants and assistance to states -- is coming soon, why not stimulate consumers to buy cars? Why not offer eye-popping rebates -- say, $3,000 -- for a limited time to buyers of cars and light trucks? It would probably make sense to phase out rebates for the most expensive cars, and as a treaty obligation, it wouldn't do to discriminate against foreign makes.

How much downstream benefit this would generate and for whom is hard to predict. Still, it is a fair bet that most of the money would be quickly recycled in the form of demand for everything from auto parts to car mechanics' salaries -- just what you want to happen in a recession. If, say, 12 million nonluxury vehicles were sold in the next year -- similar to 2007 -- the rebates would total $36 billion. Of that sum, about one-half would go for cars built by the Big Three. Better yet, more than 80% could be expected to go for vehicles actually manufactured in North America, even if the auto maker is from overseas.

This is not a perfect solution. The rebates would have to be phased out so that sales don't drop off a cliff the day after the deadline. Not to mention that it is far from clear that it ever makes economic sense to favor one industry over another during hard economic times. But some form of aid to the auto industry seems to be politically inevitable. Wouldn't it be nice to manage the task with maximum benefit to middle-income Americans -- and minimal micromanagement by Washington?




GM failure: The shockwave
If General Motors really does run out of money by the end of the year, as it predicted was possible, the impact would be felt far and wide - to hundreds of suppliers, rival automakers and ultimately dealers across the nation. "Once the first domino falls, it rapidly takes out all the other dominoes," said Dennis Virag, president of the Automotive Consulting Group. Suppliers would be among the first to feel those effects since GM only manufactures the body, the engine and the transmission used in its cars. In the United States alone, GM spends $31 billion on parts from 2,100 different suppliers.

These include the "direct suppliers" involved in producing a vehicle - those that provide everything from steering wheels and seatbelts to brakes and airbags - as well as "indirect suppliers" - those that make things such as gloves, protective eyewear, shop rags and lightbulbs. Although lawmakers appear to be souring on providing a $25 billion bailout to automakers, the impact of a GM failure on the industry as a whole - and therefore the economy as a whole - is weighing heavily in their decisions. So far this year, 23 major auto-related companies, most of them parts suppliers, have filed for bankruptcy, according to consulting firm Grant Thornton. They are struggling since car makers have cut back as sales have slowed and raw-material prices have risen. "I would argue that in today's environment, with the stress that's already on the supply base, they can't take another hit," said Kimberly Rodriguez, a principal at Grant Thornton's automotive practice. "The ripple effect would be huge," she added.

Impact on rival car makers As supplier companies fail, that would have a direct impact on Ford and Chrysler, since the three domestic auto manufacturers share about 70% of their suppliers, Rodriguez estimated. One executive who works for a Detroit automaker, and who did not want to be named, said the impact of GM - or any of the three - failing would be dramatic and very challenging. Not all those affected would suffer equally, but it is hard to predict which companies would be hit hardest, because the relationships among the various suppliers and automakers are complex, he said.

Impact on dealers A GM failure would also affect about 14,000 dealers in the United States, according to the industry newspaper Automotive News. That is almost half of the nation's 29,000 dealerships that specialize in domestic vehicles. But even if those 14,000 GM dealers also offer foreign cars, the risk of losing their supply of domestic vehicles could force many of them out of business, said Paul Taylor, an economist with the National Automobile Dealers Association. Already, he noted, the industry is expected to lose about 700 dealers by the end of this year, up to 80% of which will be domestic-brand stores.

Car companies are wary of publicly discussing the possibility of financial disaster because it makes it harder to sell the cars that are on dealer lots today, said consultant Virag. Customers don't want to buy from a company they fear may soon be insolvent. "It's a difficult situation that the automakers are in," said Virag. "To talk about bankruptcy would only exacerbate the situation, but not talking about it isn't helping."

But whether a bankruptcy would help suppliers and everyone dependent upon GM is still uncertain. If it is determined that GM could file for bankruptcy under Chapter 11 rules, rather than a Chapter 7 liquidation, the automaker could potentially reorganize. That way the company could seek permission to pay outstanding bills to "critical suppliers" that it absolutely needs, said Robert Sanker, a Cleveland bankruptcy attorney who has represented creditors of bankrupt auto suppliers.

Still, Sanker said, relatively few suppliers would be granted "critical supplier" status in court, leaving many more that would have payments cut off. And GM is says it is not considering Chapter 11, but rather is continuing to seek government assistance. "Bankruptcy reorganization is not an option for GM because it would create more problems than it would solve," said spokesman Dan Flores. 




GM Canada's pension plan troubled before market collapse
General Motors pensioners in Canada are seeking advice from a leading pension lawyer as the embattled automaker holds out its hand for help from the American and Canadian governments. Mark Zigler of Koskie Minsky LLP, whose firm has represented everyone from pensioned hockey stars to Eaton's store clerks, has agreed to speak at an autoworkers' union hall in Oshawa Dec. 1.

His topic: What happens to pensioners when a company fails and its pension fund is seriously short of money? The pensioner who helped get Zigler to attend the pensioners' meeting has vowed to grill him on what he thinks he and his contemporaries should expect from the provincial government. "I think it's the province that is at fault (for allowing the GM pension plan to fall so far behind in its funding)," said Karl Zimmerman, of Oakwood, Ont. He fears the health of the plan will only get worse next year, as losses in stock markets spread to Canadian real estate.

At the moment, the pensioners' concerns are hypothetical, but their anxiety and suspicions are real. GM of Canada's spokesmen are refusing to talk about the pension plan in light of recent stock market losses and the parent company's dwindling cash reserves. "We will not respond to the wild and inaccurate speculation of the Star regarding GM's future," spokesman Stewart Low replied in an email message yesterday.

GM had representation at a meeting yesterday with Premier Dalton McGuinty, whose province is home to most of General Motors of Canada's more than 30,000 blue-collar retirees – and which collects tax revenue on average pensions of $16,376 a year. (GM has announced it will have fewer than 9,000 factory workers by 2010.) Ontario is also the only province with a Pension Benefits Guaranty Fund and a record of making loans to that fund when it is short of money, as it is today. That precedent, and the potential for a lawsuit over the province's failure to require GM to meet certain funding rules, makes Ontario a cheerleader for GM getting help from Washington.

GM's pension plan for current and former factory workers was in depressingly sick shape a year ago, with potential liabilities of $11.5 billion and a shortfall of $4.9 billion if it were to wind up without further contributions from GM. The fund would be in much worse shape today if investments managers maintained their investing target of 69 per cent of the fund in stocks. David Burke, a retirement practice director with Watson Wyatt Worldwide, said a pension plan with 96 per cent of the funds required to pay all earned benefits without further contributions a year ago would have had about 72 per cent funding by the end of October, and less today.

For those companies required to make up that shortfall within five years, "this will present a significant challenge." Burke cannot comment on GM, which is a client. But GM is the only Ontario company not required to eliminate its funding shortfall, and its fund will be harder hit by falling stock prices than most. A more typical weighting in stocks is 60 per cent and GM's U.S. pension fund has less than 30 per cent. The Canadian fund would have lost $1.4 billion or 32 per cent of its holding in stocks since the end of last November if it performed no better or worse than major market indices.

Of course, the fund may have avoided the market mayhem if it sold off much of its equity holdings. But if it stuck to its target this could leave the fund with as little as 55 per cent of the assets needed to pay all benefits. This could result in a heavy claim on the Ontario guarantee fund, which is supposed to cover losses on the first $12,000 of an annual pension.




More Bad News: Employers Cut 401(k) Matches
As if the market weren't doing enough damage to your 401(k) retirement plan, your employer might be hurting it, too. Last month, General Motors announced that it would suspend its company matches to employee contributions to 401(k) plans. Frontier Airlines and Dollar Thrifty Automotive Group have followed suit in recent weeks. "It's a tough position for a company to be in," says David Wray, president of the Profit Sharing/401(k) Council of America. "Companies sometimes have to choose between layoffs and getting rid of the match."

Some companies have to do both. In the wake of the dot-com bubble burst in the early 2000s, some companies also stopped matching employee contributions. Eventually, those plans were reinstated, Mr. Wray says. Here's what to do if your employer takes away your company match:

Keep saving in your plan. Companies that offer matches to 401(k) retirement plans do it as an incentive to get employees in the habit of saving. And you'll need that habit now more than ever. So don't stop contributing because the company has stopped giving you free money. With compound interest, even seemingly small contributions can have a tremendous impact on your result.

Try Saving More. Although there's a lot of budget crunching going on, try to see if you can make up the difference in what your employer was contributing, says Mr. Wray. Check what the maximum contributions are with your human-resources department. Retirement planners suggest that savers put away 5% to 10% of their income toward retirement, if possible.

Consider an IRA. Although Individual Retirement Accounts are great investment vehicles, financial advisers suggest maxing out 401(k) contributions first, as they generally carry fewer fees and greater tax advantages. A 401(k) will allow a saver to contribute more tax free per year.
For example, in 2008 the 401(k) contribution limit was $15,500, compared with a $5,000 limit for traditional and Roth IRAs. When choosing an IRA, investors should decide whether they want a traditional IRA, which allows for tax deductions in the year that the account is contributed to, or a Roth IRA. The latter offers no tax deductions today, but money withdrawn from the account later isn't taxed.

Look Into an HSA. Health Savings Accounts "are a very underutilized product," says Michael Doshier, with Fidelity Investments' workplace investing group. Although HSAs are not intended to replace 401(k) plans, they help you save for future qualified medical expenses. They are "triple tax-free," meaning that money put in, deferred and withdrawn from the plan comes tax-free. And as for what the market is doing to your 401(k), Mr. Wray suggests that people take a healthy look at their risk tolerance and asset allocation. "But try not to check on your account too much."




Despite Pledge, Citigroup to Raise Credit Card Rates, Blaming ‘Difficult’ Environment
Citigroup is reneging on a promise it made to tens of millions of credit card customers in good times. After pledging that it would no longer reserve the right to raise interest rates at any time for any reason, Citigroup now plans to start raising rates for customers who have not had an increase in at least two years. The move appears to backpedal from a commitment that Citigroup executives made to Congress in early 2007 when they tried to fend off greater regulation by promising not to raise rates until an account expires.

Citigroup attributed its decision to the “difficult market environment,” suggesting that the cost of the program — on top of sharp increases in its borrowing costs and severe anticipated losses — cut too deeply into profits. The bank said the policy change would only partly offset a $1.4 billion third-quarter loss for its credit card unit. However, it declined to provide specific figures. “Citi is continually evaluating its business to ensure that it is performing as effectively and efficiently as possible,” John P. Carey, the chief administrative officer for Citigroup’s credit card division, said in a statement. “We are carrying out this repricing in order to continue lending in this environment.”

Credit card holders will be notified that the bank is raising their rates when they receive their November statements; customers with online statements will receive a separate mailing. Citigroup cardholders will then have until the end of January to turn down the higher interest rates. If they decline the rate increase, they will pay down the balances on their accounts under the old pricing terms and will be able to continue to make charges until their credit cards expire. After that, however, customers will have to reapply for a card or find a different lender. Citigroup said that, on average, it planned to raise its customers’ effective borrowing rates by two to three percentage points — a move that would cause some borrowers to pay more than 20 percent interest instead of 17 percent. Some rate increases could be much higher.

Representative Carolyn B. Maloney, Democrat of New York, who proposed the House credit card legislation, said she understood the impulse behind Citigroup’s policy reversal but did not agree with it. “Banks appear to be repricing cards for economic reasons — theirs, not their customers’,” she said. “Apparently a deal is only a deal when it doesn’t cost the financial institution too much money.”




UK banks stand to make £3.9 billion from high lending rates on loans and mortgages
Britain's high street banks stand to rake in billions of pounds from borrowers in a bid to shore up their shrinking balance sheets. Banks are projected to claw back £3.9 billion over the next year by increasing their profit margins on mortgages, loans, credit cards and overdrafts – at a time when the Bank of England's base rate has fallen sharply, from 5.75 per cent last November to just 3 per cent today.

Figures calculated by moneysupermarket.com show that banks are on set to rake in an extra £1.5 billion on mortgages. Over the past year, the rate lenders use to underpin mortgage deals – known as Libor – has declined by around 1.84 percentage points. However, the average mortgage rate has only fallen by 0.13 per cent over the same time period – a difference of 1.71 percentage points, which effectively amounts to a wider profit margin. The calculations are based on the average mortgage size of £130,000. On personal loans, despite the falling base rate the rate charged by banks to borrowers has actually risen in the past 12 months, by an average of 1.24 percentage points.

Taking the average balance on a loan as £1,824, this will equate to an extra £1.84 billion in revenue for banks over the next year, moneysupermarket.com said. There are 31 million credit cards with have an average outstanding balance of £1,384 incurring interest. Again average APR has risen not fallen, by an average of 1.5 percentage points – putting banks in line to claw back an additional £570 million in profits. A number of leading card providers have moved to raise rates on money owed, despite the base rate cut.

