Monday, November 17, 2008

Debt Rattle, November 17 2008: Apart and to Pieces

Lewis Wickes Hine Huck November 1913
Texas river-boy Lyman Frugia poles the heavy logs into the incline that takes them up to the mill.
Work is hard and dangerous, exposed to all kinds of weather.
Said he is 14 years old, has worked here several months, gets one dollar a day.

Ilargi: Let's start by agreeing that none of the Mother Mary only knows how many trillions in global bail-outs so far has solved any problem at all. It has all merely gone to serve the delay of what went up and must come down. None of it has made any bank or insurer any more solvent, and what there's been in added liquidity has been frozen in place in the absolute zero of outer space, without ever reaching the public it was allegedly handed out to aid in the first place.

That settled, let's look at two companies who won't survive till 2009 without more massive imbibing at the taxpayer trough, a ravenous no utensils needed party that will prove to be as useless as all that preceded it. GM and Citigroup, both of whom love to talk about their iconic too big to fail status, are dead and gone, and all all they can do is try to hide that their demise. So far, the US government is more than glad to help.

A GM promo video on YouTube, see below, explains why it would be so much better to give them the cash, since it would save millions of jobs. Not a word on who they're planning to sell those cars to. And that in the end is all that counts, it's what stands between Detroit and the Bulgaria model. There's no way a country can forever subsidize an industry that bleeds dozens of billions of dollars every year, manufactures products that people don't want to buy, and has no intelligent plans to turn this around, but instead relies on magical thinking.

The US automotive industry is capable of producing 17 million vehicles annually, while sales have dropped to an annual rate of only 10 million vehicles. They can magically hope that the holy spirit will descend from heaven to sell their cars for them, but the reality is that chances of that happening are somewhat slim, and certainly not robust enough to throw hundreds of billions of dollars into. Car sales won't go up from the 10 million annual number we see today for a very long time, if ever; they will instead go down, and a lot too.

For one thing, the fast shrinking number of Americans that will still have jobs, don’t have $10.000 or $20.000 lying around somewhere, they rely on credit to purchase a vehicle. And that credit is not available to anyone looking for it. Credit is only there for those who don't need it, and they don't buy 10 million cars per year.

This has to be dealt with, as I said ages ago, and decisively too, before Obama takes over as President, or he will find himself mired in utter sucking calamity. He will have to make very sure that the demise of Detroit, which cannot be avoided, is not hung like a boulder around his neck, or left pending like a sword of Damocles above it. The Big Shrinking Three will not last another 4 years. That's why they have to go. All potential bail-out money would be far better spent trying to help the soon to be unemployed.

Everything the Treasury and Fed have done until now has been 180 degrees wrong. They're merely digging a deeper hole. The money spent belongs to the public, and none of it has benefited them, not one penny. Pull the life support on GM and Citi, let them pass away with whatever dignity they have left, and get on with life. Help those who need it, or soon there'll be nothing left to help them with.

There will be millions of jobs lost in the US, no matter what anybody does. The unwinding of an extremely diseased debt and credit situation guarantees it. If Washington keep refusing to offer support for citizens, and instead hands what little they have left to corporate interests, the whole country risks falling apart to pieces. And sooner than you think.

The U.S. Auto Industry and the Ripple Effect

Citigroup axes 76,000 jobs, posts $20 billion loss
Citigroup is to slash 53,000 more jobs and cut costs by as much as 20% as the deepening global economic crisis continues to cripple the world's biggest banking group. Vikram Pandit, the Citigroup chief executive, announced the fresh round of job cost cuts at a "town hall meeting" of employees. The bank, which has 12,000 employees in the UK many of whom are based at its Canary Wharf headquarters in London, has already axed more than 23,000 jobs this year in an attempt to offset massive losses from the sub-prime mortgage crisis and the credit crunch.

Citigroup has lost more than $20bn (£13bn) in the past year as it was heavily involved in buying and selling complex mortgage-backed securities, which became worthless as the bottom fell out of the US housing market. This latest round of cuts is much deeper than most analysts had predicted and marks Pandit's boldest move yet to arrest Citigroup's rapidly plunging share price. Last week Citi's shares sank into single digits for the first time since Sanford "Sandy" Weill created the banking giant from the merger of his Travelers Group insurance company and Citicorp in 1998.