The NatWest credit card has risen from 13.9 per cent to 16.9 per cent, while HSBC's credit card and the Virgin Money Mastercard have both climbed one percentage point to the same mark. Credit card companies have also raised charges for withdrawing money from cash machines in Britain and abroad. The average rate has risen from 24.4 per cent in May to 25.2 per cent now. The hike in credit card rates triggered a response from Gordon Brown, who last week called for a "new responsible approach to lending".

He is planning a Downing Street summit to discuss the matter with the credit card firms, and said: "I think we have got to bring the credit card industry in to talk to them to join with us in establishing clear principles to apply to the costs people face on their existing debts." Overdraft rates are at their highest level since 1997. The latest data released by the Bank of England showed that the average authorised overdraft rate on a current account increased from 17.4 per cent to 17.91 per cent over the first half of the year.

Tim Moss, head of loans and debt at moneysupermarket.com, said: "Just as consumers are feeling the pinch, so too are banks, but unlike the average person who has to somehow trim costs from their everyday budget, banks can – and clearly have – been sneakily upping interest rates by 0.25 per cent here, 0.5 per cent there, in order to claw back some of their lost revenues. "Whereas people can perhaps save £20 or £30 a week by being savvy spenders, our figures show banks creaming £3.9 billion more than we would hope and expect from their loyal customers who are saddled with a mortgage, credit card debt or loan."

Lucy Widenka, personal finance campaigner for consumer magazine Which?, said: "The cost of credit is steadily increasing, and we are concerned that banks are using the current crisis to squeeze more money out of people who are already struggling. "Consumers will be fuming if banks who have been bailed out with taxpayer money are increasing charges and arrangement fees, yet falling over themselves to cuts savings rates. "An independent review of banking is urgently needed to ensure that consumers are offered a fairer deal and have access to value for money products."

A spokesman for the British Bankers' Association defended the banks' actions and insisted that customers still get value for money. "Every international banking survey confirms that the UK's banking customers enjoy some of the best value services in the world and they receive transparent and clear information on them," he said. Banking in the UK remains an intensely competitive business. "Our high street banks continue to compete for customers, and the benefits of this competition come direct to the consumer through innovations such as free banking. This is as true now in the downturn as it has been in the past."




Barclays in a corner as City brickbats rain down
Is it a case of unlucky 13 for Barclays chief executive John Varley? That is the rate of interest, after tax, the bank is paying two investors from the Gulf to subscribe for £7bn of new capital in Barclays, a deal which was intended to protect the bank from government intervention but which could end up costing Varley his job. The bank's shareholders made their fury clear to Varley and his chairman, Sir Marcus Agius, at an acrimonious meeting, brokered by the Association of British Insurers, on Friday. 'Varley has seriously miscalculated' and 'the reputation of the company and its management has been severely tarnished' were two of the more polite comments.

Shareholder fury is linked to their impotence: while they can vote the deal down at an emergency general meeting on 24 November, that would risk doing severe damage to both the bank and the value of their shareholding. The Gulf investors - the Qatar Investment Authority and Abu Dhabi's Sheikh Mansour Bin Zayed Al Nahyan - have a legal deal and show no inclination to accept any alteration of their terms. The best other investors can hope is that Barclays decides to raise a bit extra so they can buy some of the lucrative instruments. While that was being suggested last week, it is believed to be unlikely. One banking source pointed out that investors are generally anxious to discourage banks for issuing too much capital, to prevent them squandering it. And the terms of this capital-raising are so onerous it makes sense to raise the lowest amount possible.

The terms certainly look sweet for the Gulf shareholders. The £3bn of Reserve Capital Instruments will pay interest at 14 per cent - 13 per cent after tax - until 2019. That is not only more than the 12 per cent Lloyds TSB, HBOS and Royal Bank of Scotland are paying the government on the £8bn of preference shares they are issuing, but these three banks are expected to repay their prefs within 18 months. Barclays is on the hook for 10 years. The £4.3bn of convertibles look equally generous: the two investors will be able to convert them into ordinary shares, giving them ownership of more than a third of the bank, by next June at 153.26p, more than 3 per cent lower than they have traded in the past year.

Varley cannot be confident that, by eschewing the government's capital, it can avoid interference in its business. He did not escape being hauled before Gordon Brown, along with other chief executives, to be told they had to pass on the full benefits of the latest interest rate cut to their customers. Neither is the bank likely to escape other strictures imposed as the recession bites. It may have avoided the curbs on bonuses which have been imposed on RBS and HBOS as part of the price of government support, but the pay arrangements for Bob Diamond, Barclays' £20m-a-year president, and his wholesale banking staff will be scrutinised by the Financial Services Authority, which has made it clear it thinks big bonuses increase business risks.

Investors also point out that, while the government may be able to intervene while they are shareholders, their intention is to stop being shareholders as quickly as possible. And all indications from Sir Philip Hampton and John Kingman, who will run UK Financial Investments - which will oversee the government's bank stakes - is that they will intervene as little as possible. Barclays, by contrast, will be left with a number of large shareholders who will remain on the register indefinitely. While there is no indication that the Qataris, the Abu Dhabi royal family or the Chinese, Japanese and Signaporese investors, who will collectively own 38.5 per cent of the bank when these transactions are completed, will want to intervene in the bank's business, their shareholdings are so large they would be able to dictate everything from dividend policy to the composition of the board, should they chose to.

Barclays was clearly taken unawares by the furore. It has asked its shareholders for funds twice this year, only to be largely ignored. A placing in the summer attracted subscriptions from just 19 per cent of its shareholders - the remainder was taken up by the QIA and other strategic investors including Sumitomo Mitsui Banking Corporation and China Development Bank. A £2.5bn placing following its purchase of Lehman Brothers' US investment banking business was scaled back to £2bn because of a lack of investor interest. But, shareholders retort, none of these was on such attractive terms as the current issue. Locking in a 14 per cent return for 10 years, when global interest rates are falling, is extremely attractive.

And, if Barclays proves as resilient to the financial crisis as it claims, a subscription price of 153.26p next June could look like a real bargain. The onus is on Varley to prove that the deal can bring benefits to all shareholders, not just line the pockets of a handful of people in the Middle East. If he fails, questions over his stewardship will become even more pressing.




Thousands of City workers axed in jobs bloodbath
JP Morgan, the US investment bank, is drawing up plans to axe thousands of jobs across its worldwide operations, The Sunday Telegraph can reveal. The move is likely to mean redundancy for hundreds of City workers, compounding the growing sense of crisis in London's financial services industry and the broader British economy. People close to JP Morgan say it has begun consulting on the scale of job cuts but that it was likely to be on a comparable scale to those of rivals.

In recent weeks, investment banks including Citigroup, Goldman Sachs and the former ABN Amro operations owned by Royal Bank of Scotland have embarked on new waves of redundancies, at the likely cost of thousands of City posts. Both Citigroup and Goldman are letting about 10pc of their workforces go, a proportion which, if applied to JP Morgan, would result in more than 3,000 jobs being slashed around the world. This week, fears about the accelerating rate of job cuts in Britain are likely to gather pace, with firms such as Wolseley, the plumbing and building services group, and Experian, the financial information provider, reporting earnings to the City.

People close to both companies said last night they would be announcing new cost reductions this week that will include job cuts, although the scale was unclear. Tomorrow, the CBI will slash its forecasts for UK economic growth and outlining a picture of soaring unemployment in the UK over the next year. Trading conditions across the economy are deteriorating, with John Lewis and Marks & Spencer understood to have endured tough weeks during November.

Last week, BT confirmed 10,000 job cuts, and companies across the banking, industrial and technology sectors outlined plans for thousands more. The cuts prompted the British Chambers of Commerce to predict that unemployment could rise as high as 3.25m. The bleak outlook has added a particular sense of urgency to negotiations between the Government and the major lending banks, which are being accused by small business groups of denying loans to healthy businesses and pushing them to the brink of collapse.

JP Morgan's cuts are likely to take place from the beginning of next year. JP Morgan does not publish details of staff numbers around the world, but as the headquarters of its European, Middle East and Africa operations, the extent of the jobs under threat in the City is likely to be substantial. A spokesman for JP Morgan declined to comment. JP Morgan Cazenove, which employs 600 people in London, is understood not to form part of the review.




The Great Depression, Not So Far Away
Louise McKenzie was a 14-year-old Girl Scout when she helped prepare dinner for the president of the United States as a way to show the American public that nutritious meals could cost very little during the early years of the Great Depression. In her Rosslyn home, a yellowed clipping from that April day in 1931 with President Herbert Hoover and his wife has been carefully preserved. She can still recount the meal: "split-pea soup, meatloaf, baked potatoes, tomato salad, bread pudding and tea, for just under 25 cents a person."

Now 91, McKenzie has heard echoes of her past in the economic turmoil of late, which many analysts have described as the worst since the "Black Tuesday" stock market crash of 1929. At the height of the Depression that spanned the 1930s, unemployment rates reached nearly 25 percent. The common adage of the time, McKenzie recalled, was: "Use it up. Wear it out. Make it do. Do without." The ethic of conserving money -- and avoiding credit -- stuck with many in her generation for the rest of their lives. Some have never used a charge card or rarely allowed a balance due.

The life experiences of the Depression generation tell an increasingly relevant story about the toll of severe economic crisis and how people persevere in times of extreme hardship. Many who remember that era, or who have studied it, wonder how the current generation would withstand such dire circumstances. Among the larger public, the economic crisis of late has touched off deep concerns. In exit polls for the presidential election, more than six in 10 voters cited the economy as the nation's biggest issue. A few weeks earlier, 41 percent of those polled by CNN/Opinion Research said the country was headed toward a depression.

To get by in the 1930s, McKenzie and her contemporaries say, people relied on the strength of family, the support of community and the grit and work ethic of the time. Families grew food, wore hand-me-downs, helped one another, eked by. "People are turning to this generation now because we may be called upon to make sacrifices unlike anything we've seen since then," said sociologist Andrew Cherlin of Johns Hopkins University. "They did it well." Historian Steven Mintz of Columbia University said the children and grandchildren of those who lived during the Depression are essentially "a softer generation." Those who knew the 1930s, he said, also "knew how tough life could be before the Depression. I think they had an inner strength they could draw upon. I'm not so sure we have that."

Nathan "Hank" Greenberg, 95, a retired archivist who lives in Silver Spring, said he has never forgotten how tough it was on his family to be in debt in the 1930s and how long the bread lines stretched in Manhattan. He remembers men crying as they waited in line. He eventually lost his job as an errand boy, laid off like so many others. "I made a vow," he said. "I don't want to owe money, ever." To that end, Greenberg has paid for everything in cash, including his car and his condominium.

McKenzie's family held steady at the beginning of the decline, with her father serving as a member of Congress. But he was a Republican and was defeated in the political landslide of 1932 that elected Franklin D. Roosevelt as president. After that, "we were in the soup with everyone else," she said. To get by, her father took a job out of state. She and her mother rented out their Chevy Chase home and lived in a cheaper rented room. The family struggled but remained upbeat, said McKenzie, who recounted her father's words: "There is some good in all things evil."

Much of that sense of sudden struggle that tested people and rearranged lives was woven into the stories of several residents who gathered recently at a Silver Spring retirement community. It happened to be the 79th anniversary of Black Tuesday, which marked the Depression's onset. Living through that time defined their approach to money and credit, they said, even after the world around them became more stable and prosperous. "We know what it's like not to have money and to have to be careful, and I think that's a good thing," said June Roper, who was born a month after the crash.

Roper recalls that her stockbroker father lost his job, and the family had to move in with relatives. Her father found a job in typewriter sales, but no one was buying, so he started doing repairs. When her mother became pregnant with her sister, the extended family disapproved. "Everyone was very upset with my mother, because how dare she have a baby when people were struggling so?" she said. One advantage of having lived through the Depression, Roper said, is an understanding that it would not last forever. "We saw the recovery, which I think people need to remember now. You do recover," said Roper, who is a retired stockbroker.

Still, the modern generation needs to reconsider its spending and use of credit, she said. "That we have this problem now is really a wake-up call, and if we're smart about it -- if the government's smart and the people are -- it will say to people: You can't borrow to live," she said. Her friends shared other stories of the past. Jim Feldman, 83, who worked in the Foreign Service, recalls men with no food knocking on the door of his family's apartment in Chicago. He recalls signs posted on city buses reading, "The driver of this vehicle is a college graduate," and men working as crossing guards near schools.

Thinking about the economy's recent plunge, Feldman said, "We had a generation that never knew anything about it and never thought it could happen -- and it happened. You know, with this older group, we don't have any illusions about that kind of thing. There is always a price to pay." Roper said she has started to talk to her grandchildren about credit. In her day, she said, the only thing you bought on credit was your home. They had hand-me-down furniture and clothes. "Now young people want the house before the baby. People just want instant gratification," Roper said.

Across the region, others who lived through tough times could not help but think back on the experiences that formed their early lives. Katharine Pagan, 96, a retired District schoolteacher who lives in Adams Morgan, said she vividly recalls the bleak circumstances of others, most notably her fourth-grade students in Southwest. "I can remember I almost wept when a boy handed me an orange, which was his Christmas present to me," she said. "I could only imagine it was the only orange he'd seen in weeks or months." Nearly 80 years later, she still remembers his name.

Still, not everyone recalls the Depression the same way. At a Fort Lincoln senior citizens' complex in Northeast, six friends and neighbors who thought back to the 1930s found themselves remembering how their families managed in spite of hardships. "People knew how to do for themselves, how to make ends meet, back in the day, more so than now," said Bernice Thompson, 77, a retired bank employee. Clara Thomas, 96, who grew up in Northwest, said her family was so poor that it did not feel like a sharp downturn when it got worse. "We just did not have all the things that everybody else had," she said. "We were used to not having it." Several reflected on the social structures within the community that sustained them and said they do not exist in the same way anymore.

Sylvester Steven, 74, said his African American neighborhood had a community ethic to help those down on their luck. When someone could not pay rent, neighbors threw a rent party to raise funds. When someone needed food, people pitched in. "The neighborhood was the village, as the saying goes," he said. Carlie Buchannon, 83, recalled helping to cook for her family of 13 -- mother, father, grandmother and 10 children -- while her parents worked, laundering clothes in a home business. Her father also was a handyman and carpenter, she said, and "he would pull that wagon all over Washington to find something to do."

She has no memory of being hungry. But she remembers wondering "why I had to walk in the cold all the way across town to go to school, instead of going to the school right near us." She came to learn that was because of racial segregation. Benton Doherty, 83, of Manassas said his concern is not for himself but for those who come after him. Despite growing up during the Depression, he said, "I'm afraid that my grandchildren and great-grandchildren won't have it as good as I did. I think they're going to have to work a lot harder. There are a lot accumulated problems that need to be solved."

But Sylvia Berlin, 93, of Glover Park noted that the government has more social and economic programs than it did when the market crashed in 1929. "I don't know where this is going to lead," she said. "I would hope there are enough government controls to save this from sinking into that." Still, for David Beard, the present crisis seems daunting. Eight decades after the Depression began, he is 96, living with his wife in a nursing and rehabilitation home in Adelphi and suddenly facing another wave of financial anxiety. The couple's savings for these late years has been reduced greatly by the stock market decline, he said.

"In the Depression, as a kid growing up, we felt one way or another we'd muddle through," he said. "When you're 96 and you're watching your savings melt away and run down the stream, you have a different outlook, a more defeatist outlook. . . . It's frightening. You are at the mercy of external forces."




Ilargi: Yeah, I'm sure it fills the US taxpayer with a warm furry fuzzy Christmassy feeling to know that Bill Gross has figured out a way to get richer off their bail-out billions. Remember that he "self-sacrificingly" offered to run the oiginal TARP for free.

Gross Says Consumer Lenders Attractive After TARP
Bill Gross, manager of the world's biggest bond fund, said the debt of consumer-finance companies is attractive after Treasury Secretary Henry Paulson announced plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit. "American Express has been potentially admitted to the club in terms of capital injections," Pacific Investment Management Co.'s Gross said in a Bloomberg Television interview. "These are excellent investments based on their associations with the government either through the FDIC guarantees or through the TARP program, and that's where I think an investor wants to go."

Paulson, who shifted his focus on Nov. 12, initially sold the Troubled Asset Relief Program as a way to rid bank balance sheets of illiquid mortgage assets. American Express won Federal Reserve approval on Nov. 10 to become a commercial bank, which may help the New York-based company expand funding from consumer deposits and get access to the Treasury's bank rescue program. American Express has dropped 61 percent this year as more consumers fell behind on payments and doubt was raised about its own access to credit. Yields on bonds backed by auto loans and credit-card debt stayed at record highs relative to benchmark interest rates. The gap, or spread, on top-rated credit card bonds maturing in three years remained at 525 basis points more than the London interbank offered rate, or Libor, according to Bank of America Corp. data.

Gross has recommended buying mortgage securities issued by government-sponsored enterprises such as Fannie Mae and Freddie Mac, and the debt of banks that have sold stakes to the U.S. government. He advised against buying Treasuries, which his Total Return Fund has not held since December. "If the Treasury is willing to partner with these institutions, why should we not be willing to join them, especially when we're getting yields higher than the Treasury is getting?" Gross said today. "That's a partnership that we think makes a lot of sense."

Gross's Total Return Fund lost 2.1 percent in the three months through Sept. 30, compared with a 0.49 percent slump by the benchmark it uses to measure performance, according to Pimco's Web site. Mortgage securities and investment-grade corporate debt accounted for 93 percent of its holdings. Freddie posted a record quarterly loss today and asked the Treasury for $13.8 billion to bolster the company's net worth. Paulson said Nov. 12 that Fannie and Freddie need to be restructured by Congress, and federal support for the mortgage- finance companies should either be "explicit or non-existent."

"This is, if not an explicitly, then an implicitly guaranteed type of entity, both Freddie and Fannie, and to the extent that they require capital to meet those minimum requirements, they'll get it," Gross said. "This is not a situation where any creditor really has anything to fear."
Pimco, a unit of Munich-based Allianz SE, has about $790 billion in assets under management.




A Strange Shortage Illustrates The Global Economy
If anyone needs more proof that we're all part of a global economy, picture this: A young woman in Philadelphia is trying to decide on a rug for her new home, a mother in Japan is buying groceries for her kids, and a grain farmer in North Dakota is facing a strange and serious shortage. They might be scattered around the globe, but they are all connected. The North Dakota farmer, Bob Sinner, says he is suddenly getting more business than ever from overseas. But just as he was gearing up to sell more wheat and soybeans abroad, he discovered he couldn't find enough shipping containers — the big, colorful steel boxes seen on ships and trains.

The mystery of those missing containers reveals the interdependence of producers, consumers and economies around the world. "I think my grandfather would turn over in the grave if he thought we were working internationally with customers," Sinner says. "And I don't think in their wildest dreams even my parents ever thought we would ever be able to do this." Sinner took the family business, SB&B in Casselton, N.D., and turned it into a global enterprise. He says he has worked hard the past two decades calling and visiting people all over the world, gaining their trust and then selling them his wheat and soybeans. So he was surprised when, about a year and a half ago, people started calling him out of the blue — customers he had never pursued in countries he had never worked in. "Inquiries certainly weekly from companies we don't know," Sinner says. "In different countries, South Asia, Middle East, Europe."

To understand the sudden interest, consider a shopper's trip to a supermarket in Hashimoto, Japan. Kato Akemi is picking a package of natto — a fermented soy product — off the shelf. She didn't check where it was from, but a quick glance shows it's from the U.S. Akemi doesn't care that it's not Japanese. She bought it because her kids like it and it was the cheapest brand of natto. Soy products from the United States are cheap because the dollar has been on the decline for the past several years. That's why Sinner kept getting those calls from Asia, Europe and the Middle East for his soybeans — they were a good deal. Despite the explosion of interest in Sinner's crops from all over the world, he couldn't ship because there weren't enough containers.

"In fact, we've had to turn some business down because we simply cannot get enough equipment," Sinner says. "I've never seen it this bad. This is as worse as it's ever been." His 45,000-square-foot processing facility near Fargo became a storage area. Rows and rows of packaged grain stood piled high and wide, waiting for containers to come and take it all away. Sinner started hiring extra truckers to be on the prowl for boxes. When there was a rumor that containers would be coming into the nearest rail terminal, he would send his truckers out the night before to wait and, he hoped, be first. "What you don't know is how many other people are trying to get those same containers," Sinner says. "So we're sending trucks down there and it's 250 miles to Minneapolis. Well, they get down there and guess what? There's no containers available."

So how did Sinner end up with a bulging storage facility and playing guessing games with trucks and boxes? The problem is connected to lamps and rugs. Beth Hagovsky's new house in Philadelphia is beautiful. It's also mostly empty, with bare walls and just a few pieces of furniture. She says she goes to Crate and Barrel and Target nearly every week to buy things for her home — but then she hesitates to buy them. "When you think, 'Oh my god, my retirement plan is just shot right now,' " Hagovsky says, "should I buy this lamp? Should I buy this rug? Because are we really gonna be in some sort of decent financial position a year from now or are times gonna get even tougher for us? And as you're looking at some stupid rug, you're thinking, 'Is it really worth it?' "

She answers that question the same way many people have been answering that question lately: No. She walks away and her floors remain naked; her living room corner stays dark. Americans aren't buying as much, which means they aren't importing as much. This is how Hagovsky — and probably most of us — are linked to Sinner. We usually buy rugs, couches, teddy bears and shoes, and all those goods ride over from Asia or Europe in containers. And that's how Sinner gets his containers: They have to come from overseas so that he can fill them up with soybeans and wheat and then send them back. So Akemi in Japan might want to buy Sinner's cheap soy products. But if Hagovsky doesn't take out that credit card and furnish her house, Sinner can't get his stuff to Japan or anywhere else.

"Well, we're all consumers, we all have our personal lives that we have to take care of," Sinner says. "I don't fault those consumers for those decisions — that's just a function of our economy." It's an economy that is not looking rosy for exporters or anyone else. The dollar has gotten stronger, but this isn't good news for Sinner. Japanese moms might still see his tofu on their shelves, but it probably won't be the cheapest on the shelves. That, in turn, is likely to mean all the new business interest in Sinner's products will evaporate. On the import side, it's been almost five months since Hagovsky moved into her new home — and she still hasn't bought a rug.




IMF Loan to Pakistan May Spur Help From Other Donors
Pakistan's new agreement with the International Monetary Fund over a $7.6 billion loan may lead to more help from other donors and is expected, at least for now, to stave off economic collapse in the South Asian nation. But the IMF's package falls well short of the $10 billion to $15 billion that Pakistani officials have said they need over the next two years to fix the economy. Some of that shortfall will be made up by loans from the World Bank and Asian Development Bank. Islamabad hopes the rest will come from the so-called Friends of Democratic Pakistan, a group of allies such as the U.S., China, European powers and Saudi Arabia that is holding a meeting Monday.

Pakistani and IMF officials said Saturday that the international lending agency had reached a deal for a financial stabilization package, and that Islamabad would make a formal request this week. The IMF will deliver $4 billion – the amount Pakistan says it needs immediately to avoid defaulting – this year, with the rest to be disbursed in 2009, said Shaukat Tarin, an economic adviser to Pakistan's prime minister, told reporters in Karachi. The annual interest rate on the IMF program will run between 3.51% and 4.51% and Pakistan will start repaying the money in 2011, Mr. Tarin said. "The outlook for next six months will get better from the present crisis-like situation," said Samiullah Tariq, head of research at Investcapital, a brokerage based in Karachi, Pakistan's financial center.

The IMF loan is likely to boost the confidence among donors and investors who doubted Pakistan's ability to right its economy without the fund's oversight. But it is nonetheless a major reversal for the new government of President Asif Ali Zardari. Officials had repeatedly insisted the IMF was a last resort, and were banking on allies in the West and Asia for a rescue, figuring no one wanted to see an all-out economic collapse in a country at the front line of the war against the Taliban and al Qaeda, said a finance ministry official. In recent days, however, it became "clear that without the IMF, no one was going to give us the sums we need. There was no trust there," said a finance ministry official.

Most of Pakistan's allies had either publicly or privately pressed Pakistan to seek IMF assistance, and only China had offered any money – Pakistani officials say Beijing has agreed to give a $500-million loan – prior to Saturday's announcement. The Friends of Democratic Pakistan are holding a meeting of mid-level technical officials in Abu Dhabi on Monday, and "maybe after the meeting there should be some news," said Ashfaque Hassan Khan, a finance ministry official, in a telephone interview from Islamabad. Following Saturday's announcement, the IMF urged major donors to offer Pakistan additional financing, and a Western diplomat in Islamabad on Sunday praised Pakistan's turn to the IMF, saying: "It should lead to more help." But the diplomat would not say if any firm commitments had been made.

Even if Pakistan gets all the money it needs, it faces a tough economic road. Inflation is running at around 25%, its stock market is down about 35% since the start of the year, the rupee has plunged against the dollar and Pakistan currently has only enough hard cash on hand to cover about two months of imports. Pakistan has recently taken a host of painful economic measures to lay the groundwork for help from abroad, moves that were praised by the IMF in Saturday's announcement. The State Bank of Pakistan on Wednesday increased interest rates by a hefty two percentage points to 15%, and the government eliminated fuel subsidies earlier this year in a move to sharply cut its deficit.