The shares were off almost 2% at $9.34 before the market opened on Wall Street today. Citigroup stock has fallen 68% this year, however, giving the banking group a market value of only $51.9bn. Pandit has come under intense pressure since the decline began and analysts believe he will face an even louder chorus of investor dissatisfaction if this latest plan fails to turn the share price around. He has already been forced to take some $25bn of bail-out cash from the US Treasury to keep operations afloat but the cash injection has done little to help the bank's ailing fortunes.

Pandit revealed the massive job and cost cuts in a 25-page Powerpoint presentation posted on the bank's website. The job cuts are detailed on page 17 in a section subtitled "Getting Fit - Fast!". The chart shows Citigroup employed 375,000 worldwide in the fourth quarter of 2007 and wants to reduce that number to 300,000 in the short term. The chart also shows that Citigroup's operating expenses were running at $62bn in the third quarter of this year but that Pandit wants to reduce the overhead to $50-52bn – a reduction of 16-19% – by 2009.

Most of the jobs are going to come through a painful round of layoffs with no corner of the banking group expected to be spared. Sources close to the group said as many as 15% to 20% of Citi's UK employees could face the axe although the bank declined to comment. The cost cuts are expected to come through more divestments and the closure of certain regional centres, the source added.

The bank has already raised more than $9bn selling off various divisions such as the $7bn sale of its German retail banking operations. Citigroup is not alone in cutting jobs and costs as the economic crisis worsens. Banks and brokerages worldwide have shed almost 160,000 in the past year and more are likely to come.

Will Citigroup Be Sold To JP Morgan Or Taken Over Like AIG?
If the press is right, Citigroup (C) is about to hold a big pep rally with its CEO Vikram Pandit raising the cheer followed by an announcement that it will fire another 35,000 people. Morale will never be better. But, the markets are wise, and they are saying that there is a very reasonable chance Citi may not survive as an independent entity. It is no secret that the bank's shares, which are trading below $10, are off much more over the last year than those of the other large US money center banks

Citi is at a tipping point like a cow in a field at midnight. If its stock continues to drop sharply, the market and the bank's customers may begin to lose faith and withdraw assets or cease doing business with the firm. If Citi announces that its financial fortunes will get worse between now and its next earnings report, it may say that the damage within some of its division cannot be contained.

That leaves the question of whether Citi becomes the next Wachovia or the next AIG. If the Fed and Treasury become concerned enough about the bank and have to intercede with more capital, the government may pressure Citi's board to sell the company to the highest bidder within its own industry. That may be the well-run JP Morgan. The FDIC might have to guarantee some of Citi's assets to accommodate a transaction, but there is recent precedent for the government to bend in that direction.

If the problems at Citi deteriorate quickly and its falls, as it certainly does, into the "too big to fail" bucket, the government may simply have to pour cash into the bank in exchange for a majority ownership position. That would involve bringing in new management to sell of enough assets to get the bank stable. The government would hope against hope that those sales would bring in enough money for the taxpayer to get some return. Citi's share price is a signal and it may become brighter and more troubling as the year moves toward a close.

Citi’s Leverage
More from Citi’s investor presentation… There are plenty of slides talking about “Tier 1 Capital” and such.  I never understood those ratios and don’t think they’ll be worth much in a panic situation as banks lose access to hard funding sources like consumer deposits.  Using Citi’s Tier 1 Capital ratio of 10.4% would imply a leverage ratio of 100/10.4 = 9.6x. But we know from the cases of Fannie and Freddie that regulatory capital ratios are very squishy…

Back out worthless assets from the bank’s equity calculation and the denominator decreases very suddenly.  So in Fannie’s case, you had $2.5 trillion of assets versus ~$45 billion of “capital,” which implied a leverage ratio over 50x.  And yet that “capital” figure included at least $21 billion of deferred tax assets that Fannie wrote down to $0 in the most recent quarter. The reality is, intangible assets like deferred tax assets should NOT be included when calculating leverage ratios. Excluding those meant Fannie had a leverage ratio of 100:1!  When assets are 100x larger than equity, it takes only a tiny reduction in assets to reduce equity to zero. 

And with house prices likely to fall more than 30% nationally, asset values are falling more than just a little.  This is why Fannie has already said they’ll need more than the $100 billion promised by Treasury. Leverage ratios are important because they tell you how much money is in reserve to cover losses. That’s why you shouldn’t include faux assets like intangibles, deferred tax assets and goodwill.  These things are worthless in a bankruptcy court.  They can’t be used to pay off a company’s debts.  Wouldn’t it be great if you could use your tax loss carryforwards to pay off a credit card bill?