South Korea Says No Need to Tap IMF for Funding
South Korea sees no need to tap the International Monetary Fund for funding, a senior official from the country's finance ministry said Saturday. Speaking to foreign press following the conclusion of the Group of 20's first summit in Washington, Shin Je-Yoon, deputy minister for international affairs, said that asking IMF for aid was still a stigma in the Asian nation, which was given an IMF bailout during a financial crisis in the late 1990s.

Though he acknowledged the IMF has extended loans to needy nations without the tough conditions attached in previous crisis, seeking aid from the IMF is still hard for Koreans to accept, he said. "It is not a good impression," said Shin, adding that such a move may generate a public backlash. Besides, he noted, the nation has accumulated a large amount of foreign reserves as a "first line of defense." Also, the nation has entered into currency swap lines with the U.S., China and Japan for much-needed dollars. South Korea has been suffering from a dollar squeeze in recent months due to strains in the money market.

The biggest financial crisis since the Great Depression has fueled an exodus of capital from South Korea, hurting local stocks and crushing the won against the greenback. Shin acknowledged that outflows from the stock market may continue, but he doesn't expect anything "drastic." He also said the economy was under pressure as the nation's exports feel the pinch from the crisis and global downturn. To spur growth, the government has cut interest rates and implemented fiscal stimulus.

Shin said the door remains open for further fiscal stimulus, and the government still has much room to implement fiscal measures. Regarding the change in the U.S. government next month, Shin said the most important issue between the South Korean government and the new U.S. administration will be the free trade agreement. The Bush administration negotiated a free trade agreement with South Korea, but the U.S. Congress has yet to approve it.

Shin showed support for the G-20 communique released Saturday afternoon, calling it more action-oriented than statements from the Group of Seven industrialized nations. But he cautioned that the communique doesn't contain many concrete measures -- just some future plans. So, it's difficult to see how financial markets will react in coming days.




An A to Zirp of being in bad financial shape
Economists talk about whether the shape of the recession, when drawn on a graph, will look like a U, a V or an L. But the really significant letter of the alphabet is D: for devaluation, deflation debt and dole queues. Some might add dunces - the ones in charge of banks - but that would be unkind.

The pound has been plumbing new lows, reflecting investors' misgivings over the UK economy. As the debt capital of the developed world, we are particularly vulnerable to the global downturn; Gordon Brown, a powerful voice at the G20 meeting in Washington this weekend, advocates tax cuts and increased public borrowing. But his claims that the UK can afford this, because our national debt is relatively low, do not stand up to much scrutiny. The PM's official figures do not include items such as the bank bail-outs, the future cost of public sector pensions, or Private Finance Initiative debts.

Soaring levels of personal indebtedness are also worrying if, as Bank of England governor Mervyn King fears, we enter a period of deflation. A short, sharp burst of deflation might actually help the economy, if it encouraged consumers - those who are still in work at any rate - to spend. But a longer dose of falling prices would be harmful, as people would simply put off purchases in the hope of buying cheaper later, as was the case in Japan in the 1990s, and that would prolong the recession.

The credit binge in the UK makes deflation particularly threatening - the ratio of household debt to annual income reached 170 per cent in the second quarter of this year, compared with 105 per cent in the downturn of 1990/1. Under normal conditions, inflation will erode the real burden of borrowings over time, but in a deflationary environment, debt becomes more onerous. Turbo-charged borrowing has not been a huge problem over the past few years because of low interest rates, rising house prices and robust employment. That has all changed: deflation is already a reality, not a spectre, in the housing market, and the years when being made redundant meant a nice cheque, a bit of a holiday then a quick waltz into another job are over.

Dole queues are swelling rapidly; more than 20,000 job losses were announced last week alone and economists predict the total will reach 2.5 million by 2010. Redundancies are by no means confined to the banking sector. Manufacturers shed 10,000 more jobs in the three months to June than in the previous quarter; as an aside, in the virtually unreported 'industry crunch,' the sector has lost a million jobs in a decade. The devaluation of sterling is theoretically good news for exporters since it makes British goods cheaper abroad - but in reality that is no help since our biggest customers, the eurozone and the US, are also in recession and therefore less able or willing to buy.

Measures to support the development of green technology are likely to figure in next week's pre-Budget report, and job creation in that area will be very welcome, though they are unlikely to take effect quickly enough to reduce the jobless lines short term. As well as an unprecedented fiscal package, central banks are expected to act aggressively. Markets reckon the Bank of England will take rates as low as 1 per cent in the New Year, and it is not inconceivable that the US might reduce them to nought. Another new acronym, from economists at Citigroup, is Zirp, or zero interest rate policy - all well and good, but what on earth do you do next?




The Year of Wall Street's Fallen Idols
Millions of Americans are reeling from investment losses this year. For many, the financial cost of the red ink is only part of the misery. They're also kicking themselves for the losses. Maybe you feel you invested too much. Maybe you feel you should have invested in different assets. This may prove scant consolation, but it is worth noting: The best of the best have done no better. So go easy on yourself. This has been Wall Street's year of the fallen idols.

Marty Whitman, the legendary septuagenarian who co-manages Third Avenue Value, has seen crises come and go. There are few you could trust more in a panic. But his fund has almost halved this year. Bill Miller, the famous manager at Legg Mason Value, has fallen by nearly 60%. And that's not even the worst of it. Miller's more flexible, go-anywhere fund, Legg Mason Opportunity Trust, is down by two-thirds since the start of the year. Ron Muhlenkamp at Muhlenkamp, Wally Weitz at Hickory, Manu Daftary at Quaker Strategic Growth, Richie Freeman at Legg Mason Partners Aggressive Growth, Ken Heebner at CGM Focus, Christopher Davis and Kenneth Feinberg at Davis New York Venture Fund, Will Danoff at Fidelity Contrafund, Saul Pannell at Hartford Capital Appreciation: They've all lost about 40% or more. Some have nearly halved.

It is a shocking bloodbath. These are managers with some of the highest reputations on Wall Street. They have beaten the Street over many years, even decades. And even they got shellacked. What chance did you have? Even most of those who anticipated a crash got pummeled. Bob Rodriguez at FPA Capital has been very bearish for years, and was holding large amounts of cash in the fund. But he's still down 36%. The picture for Warren Buffett looks somewhat better, although he swung from $3 billion investment profits to $1.4 billion losses in the first nine months of the year, while net earnings more than halved. Shares in Berkshire Hathaway have fallen about 31% since Jan. 1.

Those who look good include John Hussman at Hussman Strategic Total Return, who is down just a few percent. And Jeremy Grantham at GMO, who predicted much of the meltdown. His GMO Benchmark-Free Allocation Fund, an institutional fund that has a pretty free rein on what to hold and what to avoid, has still lost 11% so far this year. There are three long-term lessons here for ordinary investors. The first is that if the smartest and best fund managers can't successfully anticipate a crash with any degree of confidence, you can't either. Time spent trying is time wasted. The smart money rarely spends much time very bearish, and with good reason.

In practice it is almost impossible to predict a crash. And even if you are right about the direction, you will probably get the timing wrong. That may end up compounding your losses instead of preventing them. John Hussman is among very few who have gotten this one right. I know at least two superstar managers who correctly anticipated a blow out, and moved heavily into cash… in the fall of 2006, a year too soon. Markets soared instead.

I also know of at least one portfolio manager who's been predicting the U.S. credit implosion for at least seven years. Prudent Bear has been betting on falling shares (and rising gold) for a long time. It's finally getting its reward: It's up about 37% so far this year. But investors actually lost money between 2003 and the end of 2007, while the rest of Wall Street rose 70%. And remember that investing is a long-term game. This has been the worst financial bloodbath since 1929. Yet Ken Heebner is still up more than fivefold over the past ten years, even after factoring in this year's carnage. Mr. Daftary has more than doubled investor's money. Many others are up 50% or more over that time.

The best an investor can do is to look for value, prefer unfashionable assets over fashionable ones, and avoid chasing past performance. As previously observed here, everything has now fallen. Inflation-protected government bonds. Munis. Gold stocks. The whole shebang. Eighteen months ago, every single asset class was expensive. Today it's possible that almost every single asset class – with the possible exception of regular Treasurys - is cheap.




End to AIG cleanup far off
By the close of the third quarter, American International Group desperately needed more time to sell assets and pay down its onerous $85 billion debt. Last week the Fed bought the insurer that time—at a cost of $150 billion. That’s the price tag of a new bailout package, unveiled early last Monday by the Fed and AIG prior to the company’s third-quarter earnings call the same day. The new plan costs 43% more than the original bailout, announced Sept. 17, and it may not be the final deal between AIG and the Federal Reserve. Even if it succeeds, analysts say, the days of AIG’s dominance in the insurance market are likely over.

Under the revised plan (referred to as a “solution” by AIG executives), the Fed will buy $40 billion in AIG preferred shares via the Treasury’s Troubled Asset Relief Program. The government will also replace the $85 billion bridge loan it had extended to AIG with a $60 billion loan that entails less burdensome terms and is due in five years rather than two. In addition, the Fed will provide $50 billion to create two separate entities that will purchase AIG’s distressed securities and backstop the insurer’s securities lending program, eliminating the prior securities lending facility AIG had in place with the Fed.

Taxpayers will own 77.9% of AIG’s equity and will hold warrants to purchase an additional 2% equity interest, and so will benefit from any future appreciation in AIG shares. AIG chief executive Edward Liddy, whom the government tapped to run the company, said during the earnings call that the new plan represented a milestone in a “multi-year journey” that will eventually include asset sales. His comments stood in stark contrast to his first conference call with investors, held five weeks before, in which he announced AIG’s original restructuring plan and said the company would move “expeditiously” and the sales would likely occur “sooner than perhaps some people might suspect.”

The company announced last week that it had lost $24 billion in the third quarter, its fourth consecutive quarterly loss and its largest ever. Mr. Liddy emphasized during the conference call that the conditions of the agreement could change in the future. The revised deal, he said, “is not fixed in concrete forever.” Analysts said they would not be surprised to see a third version of the bailout in the future, but agreed that the new deal would better address the root problems in AIG’s financial products division. “For us to emerge successfully from this crisis, we cannot continue to hemorrhage money in the two areas of credit default swaps and securities lending,” Mr. Liddy said. “We need to stop that, and we need to stop that now.”

Prior to renegotiating its deal, AIG had borrowed about $75 billion for those two areas. AIG’s ongoing exposure to credit default swaps will now amount to any changes in the market value of its swaps prior to the creation of the special-purpose vehicle to buy AIG’s collateralized debt obligation exposure, as well as AIG’s $5 billion investment in that entity. The insurer’s ongoing exposure to securities lending will total any changes in the market value of its securities lending program prior to the creation of the special-purpose entity that will take on AIG’s residential mortgage-backed securities, plus AIG’s $1 billion investment in that entity. Mr. Liddy did not give a timetable for the creation of the new vehicles.

The program’s success hinges on whether AIG’s counterparties are willing to sell the insurer’s collateralized debt obligation exposure to the new entity at prices below par. Experts said the revised rescue will have little immediate effect on commercial policyholders. The plan will likely allow AIG to survive, but the insurer’s prolonged, public battle for survival will continue to take a toll on its businesses as competitors attempt to poach its policyholders and employees. “The longer there is uncertainty over the ultimate outcome of AIG, the more of a chance there will be of an erosion of the franchise value [of its subsidiaries],” said Andrew Colannino, vice president of property and casualty at A.M. Best.

AIG still plans to sell all subsidiaries, except for the insurer’s domestic property and casualty business, its foreign general insurance business and a majority stake in its China-based American International Assurance Co. “We have a smart, disciplined competitive process for selling assets,” Mr. Liddy said. “The [new plan] gives us more flexibility and more time. We have great confidence in our ability to sell these remarkable assets.” He said that almost a hundred possible buyers had expressed interest in the assets. “It’s just not something that someone comes to you on Friday and says here is my price,” Mr. Liddy said. “It requires great diligence and great thought, and that’s exactly what we are doing. It’s a smart, disciplined, thoughtful process.”

AIG’s subsid-iaries have been under major competitive pressure throughout that process, said Donald Light, an insurance analyst with Celent. “I think that’s going to continue until the situation is stabilized at the holding company, and that hasn’t happened yet…. But if this bailout works, it’s a huge plus for the overall success of AIG going forward.” If it succeeds in the sales, AIG will emerge a “lesser player” in a sector where it once dominated, said John Ward, chief executive of Cincinnatus Partners, a private equity firm specializing in the insurance industry. “The broader picture will depend on how the asset sale scenarios play out. The competitive landscape may change.”

Competitors have already made inroads in some areas. AIG commercial insurance’s account retention decreased 6.5% from September 2007 to September 2008, and “modestly” from October 2007 to October 2008, said Kristian Moor, AIG executive vice president of domestic general insurance and president and chief executive of AIG’s property/casualty group. It experienced about 5% turnover among its 700 senior management employees in the commercial insurance business. “[AIG] still faces many challenges,” Mr. Ward said. “I feel confident everybody is willing to work through the new challenges, but it’s still an uphill battle, and it’s going to take a lot of work to get through this long, complex process."




France faces week of strike chaos
France faces a week of disruption from transport and public sector strikes as unions wage a slew of separate campaigns against President Nicolas Sarkozy's labour reforms. Hundreds of domestic and international flights were cancelled for a third day on Sunday as Air France pilots pursued a four-day strike, due to end late on Monday. Travel chaos could spread to the railways on Tuesday when train drivers stage the first of two actions called by separate unions for the same week, while on Thursday many schools could be closed when teachers demonstrate over 2009 budget cuts.

On Saturday, postal services face disruption over plans to prepare the La Poste mail service for partial privatisation. The head of one of France's biggest unions, CGT leader Bernard Thibault, urged Sarkozy to pay the same attention to workers' demands as he and other leaders have devoted on the world stage to finding a solution to the financial crisis. "It is urgent to tackle the social situation," Thibault told France Info radio. Sarkozy is due to return to Paris on Monday or Tuesday after a private visit to New York following this weekend's economic Group of 20 summit, which he labelled a "historic" success.

According to an opinion poll for Sunday's Journal du Dimanche newspaper, the conservative leader's popularity rating recovered one percentage point to 44 percent this month after falling sharply since he was elected last year. Prime Minister Francois Fillon saw his rating improve two points to 55 percent. Sarkozy has denounced the excesses of capitalism following the worst financial crisis in decades but has angered unions by spending billions on bailing out banks while dismantling part of France's 35-hour work week and relaxing other restrictions.

The series of strikes comes as leading unions jostle for position in elections for labour arbitration panels on Dec. 3. A bid by the government to end the Air France strike by guaranteeing the right to retire at 60 broke down on Saturday when pilots voted against ending their strie half way through. Air France said it was operating 65-70 percent of long-haul flights and around half of its planned short and medium-haul flights on Sunday, the same level as on previous days. The strike is over proposals to allow pilots to retire at 65 rather than the current retirement age of 60, a measure being discussed in parliament as part of social security reforms.

Air France and the government say the planned change would be voluntary and pilots would not be forced to work until 65. But unions believe it is the thin end of a wedge that will force staff to work longer or accept lower pensions. The deputy chief executive and next CEO of parent Air France-KLM, Pierre-Henri Gourgeon, called the strike "dangerous and useless" and warned pilots it could make the airline more vulnerable to a growing aviation crisis. He told pilots in a video statement the four-day walkout would cost the company 100 million euros, enough to buy a large Boeing 777 aircraft that would in turn create 20 crew jobs.

State railway SNCF has also made overtures by offering to negotiate over changes in freight service working hours. Unions did not immediately say whether they would take up the offer. SNCF says it wants to conduct an experiment with 900 volunteers to find a new way of organising the work week in its freight division to meet the rising threat of competition. The last strike on Nov. 6 caused significant disruption. In schools, almost all teachers' unions are calling for a one-day strike on Thursday over what they describe as worsening conditions and plans to cut thousands of posts in 2009.




Lobbyists Swarm the Treasury for Piece of Bailout Pie
When the government said it would spend $700 billion to rescue the nation’s financial industry, it seemed to be an ocean of money. But after one of the biggest lobbying free-for-alls in memory, it suddenly looks like a dwindling pool. Many new supplicants are lining up for an infusion of capital as billions of dollars are channeled to other beneficiaries like the American International Group, and possibly soon American Express.

Of the initial $350 billion that Congress freed up, out of the $700 billion in bailout money contained in the law that passed last month, the Treasury Department has committed all but $60 billion. The shrinking pie — and the growing uncertainty over who qualifies — has thrown Washington’s legal and lobbying establishment into a mad scramble. The Treasury Department is under siege by an army of hired guns for banks, savings and loan associations and insurers — as well as for improbable candidates like a Hispanic business group representing plumbing and home-heating specialists. That last group wants the Treasury to hire its members as contractors to take care of houses that the government may end up owning through buying distressed mortgages.

The lobbying frenzy worries many traditional bankers — the original targets of the rescue program — who fear that it could blur, or even undermine, the government’s effort to stabilize the financial system after its worst crisis since the 1930s. Among the most rattled are community bankers. “By the time they get to the community banks, there may not be enough money left,” said Edward L. Yingling, the president of the American Bankers Association. “The marketplace is looking at this so rapidly that those who have the money first may have some advantage.”

Adding to the frenzy is the possibility that the next Congress and White House could change the rules further. President-elect Barack Obama has added his voice by proposing that the struggling automakers get federal aid, which could mean giving them access to the fund — something the Treasury secretary, Henry M. Paulson Jr., has resisted. Despite the line outside its door, the Treasury is not worried about running out of money, according to a senior official. It has no plans to ask lawmakers to free the second $350 billion of the rescue package during the special session of Congress that could begin next week. That could limit the pot of money available, at least until the next Congress is sworn in next January. Meanwhile, the list of candidates for a piece of the bailout keeps growing.

On Monday, the Treasury announced it would inject an additional $40 billion into A.I.G., amid signs that the government’s original bailout plan was putting too much strain on the company. American Express won approval Monday to transform itself into a bank holding company, making the giant marketer of credit cards eligible for an infusion. Then there is the National Marine Manufacturers Association, which is asking whether boat financing companies might be eligible for aid to ensure that dealers have access to credit to stock their showrooms with boats — costs have gone up as the credit markets have calcified. Using much the same rationale, the National Automobile Dealers Association is pleading that car dealers get consideration, too.

“Unfortunately, I don’t have a lot of good news for them individually,” said Jeb Mason, who as the Treasury’s liaison to the business community is the first port-of-call for lobbyists. “The government shouldn’t be in the business of picking winners and losers among industries.” Mr. Mason, 32, a lanky Texan in black cowboy boots who once worked in the White House for Karl Rove, shook his head over the dozens of phone calls and e-mail messages he gets every week. “I was telling a friend, ‘this must have been how the Politburo felt,’ ” he said.

The Congressional bailout law gave the Treasury broad authority to decide how to spend the $700 billion. Under the terms of the $250 billion capital purchase program announced last month, cash infusions are available to “qualifying U.S. banks, savings associations, and certain bank and savings and loan holding companies, engaged only in financial activities.” That definition has grown to include private banks and insurers like Allstate and MetLife, which own savings and loans. It may also encompass industrial lenders like GE Capital and GMAC, the financing arm of General Motors, provided they win approval to reclassify themselves as a bank or savings and loan holding company.

The Treasury set a deadline of Friday for institutions to apply for capital investments, which has meant a grueling few weeks for already overworked officials like Mr. Mason. “Jeb is like the customer service agent at Verizon when the power lines go down,” said Robert S. Nichols, president of the Financial Services Forum, a trade group for big institutions like Citigroup, Fidelity and Allstate Insurance, some of which have received federal money. The influential independent and community bankers group, which represents smaller institutions, won an extension of the deadline for privately held banks while the Treasury considers a way for them to participate in its program as well.

The Treasury, several industry executives said, wants to avoid too strict a definition of eligible institutions, in case the Obama administration decides it wants to tweak the requirements for an investment, or even overhaul the rescue program. Several lobbyists said the Treasury’s model contract acknowledges the possibility that Congress could impose new requirements on recipients of the money, and some Democratic lawmakers have talked about further restricting executive compensation, shareholder dividends or other uses of the money as part of the deal. “We are like a tenant signing a lease contract with the landlord where the landlord can come back and change the terms after the fact, and in fact we are going to have a new landlord in a couple of weeks,” said Mr. Yingling of the bankers association.

The first wave of lobbying came in early October when Mr. Paulson announced the plan to buy troubled mortgage-related assets from banks. The Treasury said it would hire several outside firms to handle the purchases, and would dispense with federal contracting rules. Law and lobbying firms that specialize in government contracting fired off dispatches to clients and potential clients explaining opportunities in the new program. Capitalizing on the surge of interest, several large firms, including Patton Boggs; Akin Gump; P&L Gates L.L.P.; Fried, Frank, Harris, Shriver & Jacobson; and Alston & Bird, have set up financial rescue shops.

Alston & Bird, for example, highlights its two biggest stars — former Senator Bob Dole and former Senator Tom Daschle. Mr. Dole “knows Hank Paulson very well” and has been “very helpful” with the financial rescue groups, said David E. Brown, an Alston & Bird partner involved in its effort. “And of course, Senator Daschle is national co-chair of the Obama campaign,” Mr. Brown added, noting that because Mr. Daschle is not a registered lobbyist, his involvement is limited to “high level advisory and strategic advice.” Ambac Financial Group, in the relatively obscure bond insurance business, never needed lobbyists before, said Diana Adams, a managing director. But its clients persuaded the company to hire two Washington veterans — Edward Kutler and John T. O’Rourke — who helped arrange a recent meeting with Phillip L. Swagel, an assistant Treasury secretary. “We haven’t really asked for much in the past,” Ms. Adams said.

Initially, the banks reacted coolly to the prospect of the government taking direct stakes in them. They worried about restrictions on executive pay, and whether there would be a stigma attached. In conference calls with industry groups, Mr. Mason helped explain the Treasury proposal — a job he and his colleagues did well, judging by the change of heart among banks. “The biggest surprise was how quickly it went from ‘I don’t need this,’ to ‘How do I get in?’ ” said Michele A. Davis, the head of public affairs at the Treasury, who is Mr. Mason’s boss. Underscoring the many ways companies can take part in the rescue fund, the Hispanic Chamber of Commerce and other Hispanic business groups met with Mr. Paulson to push for minority contracts in asset management, legal, accounting, mortgage services and maintenance jobs, like plumbing and masonry.

“They are going to need a lot of folks in minority communities that are able to service their own communities,” said David Ferreira, head of government relations for the Hispanic Chamber of Commerce. As the automakers have pushed for federal help, the trade groups for car dealerships and even boat dealerships are pressing their own cases. They argue that showrooms are feeling a squeeze between higher borrowing costs to finance their inventory and slowing consumer sales to move it out the door. “We have been encouraged by reports that Secretary Paulson is looking to broaden the program,” said Mathew Dunn, head of government relations for the National Marine Manufacturers Association.

On Friday, the automobile dealers sent Mr. Paulson a letter urging him to keep them in mind. “A well-capitalized, financially sound dealer network is essential to the success of every automobile manufacturer,” wrote Annette Sykora, a car dealer in Slaton, Tex., and the chairwoman of the National Automobile Dealers Association. “Any government intervention should include provisions to preserve the viability of dealers.” Some lobbyists, Mr. Mason said, had called him even though they did not have any clients looking to get into the program or worried about its restrictions. They were merely seeking intelligence on which industries would be deemed eligible for assistance. He suspects they were representing hedge funds that wanted to trade on that information.




Where tax goes up to 60%, and everybody's happy paying it
Political parties have been vying to offer the biggest tax cuts as the credit crunch tightens its grip on Britain. In their view, low taxes are now the best way to get the economy going and to help out families. Cutting or keeping taxes low has always proved popular with the electorate: in 1992 the Conservatives' election campaign slogan 'Labour's tax bombshell' made the most of the then shadow Chancellor John Smith's intention to increase the higher rate of tax from 40 to 50 per cent. Labour lost.

But is this the best way to proceed in the long term, and would UK taxpayers get better value for money if they paid more, rather than less? One way to examine the issue is to compare state help provided by the British government to one which traditionally charges much higher taxes: Sweden. Swedes support the second-highest tax burden in the world - after Denmark's - with an average of 48.2 per cent of GDP going to taxes. Yet Sweden, along with equally high-taxing Denmark and Norway, tops almost every international barometer of successful societies.

Swedes' personal income tax can be as little as 29 per cent of their pay, but most people (anyone earning over £32,000) will pay between 49 and 60 per cent through a combination of local government and state income tax. By comparison, the UK's tax burden is 36.6 per cent of GDP, the basic rate of tax is 20 per cent and the higher rate 40 per cent, plus National Insurance at 11 per cent for those earning between £105 and £770 a week, and 1 per cent for anything earned above this limit.

But for most Swedes paying high taxes is a benefit, not a problem. 'I am very happy to pay high taxes because I know I am getting value for the money later on,' says Valentina Valestany, a 39-year-old legal adviser. She is especially pleased with the school her daughters Westa, 15, and Anastasia, 13, attend. 'Lunches are free, it was no problem getting in. My daughters receive a very good education and they have great teachers.'

Nicholas Aylott, a 38-year-old British lecturer, is working as a political scientist at Stockholm's Södertörn University College. 'If you start talking to someone in Britain, you can be fairly sure that they will end up saying that taxes are too high. In Sweden, you can't do the same,' he says. 'Most people trust the state to manage taxes well. There's a broad, deep faith that the money going into the welfare state will be employed usefully.' But he also points out that self-interest is at play: 'The median voter is a woman who works for the public sector, and around two-thirds of the electorate draw most of their income from the state, either because they work in the public sector or draw benefits from it.'