A leverage ratio is basically assets/equity.  If assets decline in value, and not because of a reduction in liabilities, then there has to be a one-to-one decrease in equity.  This is so because for a balance sheet to “balance,” assets must equal liabilities + equity.  In Fannie and Freddie’s case, you knew a long time ago that assets were going to fall at least 5% and that that would be enough to wipe out the company’s equity.  At its most fundamental level, a company’s stock price is its equity divided by the number of shares outstanding.  If equity = $0, then the stock price equals $0.  Fannie’s and Freddie’s stocks both trade pretty close to $0.

Now consider Citigroup. It has $2.05 trillion of assets listed on its balance sheet.  That includes $63 billion of “goodwill and intangibles,” worthless assets like Fannie’s DTAs.  Contrast this with the company’s equity of $151 billion, which would include $25 billion from TARP.  That implies a leverage ratio of 14x, not 10x as the bank would have you believe when it publishes its “Tier 1? capital ratio.  Remove goodwill and intangibles from assets and equity and you have a true leverage ratio of 23x. = ($2.05 trillion - $63 billion) / ($151 billion - $63 billion).  That’s roughly the same calculation we did to get to Fannie’s true leverage ratio of 100x.

By the way, I’m giving Citi credit for the $164 billion of “other assets” on the balance sheet as well as $19 billion of assets of “discontinued operations” held for sale.  These sound pretty squishy too… And now for the scary part.  Citi’s $2.05 trillion of assets are just “on-book” assets.  They have $1.6 trillion of credit commitments and $1.3 trillion of “off-balance” sheet commitments to boot. You only need a small paper loss on the company’s assets (on or off balance sheet) in order to wipe out the company’s equity. Now what if I told you the same is true for all the major banks in the U.S. and Europe? You might think it prudent to keep some money under your mattress.

ABCPMMMFLF Spells Fed Relief for JPMorgan, Citi Shadow Banking
The U.S. Federal Reserve's emergency lending programs, intended to thaw commercial paper and money markets, are also helping banks limit losses from some of their $4 trillion in off-the-books guarantees and loan commitments.A Fed program to buy as much as $1.8 trillion of short-term debt from U.S. companies means they don't have to tap backup credit lines provided by banks, which would have forced JPMorgan Chase & Co., Citigroup Inc. and other financial institutions to record the loans on their balance sheets and raise more capital. Another Fed program, with the acronym ABCPMMMFLF, aims to shore up the $1 trillion market for asset-backed commercial paper issued by off-the-books financing vehicles guaranteed by banks.

"The Fed's commercial paper programs avoided a mid-air collision," said Josh Rosner, managing director of New York- based research firm Graham Fisher & Co. Having to deliver on the loan commitments "would have caused a liquidity crunch" for the banks that made them, he said. The three-week-old program for commercial paper, or debt maturing in nine months or less, had $257 billion of loans outstanding as of Nov. 13, the Fed reported. Ford Motor Co.'s financing unit, which uses a $16 billion commercial paper program to fund auto loans, sold about $4 billion of that to the Fed, according to a Nov. 7 regulatory filing. Doing so minimized draws from the $16 billion of bank credit lines backing up the commercial paper, the filing said. The credit lines are provided by 42 banks, including JPMorgan ($3 billion), BNP Paribas SA ($1.1 billion) and Deutsche Bank AG ($924 million), according to Ford Credit Auto Owner Trust, manager of the program for the Dearborn, Michigan-based company.

Torchmark Corp., a McKinney, Texas-based insurer, said on Oct. 23 it was relying on Fed financing instead of drawing on a $600 million credit line from JPMorgan, Bank of America Corp. and 12 other banks. Also using the Fed program are American Express Co., Chrysler Financial Corp. and General Electric Co., the biggest commercial paper issuer with $63 billion of backup credit lines provided by 70 financial institutions. Another $76 billion of loans was outstanding under the Fed's Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCPMMMFLF) set up Sept. 19 to help money funds raise enough cash to meet redemption requests. In that program, the Fed made risk-free loans to banks so they could buy asset-backed commercial paper from the money funds.

JPMorgan in New York, Bank of America in Charlotte, North Carolina, and Boston-based State Street Corp. have all participated, according to regulatory filings. Citigroup also used the facility, spokeswoman Danielle Romero-Apsilos said. New York-based Citigroup, the fourth-largest U.S. bank by market value, is the biggest administrator of asset-backed commercial paper programs, followed by Amsterdam-based ABN Amro Holding NV, JPMorgan, the No. 1 U.S. bank by market value, and Bank of America, the third-largest U.S. bank, according to data compiled by Asset-Backed Alert, which tracks the market. If companies eligible for the Fed's commercial paper program had tapped their credit lines for the full $1.8 trillion, the banks would have had to set aside tens of billions of dollars against the loans. They also would have had to draw down their cash reserves, sell highly rated investments such as Treasury bills or crawl back to the Fed for additional financing, said Joe Scott, a banking analyst at Fitch Ratings in New York.

Tapping lines of credit "would have been a big deal in terms of the total amount outstanding that would then have to be funded by the banks," said Tanya Azarchs, global research coordinator for financial institutions at Standard & Poor's in New York. Once loans and securities are added to the balance sheet, banks have to account for subsequent losses and writedowns in their earning statements. The 30 biggest U.S. banks hold about $1 of capital for every $11 of "risk-weighted assets," a figure that encompasses assets both on and off the balance sheet, Scott said. Off-books assets get about half the risk-weighting as those on the books, which means banks are required to hold about half the capital. Some banks already are so burdened with faulty mortgage investments that they might have become "toast" with the stress of additional capital requirements, Rosner said.

Since the financial crisis began last year, U.S. banks have had to raise more than $480 billion through sales of equity stakes and other assets to replenish coffers depleted by about $650 billion of writedowns and loan losses, according to data compiled by Bloomberg. Fitch published a report last week saying that European banks may need as much as 80 billion euros ($100 billion) of extra capital to meet open credit lines to companies. No similar study has been done for the U.S., Scott said. Banks abetted the growth of money markets by agreeing to provide liquidity facilities, or backstop funding, whenever mutual funds, corporate treasurers and other short-term debt investors backed away. Now the Fed is playing that role, offering loans that have caused the central bank's balance sheet to double in the past seven weeks to $2 trillion.

"Anything that enhances liquidity in the system as a whole will benefit all the parties to the system," said William Sweet, a former Fed staff attorney who's now a partner in Washington with Skadden, Arps, Slate, Meagher & Flom LLP. The Fed's new lending facilities may "have an indirect positive effect on the banks by lessening their need to provide backup funding, which they do for all sorts of things in the economy," he said. The indirect benefits add to the explicit support the U.S. government has provided to the country's financial institutions during the past two months. The Treasury Department is injecting $250 billion into banks, including JPMorgan, Bank of America, Citigroup, State Street and Wells Fargo & Co. On Oct. 14 the Federal Deposit Insurance Corp. said it would guarantee banks' newly issued debt.

So far, the programs haven't halted the decline in financial stocks. The KBW Bank Index, which tracks shares of the 24 largest U.S. lenders, fell last week to a 12-year low. Under U.S. accounting rules, banks don't include loan commitments -- typically letters of credit or the unused portion of credit lines -- on their balance sheets. When a company taps its credit line, the bank has to deliver the funds, and the loan gets recorded on the balance sheet. Partly because the loan commitments are off the books, disclosure isn't standardized. JPMorgan has $407.8 billion of what it calls "wholesale" loan commitments, according to regulatory filings. Citigroup has $400.7 billion of "commercial and other consumer" loan commitments. Bank of America has $385.2 billion of "loan commitments" and Wachovia Corp. in Charlotte has $236.2 billion. San Francisco-based Wells Fargo, which is buying Wachovia, has $89.5 billion of "commercial" loan commitments.

Companies that can't qualify for the emergency Fed financing because their credit-ratings are too low have tapped backup bank lines to refinance their commercial paper. They include American Electric Power Co., a Columbus, Ohio-based utility, and appliance maker Whirlpool Inc. Regulators never should have let banks back commercial paper programs to finance anything other than short-term obligations, such as inventory and payroll, Graham Fisher's Rosner said. The potential for losses from off-balance-sheet assets was demonstrated last December, when Citigroup had to bring $59 billion of so-called structured investment vehicles back onto its balance sheet. Those assets are still haunting the bank, costing $2 billion in writedowns in the third quarter. The Financial Accounting Standards Board, which sets U.S. bookkeeping rules, bowed to industry pressure in July when it agreed to delay by one year, to 2010, new rules that would have forced banks to pull more off-balance-sheet obligations back onto their books. The new rules apply to trusts used to package credit card loans into securities. Citigroup, JPMorgan and Bank of America alone have about $300 billion of these combined.