Overall though, he says, 'Swedes are very attached to the idea of the state as the People's Home. Everyone in society is under the same roof, everyone will be protected. Sweden is now a more diverse society, but this idea still persists.' And Swedes are well provided for. Year after year Save the Children puts it at the top its league of countries where it is best to be a mother; the country is sixth on the UN Development Programme's human development index (the UK is 16th); and Unicef ranks it second in its table of child wellbeing in rich countries. Maybe Sweden proves that it's worth paying high taxes.

Childcare is important to Aylott and his wife Elena as they have a young son, and in Sweden, they have found it affordable, available and generally of good quality. 'The kindergarten that our son Alex attends costs just 1,200 kronor (£97) a month. I have relatives in London who pay 10 times that,' he says. 'It was no problem finding Alex a place as there are plenty of local kindergartens where we live. In Sweden we are able to raise a young child and hold two demanding jobs at the same time. In Britain, it wouldn't be as easy.' Aylott and his family are enjoying one of the many benefits Sweden offers its residents. Aside from universal kindergarten coverage, Swedes enjoy free schools - public and private - free health and dental care for under-18s, or generous personal benefits such as a child allowance of £1,080 a year per child.

But the most eye-catching benefit is probably parental leave. Parents enjoy a joint parental leave lasting 480 days. For 390 days they receive 80 per cent of their income, capped at 440,000 kronor a year (£35,800), while for the remaining 90 days they receive 180 kronor (£14.60) a day. In theory the leave is split fifty-fifty, but it is up to the couple to decide how they want to organise it. One partner can give as many days as he or she wants to the other so long as each parent takes up to 60 days at the minimum. A single parent is entitled to the full 480-day period.

For some couples, this means the father can become the child's prime carer during the first years. 'I'm taking 15 months off while my wife, Anne, will take five months,' says Gustav Levander, 31, a teacher and musician. 'Some of the leave we're taking together at the same time, while for other periods either Anne or I will be at home while the other is at work. It's unbelievably good that I have the opportunity to stay at home for a long time. My son, Olle, will get the chance to know me well in his early years.' In the UK, fathers can only take up to two weeks of statutory paternity leave, unless their employers offer them a more generous period.

Swedish parents can also stretch the leave by taking it part-time. 'You can take off an hour or two a day for certain periods, if you want. So if you want to leave work earlier to pick up your child from kindergarten, you will be paid by the state for the missing hours,' says Niklas Löfgren, an analyst at Sweden's Social Insurance Agency. Compare this with the childcare-juggling that Sandra Haurant, who lives in Bedfordshire and works two days a week as a website editor in London, has to do. She has two small children: Ines, eighteen months, and Tom, three-and-a-half, and pays £120 a week for them to spend a day-and-a-half a week in a private day nursery. The rest of the time she's working, her mother looks after the children. 'The cost of childcare is unbelievably expensive,' she says. 'I'm only paying for a day and a half a week, but we're still paying around £480 a month.'

The UK government offers all three- and four-year-olds 12-and-a-half hours of free early years education a week for 38 weeks a year, with a registered school, nursery or playgroup provider. But the hours can only be taken in two-and-a- half hour sessions (either for a morning or an afternoon), meaning you can't actually get a full day of free childcare. If you are employed and fall pregnant, you are entitled to statutory maternity leave of one year, and may be entitled to receive statutory maternity pay for up to 39 weeks regardless of how long you've been with your employer - but fathers can only take up to the two weeks statutory leave.

All parents are entitled to claim child benefit for children under 16. At the moment, you can claim £18.80 a week for the eldest or only child, and £12.55 a week for any additional children. Sweden has a progressive state pension system: the more you earn, the higher your final pension will be. The retirement age is also flexible: you can start drawing on it from the age of 61, with no fixed upper limit, but the longer you wait to draw your pension, the higher it will be. Very broadly, 'If you earn the average salary of 260,000 kronor (£21,200) a year, you will receive about 55 per cent of your salary as pension,' says Arne Paulsson, a pensions expert at Sweden's Social Insurance Agency. 'About 90 per cent of Swedes have occupational pensions on top of that, which amounts to 15 per cent of their salary. So in total, people get about 70 per cent of their income when they retire.'

There is also a guaranteed minimum pension for those who have not worked enough to qualify for the state pension. Depending on personal circumstances, it can be at most 6,381 kronor (£514) a month for a married person and 7,153 kronor (£576) a month for a single person. You can start drawing on it from the age of 65. In contrast, the basic state pension in the UK is paid to men at 65 and women at 60 - though for women the qualifying age will gradually increase to 65 by 2020 - and is worth £90.70 a week, though this can vary depending on individual circumstances.

The Pension Credit tops up the basic state pension by guaranteeing a minimum amount for those who are on a low income. It guarantees everyone aged 60 and over an income of at least £124.05 a week for someone who is single and £189.35 a week for someone with a partner. In case of unemployment, most individuals receive 80 per cent of their previous salary for the first 200 days of inactivity - up to 680 kronor (£53) a day - dropping to 70 per cent for the next 100 days. To qualify, individuals must have been in paid work for a year before becoming unemployed. They must also be members of one of the country's 33 unemployment insurance funds, which most working Swedes are.

These are partly funded by taxpayers' money and partly by members' fees, which vary according to professions. Teachers, for instance, must pay in 166 kronor (£13.40) a month, while construction workers can pay 311 (£25), less if they belong to unions. 'The fee is relative to the risk of unemployment in your sector. If there's a higher risk of it, you pay more,' says Eija Loijas, an adviser at the Swedish Federation of Unemployment Insurance Funds. If unemployed Swedes were not prior members of an unemployment insurance fund, they receive the basic unemployment benefit of 320 kronor (£25) a day for 300 days if they worked full-time, dropping to 160 kronor (£13) if they worked part-time. During that time, unemployed Swedes must show that they are actively looking for work.

If they refuse the first job offer, they lose 25 per cent of their benefits for 40 days. If they turn down three job offers, their benefits are suspended. If Swedes have not found a job after 300 days, they will be enrolled into a job training programme until they find one, receiving 65 per cent of their previous income during that time. Contribution-based Jobseeker's Allowance, the main benefit for people in the UK who are eligible and out of work, pays £47.95 a week for people aged 16 to 24 and £60.50 a week for those aged 25 or over. To qualify you must be able to work at least 40 hours a week, be looking for work, have paid enough National Insurance on your income, have savings less than a certain amount and be over 18 years old and under state pension age.




Saving the world – and Australia too
Nothing pleases the Greenies more than to have Kevin Rudd as prime minister. To them, Rudd literally has a green heart. Almost everything he touches – or does – is, in some ways, connected with the environment or climate change – as he puts it, advancing the greener future of this planet.

Last week, he bailed out the struggling car industry in Australia with a A$6.2bil lifeline with one condition. Of the amount, A$800mil will be put into a fund to raise it to A$1.3bil for research and innovation to build a new green car with low emission and fuel efficiency for Australia and the world. Describing the automotive sector of the industry as a “cornerstone of Australian manufacturing”, Rudd wants a car that is more innovative, more productive, more competitive and more export-focused, as the late Industry Minister in the Hawke government John Button envisaged in the 1980s.

The new plan, aimed at also addressing the challenges now facing the industry, will “green” and reinvent it to create a low-carbon, environmental-friendly car of the future which, the government hopes, will be indispensable for global markets and supply chains. It will turn the industry into a provider of green-collar jobs – jobs that will still be around in “tomorrow’s increasingly carbon-constrained world”. And it will ensure that the car industry will continue to contribute to the nation’s prosperity which, in turn, will give the industry the certainty it needs to invest in the vehicle technologies of tomorrow.

The idea has been described as the most comprehensive plan ever devised for the vital sector of the Australian industry. It is to bring about a historic transformation that will prepare the industry for the future. And it has certainly come at the right time in view of the recent dreadful financial crisis that has severely affected the car industry in the United States. GM, America’s biggest car manufacturer now on the brink of bankruptcy, is seeking a further US$25bil from the US government in addition to the original US$25bil it has been offered. It claims that more than 1.4 million workers and suppliers will be out of jobs by the middle of next year if it is not rescued from the deep black hole.

Rudd points out that Australia is one of the only 15 countries in the world today that can create a car from the drawing board to the showroom floor. Historically, Australia’s first car on the road was in 1897 when inventor David Shearer displayed his steam-driven horseless carriage in Adelaide. Two generations later, the Holden 48-215 came off the production line in 1948. It has made Australians proud of their Holden, which has since gone through many improvements. Rudd believes that the advanced technologies that the nation uses in its modern cars, from microchips to composite materials, would enable manufacturers to build a lot more things as well.

The fund, to which the government will raise a further A$4.9bil, will provide transitional assistance to car manufacturers for research and development on new innovation of greener cars over the next 10 years. The projects include A$116.3mil to promote structural adjustments through merger and consolidation in the car component sector from Jan 1 next year. This has been brought forward from the starting date in 2011. About A$20mil will be provided to help suppliers improve their capacity to integrate into complex national and global supply chains. Buyers of new vehicles with factory-fitted LPG technology will receive A$2,000 each as an incentive under the expanded A$10.5mil scheme.

The government report, titled “Plan for a Greener Future”, specifies that participants, such as car designers, engineers, technologists and researchers, must prove that they are aiming for better environmental outcomes and are building the capacities needed to compete in global markets. “The government expects this assistance to stimulate industry investment of at least A$16bil in new capacity and new technologies – not to mention billions of dollars in wages and salaries for tens of thousands of workers,” it says.

The report adds that the world is changing and Australia’s automotive industry must change with it. “Global warming, the emergence of low-cost competitions … have all altered the landscape in which our vehicles and component markets operate. “The recent deterioration in the international economy has compounded these challenges. “Our choices are simple – our industry must either adapt to the new environment or face extinction.”




Tide turns against 'dirty' oil sands
The oil industry, rather like mining, is a mucky business. Its activities - and ours in consuming products such as petrol and plastics - directly contribute to global warming. It would be fair to say then, that ethical investors have hardly been fans of the industry.
But in recent years there has been a grudging acceptance that - like it or not - the world will remain dependent on oil for a long time, even as we try to move towards a low-carbon economy. All but the most diehard of environmentalists now accept that oil companies serve a necessary, if undesirable, purpose.

But the critique of business-as-usual is gathering force, thanks in large part to the hugely expensive, dirty and carbon-intensive oil sands projects. Most of the world's oil sands are located in Alberta, in northern Canada, giving the country estimated reserves of a staggering 179 billion barrels, second only to Saudi Arabia. Currently, Canada's oil sands produce just over a million barrels a day but planned projects would triple this by 2020. If companies expand at the rate they say they will, the country could become one of the largest oil producers in the world.

With concerns over energy security rising, the prospect of a stable non-Opec OECD country such as Canada becoming a big oil producer is attractive to many in the West. There are a dozen or so companies operating oil sands projects in Canada, including Shell, ConocoPhillips, Exxon and Total. A year ago BP entered into a joint venture with the US firm Husky Energy which is scheduled to start producing oil in 2012.

Conventional oil production involves drilling into rock to find reservoirs of the black stuff sloshing around. Because the oil is in liquid form, it's relatively easy to force to the surface. However, extraction from oil sands is more difficult, and results in a much larger carbon footprint.
Most existing oil sands projects have more in common with mining than conventional oil production. The forest is cleared, and vast pits are dug out of the clay and sand to get to the oil below. Hot water is pumped into the oily sludge to separate the oil from the sand and clay. Even then, the untreated oil is in the form of thick bitumen, with a consistency of peanut butter. Huge upgraders are needed to treat it before it can be transported by pipeline and refined conventionally.

Analysts estimate that the resulting carbon emissions are between 2.5 and eight times higher than emissions from conventional oil production. Canadian environmental organisation the Pembina Institute estimates that by 2030 the emissions produced by Canadian oil sands projects could total more than a quarter of the UK's current emissions. But the environmental problems aren't restricted to carbon emissions and deforestation, serious though they are. Oil sands consume vast amounts of water, which in northern Alberta are drawn from the Athabasca river. The industry insists that flow rates in the river are only affected slightly by the process, but many local leaders disagree.

Oil sands projects also leave behind all the by-products of the mining process: clay, sand, the recycled water used to separate the oil and the toxic chemicals used in the process. These are pumped into vast, toxic 'tailings ponds'. According to the Pembina Institute, there are about 5.5 billion cubic metres of these tailings ponds in Canada, some as big as 13 square kilometres and visible from space. There are concerns that these ponds will leak into the water table, polluting rivers and wildlife. More worryingly, there do not seem to be clear plans about how to treat them. All these issues - carbon emissions, deforestation and pollution - represent serious long-term environmental and reputational liabilities for the companies involved. Ethical investors take note.