"With the capital issues in the financial services industry, the last thing you want to do is require more capital," said Scott Valentin, an Arlington, Virginia-based credit-card industry analyst for Friedman Billings Ramsey. The Fed's efforts helped unfreeze the markets, bringing 23 straight daily declines in the London interbank offered rate, or Libor, that banks charge each other for borrowing dollars for three months. The rate serves as a benchmark from which many other loans are priced. "To the extent that the Fed's actions bring down Libor, generally everybody benefits," said Roger Lister, chief credit officer of ratings company DBRS Inc. who worked as an economist with the Fed Bank of San Francisco during the savings and loan crisis in the 1980s. "The banks are sort of in the middle." This isn't how it was supposed to work, Lister said.

"Looking back, there wasn't enough clarity on the extent to which banks were providing a lot of liquidity lines that relied on all the markets behaving reasonably well most of the time," he said. "Everything was fine as long as markets behaved reasonably well most of the time, which they didn't." Regulators need to do a better job of policing banks' off- balance-sheet commitments, said William Seidman, who was chairman of the FDIC during the savings and loan crisis. "It's a matter of making sure that banking regulators look at potential and contingent obligations," Seidman said. "They can tell banks, `If you want this, you've got to have more capital, or else you have to get rid of it."' The Treasury's capital infusions and the FDIC's debt guarantees also helped ease the burden of off-books commitments. That's because the jolt of confidence helped stabilize the market for so-called tender-option bonds, a type of municipal bond that comes with backup guarantees provided by the banks, said Matt Fabian, managing director and senior analyst at Municipal Market Advisors, a Concord, Massachusetts-based research firm.

The market convulsed in September after the bankruptcy of New York-based Lehman Brothers Holdings Inc. made buyers question the validity of the guarantees, he said. "People had been pulling back because they had fears about the credit quality of the banks that are the liquidity providers," Fabian said. "Once the federal government stepped in and was more assertive with directly assisting the banks, I think people generally have taken more comfort." Citigroup said in an Oct. 31 regulatory filing that its inventory of tender-option bonds swelled to $7 billion at the end of September from $1.1 billion at the end of June, as holders asked the bank to take them back. In October, Citigroup's inventory of the bonds fell back to pre-September levels as the market loosened up, said a person familiar with the situation who declined to be identified because the bank hasn't provided a public update. Jeffrey Previdi, a senior director in the public finance unit of Standard & Poor's, said the Fed's actions have brought "a little bit of return to normalcy" in the tender-option bond market. "But there are still some real issues concerning credit or liquidity providers and their strength."

Crisis sends Japan into recession, outlook bleak
Japan slid into its first recession in seven years in the third quarter as the financial crisis curbed demand for Japanese exports, with some analysts warning the country may be headed into its longest recession on record. The 0.1 percent contraction in July-September GDP confirmed the global financial crisis has sabotaged growth in yet another major economy. The euro zone is also in recession, using the common definition of two consecutive quarters of contraction, and the United States is seen following.

Some economists warned Japan could face a record four quarters in a row of recession, and Economy Minister Kaoru Yosano similarly warned of increasingly tough times ahead. "The downtrend in the economy will continue for the time being as global growth slows," Yosano told a news conference. "We need to bear in mind that economic conditions could worsen further as the U.S. and European financial crisis deepens, worries of economic downturn heighten and stock and foreign exchange markets make big swings."

The European and Japanese recessions underscore the task facing world leaders who backed on Saturday a plan to combat the global economic crisis, but failed to impress markets seeking specific measures. Market mayhem since October, not included yet in the published gross domestic product (GDP) figures, adds to the gloomy outlook for Japan, the world's second-largest economy. Tokyo's Nikkei share average has fallen by a quarter since the start of October, and the yen spiked to a 13-year high against the dollar last month, further hurting exporters and surely curbing consumption.

Bank of Japan Deputy Governor Kiyohiko Nishimura warned that the market mayhem was not over. "Due to strong awareness of counterparty risks in the dollar markets, the function of these markets is declining and Japan's financial market is also becoming unstable," Nishimura said at a seminar on Japanese and French financial markets. Japan's gross domestic product figure translated into an annualised fall of 0.4 percent, lagging a consensus market forecast for a 0.3 percent expansion, government data showed.