As recently as the summer, the frenzy to develop Canada's oil sands was in full swing. Soaring costs for everything from property in Fort McMurray, the nearest town to the projects, to labour, reflected the oil rush. But that was when oil prices were $147 a barrel. Today, they are less than half that peak and companies including Shell are scaling back their expansion plans. The problem is economics. According to Goldman Sachs, oil sands developers need oil prices to be at least $70 a barrel to make a decent return. Shell currently produces about 150,000 barrels of day - 5 per cent of its total production - from oil sands. This will soon rise by 100,000 and by 2020, it wants to get 15 per cent of its oil from these projects by 2020.

A fortnight ago Shell chief executive Jeroen van der Veer said he was delaying plans to add an extra 100,000 barrels per day from oil sands, but before ethical investors rejoice, no one is expecting prices to stay this low for long. Sooner or later, oil sands will become profitable once again. And with a third of Shell's potential reserves made up of undeveloped oil sands, the company is unlikely to turn its back on Alberta in a hurry. In 1999, Lord Browne, who was then running BP, decided to sell off the company's oil sands interests in Alberta, believing that the projects were too expensive. Despite the recent slump in oil prices, BP's new-found enthusiasm for oil signs shows no signs of abating.

Oil sands projects vary vastly in terms of how much carbon they produce. According to research firm Trucost, Shell's Muskeg River Mine project in Alberta is less carbon intensive than BP's conventional exploration and production projects. The industry and government are promoting carbon capture and storage technology, which stores emissions from power plants underground, as a way of making the projects greener. However, the unproven and uneconomic technology, even if it works and attracts the financial support that is required, is at least a decade away from deployment. Companies have also promised that once their operations have ceased, they will remediate the affected land so that it resembles its original state. But local leaders say it is impossible to properly repair the land, which includes boreal forests and peat bogs.

The Canadian and Albertan governments have a poor record on reducing their emissions. Environmental regulations governing the oil sands projects do not require absolute cuts in carbon, for example. Ethical investors should not rely on the authorities to force oil companies to clean up their act. Transparency on their environmental performance also needs to be improved. This year Co-operative Asset Management launched a campaign to try to persuade oil sands companies to delay their investment plans until they have proved that oil sands and ecologically and financially sustainable. The recent slump in the oil price - for as long as it lasts - has won them a reprieve.


41 comments:

Anonymous said...

Ilargi: you seem critical to the world leaders and their porposed solutions to the challenges we are facing. What kind of solutions and/or actions do you think could "save" the world?

nassim said...

Regarding yesterday's comment:

Ilargi and I added some comments to Garth Turner's recent thread. There's a particularly interesting comment (#49) on the trader culture by a poster who calls himself nonplused. My long comment is near the bottom (#74).


All of these conflicts between traders, managers, shareholders and clients were best described in the book "Traders Gunds & Money" by Satyajut Das. It came out in 2006.

After reading this book, and in view of my own experience working in the IT department of the BofA, I was fully expecting what has come to pass. I knew it was only a matter of time.

Greenpa said...

"Pakistan's new agreement with the International Monetary Fund over a $7.6 billion loan may lead to more help from other donors "

That's from the Wall Street Journal. And contains a beautiful internal contradiction- which in fact, gives a good answer to the first comment here today.

When I moved from being CEO and founder of a non-profit, to being CEO and founder of 2 C-corps (for profit) - one of the first things I had to beat into my head is that - INVESTORS really HATE being called DONORS. It's an inherently different concept.

And yet- the IMF is making a loan- ie, an investment they theoretically expect to get back, with interest- but-

The reality, apparently, is that everyone in the room knows this money is never coming back; it's a donation- and they hope to attract more donors???

Um.

What should we do to save the world? It's pretty obviously time to : burn Wall Street to the ground.

And- burn down all the "business schools" out there to the ground; and all the "Dept. of Economics" in all the universities- they are the ones training these clueless catastrophes.

Hello? The morons in charge have NO IDEA how money works; or wealth- or what the alleged point to "business" is. none. Scrap them all; and start over; the sooner the better.

Solution for the automobile business? Fire- immediately - all management, top to middle. Leave only the workers and foremen employed. Let them figure out what to make, and how.

We'd be miles ahead. Sure, it will be painful; but less than any other option being touted.

Ok; seriously? It's time to make coherent calls for the quick removal of all top management in any troubled corporation. Get them, and their bonuses, out of there.

They. Do. Not. Know. What. They're. Doing.

And it's killing the entire planet.

Ilargi said...

"... you seem critical to the world leaders and their porposed solutions to the challenges we are facing. What kind of solutions and/or actions do you think could "save" the world?"

Anyone worth the title of leader, which requires a sense of responsibility, can only realistically do what Garrett Hardin has given a name in the Tragedy of the Commons:

"Minimize the suffering of the herd".

As for saving the world, that is far too vague a term to say anything about. What world? Yours, mine, an Iraqi or Bangladeshi's? The world of today, or that of yesterday? All these worlds change continually, and can therefore not be saved.

Greenpa said...

Ilargi and Stoneleigh - are you familiar with Kurt Joos' ballet "The Green Table"?

I saw it as a student in 1968; in Stuttgart. I was stunned; still am. Easy to google. Someone should do an update.

It comes forcefully to mind with today's BBC Business story:

http://news.bbc.co.uk/2/hi/business/7732056.stm

"World leaders have welcomed the outcome of the G20 summit that calls for further steps to shore up a global economy on the brink of recession."

Liza said...

Anon 3:06:" What kind of solutions and/or actions do you think could "save" the world?"

One is called "whistleblowing" - which is what they do here; also known as pointing out that "the Emperor has no clothes".

Takes a lot of work, and guts. One place to start.

OuttaControl said...

Save the world?

It's on my "To Do List", but far down. Right now, "Saving immediate family and friends" is on top. But, if others see what we're doing and choose to do the same, saving the world could follow. Well, not all of the people in the world - there are far too many - but the Earth itself could revert to a more dignified existence.

ric said...

Don't know if it's already been discussed, but I've just finished reading Michael Lewis' The End for Portfolio.com and found it highly entertaining. In it, he discusses Whitney and Eisman--and having lunch with Gutfreund, former CEO of Salomon Bros, whom he credits with creating the Wall Street structure that eventually brought it down: turning a partnership into a corporation, so the shareholder takes all the risk.

jal said...

"Save the world"
I'm trying to think of something intelligent and usefull for the readers. Ummmm. Okay ...
Within my power, I'll save what I can of my world, (Lifestill)
It will not be very much because I'm not very powerfull.

-----
I hope that the canadian representatives will be able to see when they are asked to put up "a sucker bet"
Remember the softwood problems and settlement.
jal

Thomas said...

Thanks to your recommendation I bought a copy of David Hackett Fischer's The Great Wave: Price Revolutions and the Rhythm of History. I finished the book last week and it changed my thinking about our current situation.

I think that we are now watching the end of the fourth wave (which began in 1896) and the wave is going to prove to be a tsunami. Right now the fools and bumblers we call world leaders are standing on the beach watching the ocean recede, scratching their butts and trying to figure out what's happening. They have as much chance of changing the situation as they would have trying to stop a real tsunami. Those who understand what's happening are running for the hills.

The Crisis of the 21st Century is going to prove to be as world-changing as that caused by the third wave, the Revolutionry Crisis of 1789 to 1820. I expect the crisis to take at least a generation to play itself out.

I had an ancestor, an Amish cheesemaker living in Montbeliard, who lived from 1745 to 1848. My only consolation is that if I survive these tumultuous times as well as he did, I might see the end of this disaster and better days.

Anonymous said...

Ilargi,
Regarding your statement: As for a social safety net in America, you got to be kidding. You’d be much better off in Sweden. Or Germany, France, Holland.
This may be true. However, there is one myth that Europeans have about America that is not altogether true. A big part of the social safety net in America is provided by the churches. Yes, the awful monster evil American churches. Churches of all faiths (and not all are southern baptists) are what drive the refugee resettlement program in America. They recruit refugees to their communities, they house, feed, clothe and care for them once they get here. Their members provide much of the service and food for local food banks, homeless shelters and kitchens. They participate in programs for the sick, elderly and imprisoned. And, I say that being a non-church member, though I was raised in a church going family. You can be sure that when times get tough and grocery shelves go bare, churches will start their own soup kitchens and set up places for homeless to sleep.
It has been an education to me to have a delightful British friend who came to the US with every bias against the evil that American churches do, only to admit a few years after she'd been here, her surprise in realizing that one of her biggest causes was largely supported by the churches of the community. Like many things in life, its the yin and the yang that explain everything. There is good and bad in everything.
Would the churches of Sweden, Germany, Holland and France uphold the safety nets of their societies? Probably not so much.

A

Anonymous said...

read somewhere:
I wonder how many people know that Pimco employees are not allowed to sell their GS stock for 90 days after buying it. Bill Gross gambled big time and and lost about 70 Billion last month (about 10 %) because HE alone counted on a bailout of LB and others. If you can not find that info on the internet…consider yourself “in the know now”.

Anonymous said...

Anon 6:07 PM

I'll buttress your statement regarding churches. In the little town nearby me, they have one service (of many in the area), a "full course" lunch (dinner really), that already serves 45 to 60 people per day. I stress, "little" town...

KR

qp said...

To A:

Thank you for your comment.

Ilargi said...

A,

I don't want to take anything away from good work done by good people, and there is certainly much to be said for the social coherence provided by churches in the US. It has problems too, though, it is a triple edged sword.

The reason US churches do what they do, and European ones to a much lesser extent, is that in Europe the state is much more involved in these programs. The reason for this goes back all the way to the Reformation, though I don't want to imply that it all went well 400 years ago.

Still, since those days, many European countries feel deeply that there should not be any religious meddling in social programs. There are also many times more people who go to church in the US than in Europe. The flipside is Jimmy Swaggart and his ilk, a trade not possible in Europe.

Is it good to leave the church in charge of the poor and huddled masses? Opinions no doubt vary, but I have my thoughts. Implying that churches in Europe would care less or something like that is not to the point; they haven't yet had to. But they'll stand up when the need is there. Religion will rise all over the world in hard times.

I think it's safe to say that European countries have far more compassion for the under-privileged than the US does. They have an actual safety net, one that allows people to keep their dignity, as well as their lives.

Maybe that's the best way to measure all this here: 50 million people without health care, that is something that is unthinkable in Germany, Holland, France, all Scandinavian countries.

In places such as those, it's not considered dignified to make people pray just to eat. Phenomena such as soup-kitchens and food stamps hardly exist, if at all. The reason? There is no need for them.

And no, I'm not sure that Europeans are so ignorant about it all. Perhaps just about the extent of it.

But again: I don't want to take anything away from good work done by good people. Then again, what does that have to do with religion? Does the US situation mean there is a patent on compassion? Or is it a sign that society at large is failing?

Ilargi said...

"...are you familiar with Kurt Joos' ballet "The Green Table"?"

Greenpa, I know of it, never seen it performed.

Feels like Krapp's Last Tape or The Bald Soprano:

Greenpa said...

Hey, look! The noise we all generate DOES get to these guys. Very interesting to know, don't you think?

http://www.nytimes.com/aponline/business/AP-Goldman-Sachs-Bonuses.html

"No bonuses this year at Goldman Sachs"

Greenpa said...

Ilargi- interesting comparisons! I think the Green Table has a more visceral impact, though, less intellectual. Communication via a sharp kick in the gut.

Art reaches people who cannot be reached by logic, and communicates things quickly that take forever via rational discourse. Not that we have time to write operas here, either. :-)

Anonymous said...

"What kind of solutions and/or actions do you think could "save" the world?"

Soon, very soon, the Millennial rein of Christ:

Isaiah 11:6-9  The wolf also shall dwell with the lamb, and the leopard shall lie down with the kid; and the calf and the young lion and the fatling together; and a little child shall lead them.  And the cow and the bear shall feed; their young ones shall lie down together: and the lion shall eat straw like the ox. And the sucking child shall play on the hole of the asp, and the weaned child shall put his hand on the cockatrice' den. They shall not hurt nor destroy in all my holy mountain: for the earth shall be full of the knowledge of the LORD, as the waters cover the sea.

TB

Anonymous said...

"Soon, very soon, the Millennial rein " - I would have to assume there is a Millennial bit, and a Millennial bridle, then, too?

Anonymous said...

For sure, I am the world's worst speller! Sorry - reign not rein!

TB

Ilargi said...

Greenpa,

We're talking different times, and different media as well. But words can be as powerfully abstract as painting, or dance, though I must say I feel everybody is years behind painting. Still, Ionesco nailed it hammer square on the head.

Wiki:

At the age of 40 he decided to learn English using the Assimil method, conscientiously copying whole sentences in order to memorize them.

Re-reading them, he began to feel that he was not learning English, rather he was discovering some astonishing truths such as the fact that there are seven days in a week, that the ceiling is up and the floor is down; things which he already knew, but which suddenly struck him as being as stupefying as they were indisputably true.

This feeling only intensified with the introduction in later lessons of the characters known as "Mr. and Mrs. Smith". To his astonishment, Mrs. Smith informed her husband that they had several children, that they lived in the vicinity of London, that their name was Smith, that Mr. Smith was a clerk, that they had a servant, Mary, who was English like themselves.

What was remarkable about Mrs. Smith, he thought, was her eminently methodical procedure in her quest for truth. For Ionesco, the clichés and truisms of the conversation primer disintegrated into wild caricature and parody with language itself disintegrating into disjointed fragments of words.

Anonymous said...

Ilargi,
Regarding the 50 million uninsured...Health care, another bubble about to burst. The health care situation is a non-sustainable mess in this country, and the European systems that have been in place are far ahead of us now. Much of the problem is that 4th branch of government you were just talking about yesterday. On the other hand, Medicaid (federal plus state program for the underpriveledged) covers 45 million people and the ER's do not turn down care to anyone. The hospital passes the cost on to the other patients. Some big medical ethics questions need to be answered before we can nationalize health care, like age limits on procedures, since 33% of medical spending goes to people over 65 years of age, most of it in the last year of life. Non-medicare patients are often charged ten times as much as legal medicare limits. How does one decide whether a schizophrenic gets a 200 thousand dollar bone marrow transplant? Who decides if premature babies get the 1 million dollar care they may require in the neonatal ICU for 3 months plus necessary procedures? How does Europe make these decisions?
We are self-insured and my own families high deductible health insurance has just doubled to over $1000/month, and we haven't had a claim in years. I am wondering whether to put the money into a piggy bank and let fate take its course.
Like Kunstler says, "Your health is your wealth".

A

/thehangedman/ said...

"What kind of solutions and/or actions do you think could "save" the world?"

First, by mercifully letting it fail.

Anonymous said...

Ilargi @6:53 -

Well said!

Charity is no substitute for effective social programs for the needy. Yes, and Europeans have learned this via their own history. Only an immature and manipulated (by rich and powerful) society tolerated George Bush Sr. promotion of "1000 points of light" or the replacing of social spending with volunteers.

Ahimsa

etz said...

Ilargi: your blog has become a required daily read.
Thanks for the great insight.

Anonymous said...

Hmmm.save the world...

I think that to save the world it will be necessary for me to save my small part of it.
I planted thyme,and rosemary,and wormwood today,as well as other herbs in a small enclosure off of the main garden area,as well as re-planting 10 of the 18 kiwis vine that were victim of a strange april cold snap.

I am working on saving my piece of the world right now...

Part of that world is a 8 year old boy,son of a girl stepchild,who spent Saturday with me.We worked the bees,and fed rabbits,and did farm things all day,while my wife spoiled his 4year old sister.

The preps I am making are not for me,they are for those in my family who have not the wherewithal to live as I do.Our family[extended] has mechanics,and soldiers,and lawmen,and nurserymen,as well as nurses...who are all getting worried,and prepared,as well as one can[how DO you prepare for the end of all things?]

I am more comfortable Than most as I have already figured out I can not do a damn thing about this mess,except remember,and live long enough to have a say on what comes after....

snuffy

Mink said...

Interesting that you picked this picture, Ilargi.

The man who staged it was the aforementioned mayor, Husayn Salim al-Husayni, a broad minded, fair and cultivated man. In the same morning he knocked on the photographer's door, a Swedish christian man and the operator of the largest photographers' studio in Jerusalem at the time ("The American Colony") saying come, history is going to be made today, we need to document it.

They were waiting for the English for weeks, drinking heavily into the nights, Husayn Salim, and his friends and relatives, waiting for a nightmare to end. The four centuries of Ottoman rule were good for them, but the War was not. When I think of social collapse and what it would mean, I think of the descriptions of Jerusalem during the war: hunger, destitution, misery and tyranny, and if not all these were enough, the locust of 1917.

Later the British tried to destroy this photograph: it was not the way they wanted to remember Jerusalem's surrender. There were another five ceremonies of surrender at least, each officer wanted his own ceremony. Husayn Salim al-Husayni was dragged to participate in all of them, made to wait for pompous colonels and generals in the cold air. Already in this photograph above he seems ill. He already had a cold and it was an unusually frosty December. After the last surrender ceremony he died.

scandia said...

Last week I filled in an application to become a patient of a new doctor in town. One query was about my mental health. Hm-m how do I answer that question- anxious,angry,distrustful,grieving,that I am hoarding cash and food. And by the way would she write me some prescriptions so I can complete my first aid kit? If I tell this young woman my current world view at best she will call me " negative", at worse she will refuse to take me on as a patient.
I assess my view as proof of sanity while noting others have concluded I am " losing it".
How will her foray into the world as a Dr. in an overburdened system play out? It will be interesting to have an interview with her. I really, really hope we can have an open and honest communication.
Currently I have to rent a car to see a Dr. in a nearby town. I would be grateful to have a family Dr. in town, this one within walking distance.

scandia said...

On Drudge Report is a video by GM outlining the disaster that awaits if they don't get the money! The fear tactic Paulson used clearly worked so GM is giving it a try. End of the world if you don't gimme what I want! We'll see if it works again. Cynically I note the release of this video on the day that Congress and the transition team are " working on " ways to support the auto industry.
I regret GM didn't take the high road and produce a video outlining a greening of the product line, a boast to all sorts of flegling green suppliers out there,...another opportunity missed. GM hasn't heard Obama's message, " Yes we can!"...for sure this stuck,visionless mgmt has to be cleared out.Give the business to the workers I say!

taswegian said...

50 million without healthcare, and to anon 10.36: In other countries, what the US denigrate as socialism we call compassion. And as for the points raised by Anon, as to who decides whether a baby lives or dies - that is the aspect of the american system that most revolts me - the beleif that such a decision should be made and the acceptance that profitability underlies that decision. In my backward, socialist, gun controlled, lacking religion country, the only reason a schizophrenic would not get a marrow transplant is if no donor could be found. The US concept of healthcare is not just substandard, but to an external eye, monumentally grotesque. I'll get off the soapbox now.

Anonymous said...

scandia,

If you are lucky...many doctors are bright enough to see whats coming down the pike....some of these herbs I am planting are medicinal,and yes ,my Dr.and I have discussed literally where medicine comes from...

snuffy

B said...

How does one decide whether a schizophrenic gets a 200 thousand dollar bone marrow transplant? Who decides if premature babies get the 1 million dollar care they may require in the neonatal ICU for 3 months plus necessary procedures? How does Europe make these decisions?

Without the profit component these things cost an order of magnitude less. In general, in Canada, if one needs treatment one gets it. Not to say there aren't delays and problems with lack of resources, but the outcomes in Canada are reportedly as good or better as in the US, and no doubt much better for those on the lower end of the socioeconomic scale. Perhaps the lack of worry about paying for healthcare improves health.

TampaSteve said...

Good Morning all, I just logged into the RBC website to download Friday's balance reports, and got this message: "Please be advised that wire payments destined to Iceland could face possible delays or other issues with final receipt by the beneficiary. These issues could impact payments in any currency and are the result of the current economic situation that exists there."

I don't know why, but that just sent a chill down my spine. Things are starting to get closer to home...

scandia said...

tampasteve, speaking of Iceland I heard on the radio that Citigroup employs 375,000 world-wide. That is more people than the population of Iceland. Citigroup is going to reduce its population by 20% .I've heard there may be significant emigration from Iceland. Will it too be 20% of the population?

Anonymous said...

Taswegian
In the US those procedures which I sited happen, too. I think you missed my point, which is every week, a newer, more expensive technology becomes available to treat a smaller subset of people. Does every AIDS patient now get a BMT? Does every pregnant woman get human genome studies with intra-utero interventions done prior to birth? Does society pay for surrogate mothers to carry the children of couples unable to carry their own? How many organ transplants does one person get? The subject is obviously too complex to discuss on a forum such as this. As for schizophrenics receiving BMT's I question the credibility of your statement, as it also reflects a lack of understanding about the BMT patient candidate requirements.
Health care costs surpassed $2 trillion in 2006, three times what was spent in 1990 and over eight times the $253 billion spent in 1980. In 2006, U.S. health care spending was about $7,026 per resident and accounted for 16% of the nation’s GDP.
B-
You raise good points, all of which I agree with.
A

jal said...

Are there any plans for mass migration out of Iceland?

OR

Are there any plans for a mass relief effort of food and fuel for Iceland?

Will the situation deteriorate to that of Gaza or worst before action is undertaken?

Iceland may be the first of many ... let us watch and see the leaders in action
jal

Anonymous said...

I appreciate the health care discussion today. It makes me realize that nutrition and exercise need to move from my general list of to-dos to my preparation list that receives higer priority.

Stoneleigh said...

Anon @12:09,

You could try the P90X program that I've been doing for the last year. It's a series of workouts on DVD, and if I can do it, almost anyone can. I still have a ways to go, but I'm already fitter than I've ever been in my life.

Ilargi is also a great personal trainer - or drill sergeant ;)

baa said...

Hallo everybody,
I've been reading this blog for two months. Thank you Ilargi and Stoneleigh for all this enormous work...
there is a Polish blog >kryzys.mises.pl< in the post Szczyt, about G-20, there is funny photo of Bernanke, in English;)
baa from Poland

Dan W said...

Roubini Is Wrong

To make the Wall Street rescue sustainable Main Street must be helped as well. The US government will need to implement a clear plan to reduce the face value of mortgages for distressed home owners and avoid a tsunami of foreclosures. A fiscal stimulus plan is essential to restore – on a sustained basis – the viability and solvency of many impaired financial institutions. If Main Street goes bust in the next six months rescuing in the short run Wall Street will still lead Wall Street to go bust again as the real economy implodes further. The federal government should have a plan to immediately spend in infrastructures and in new green technologies; 2) also unemployment benefits should be sharply increased together with a 3) targeted tax rebates only for lower income households at risk; and 4) federal block grants should be given to state and local government to boost their infrastructure spending (roads, sewer systems, etc.). [roubini]

Wrong. WRONG!! I have a few question for the good doctor:

1. How does fiscal stimulus---financed on further debt---restore financial institutions' 'viability & solvency'? The assumption that institutional viability can be 'restored' reveals a myopic view of the long term issues facing the banking sector. These issues include, but are not limited to, (a) unparalleled levels of risk associated with hundreds of TRILLIONS of dollars of of Credit Default Swap exposure, (b) accounting and valuation systems that are farcical and entirely corrupt, and (c) a profound and pervasive lack of trust (understandably so) that exists within the financial and production sectors. These financial institutions to which Dr. Roubini points can only become viable if and when the ENTIRE system is laid on the table, ALL of the vaults are opened for the world to see, and bankrupt institutions are allowed to fail.

2. RE: '...The federal government should have a plan to immediately spend in infrastructures and in new green technologies...' This is cute and politically correct, but it is also quite impossible. Spend what?! Spend money that the FED has pilfered from the American taxpayer vis-a-vis dishonest bail outs and fraudulent 'open market operations' and governmental check-kiting and Ponzi schemes? Multi-billion dollar investments in infrastructure projects and "green" solutions once again seem to ignore the fundamental issue: A thoroughly corrupt and dishonest banking and governmental system. All that these "stimuli" will produce are a few months of artificial "growth" and a perpetuation of the fantasy of returning to the good old days of 5% GDP growth and 4% unemployment. What the doctor fails to acknowledge in this argument is that we have entered an epoch of paradigmatic shift, and yesterdays solutions cannot stave off the crises created by today's forces. Let's say the good doctor gets his way, and the Democrats (of which I am one, by the way) develop a $400 Billion $$$ stimulus package to help save the American economy and the American people. where does the "money" (debt) go? To the states, to distribute as they see fit? So, in that case, the "monies" would last about 2 weeks as states and municipalities used the dough to pay off debts and hoard assets for the bad times to come. I could go on...maybe later.

3. RE: "...targeted tax rebates only for lower income households at risk..." And what do these folks do with these rebates? Spend the $$$ to stimulate economic growth??? are you kidding me professor?!? I'll tell you what they do with the money: they save it because people in lower income households know what they're up against and their level of trust is about NIL!

Look I could go on ad infinitum.

What about the FACT that international shipping of commodities is at a virtual standstill, and right now most folks in the U.S. aren't seeing the effects of this crunch because big companies are putting stuff on the shelves of grocery stores with the 3 or so months of reserves that they have in stock. International shipping is not going to magically recommence operations in a deflationary environment where the prices of good fluctuate daily, where NO TRUST exists vis-a-vis the verifiability of commercial paper, where shipping companies cannot break even, let alone make any profit, in this marketplace.

What about the "Lehman Affect". The Lehman bankruptcy will take a decade to unravel, as you know. The bundles of securitized instruments are so convoluted, and so volatile STILL, that ANY similar bankruptcy is seen as entirely anathema to the survival of the global economic infrastructure. And of course the ultimate irony is that institutions like Lehman MUST be allowed to fail in order for there to be any kind of healing.

I like Roubini. But I think he is dead wrong on this one.