Japan's second-quarter contraction was revised in Monday's data to a larger 0.9 percent slide, the biggest such drop in seven years, and some said GDP could slide for a full year. "The risk of Japan posting a third or fourth straight quarterly contraction is growing, given the fact that we can no longer rely on exports as overseas economies are slowing down due to the spread of the financial crisis," said Takeshi Minami, chief economist at Norinchukin Research Institute.

The yen dipped after the data, but a global flight to low-risk currencies meant the fall was shortlived. Japan's Nikkei share average fell 2.5 percent before bargain hunters turned the index around. In a sign the global economic slowdown was dealing a blow to Japanese companies, capital expenditure fell 1.7 percent in July-September. External demand shaved 0.2 point off GDP as growth of imports exceeded that of exports. Japan had enjoyed its longest period of economic expansion since World War Two until last year, largely on the back of corporate expansion and exports, when the subprime crisis hit.

Taro Saito, a senior economist at NLI Research, could offer no encouraging outlook for Japan's big corporates or the consumer spending that makes up the bulk of the economy. "Japan will probably post a continuous and more notable contraction as a slowdown in global economies is expected to affect exports and the appetite for capital spending, which will then hurt consumer spending," Saito said. On Friday, the 15-nation euro zone reported its economy shrank 0.2 percent for the second quarter in a row, and most economists say the United States is probably in recession, although official data won't come until January.

The Bank of Japan, which had opted out of coordinated interest rate cuts, joined the global trend late last month by cutting its key interest rate target to 0.30 from 0.50 percent. Economists are divided over whether the central bank may cut rates even further, with some forecasting a return to Japan's policy of zero rates while others see no point in such a move. "It's too late for monetary policy to revamp the economy. The economy needs to depend on fiscal policy," said Kyohei Morita, chief economist at Barclays Capital Japan.

As well as planned government stimulus spending, the export outlook will play a big part in a return to growth for Japan, but analysts were disappointed with the efforts of world leaders at a G20 meeting on the crisis over the weekend. The lengthening crisis looks set to delay Prime Minister Taro Aso's election plans. It had been thought that Aso would call a snap election this year but he has since vowed to focus on tackling the crisis, prompting media speculation it may be well into next year before voters go to the polls.

US recession has started, slump could be deep
From a business executive decision-making standpoint, there's no need to wait for the official designation of two consecutive quarters of negative GDP growth. In a near unanimous vote, 96% of economists surveyed by the National Association for Business Economics believe the United States is already in a recession.

What's more, the survey indicated that members believe the recession started in Q4 2007 or Q1 2008, with about 60% expecting a mild contraction (a real GDP decline of 1.5%), with the rest expecting a deeper recession. For 2009, the NABE's members see the U.S. economy growing just 0.9%. Economists surveyed expect the unemployment rate to rise to 7.5% by the end of 2009.

Economist Richard Felson, who did not participate in the survey, said the sentiment expressed in the survey is in-tune with economic conditions. "With consumer spending, business investment and housing all slumping, we can't point to a growth engine to stem the downtrend," Felson said. "That points to a significant GDP slump, and the slump will be worse, if credit conditions do not normalize."

For 2008, the NABE's members see U.S. GDP rising just 1.4% -- its weakest performance since 2001 -- and down from 2% GDP growth in 2007. Further, if U.S. GDP totals the above rates for 2008 and 2009, that would the U.S.'s worst GDP growth over a two-year period since the early 1980s, the NABE said. In general, economists surveyed cited a pullback in consumer spending stemming from worse household wealth and income conditions as the major reasons for the U.S. GDP slump.

Economic Analysis: Inflation is expected to moderate during the recession, assisted by contained/lower oil prices, but that's the only positive projection in the survey. Moreover, after evaluating the survey's tone, if the U.S. economy begins to emerge from its slump in the second half of 2009, that would be considered a major accomplishment and a pleasant upside surprise.

US States Desperate for Emergency Aid From Washington
First came the banks looking for a federal rescue plan to stay afloat. Next it was the automakers seeking a bailout. And now state governments say they, too, need emergency federal assistance to remain solvent. "I believe that the crisis that is happening in the states needs to be elevated in the national discussion about restoring our economy," said California state Assembly Speaker Karen Bass (D). "California is the world's sixth-largest economy. And just as we cannot let the auto industry fail, we can't let the state of California fail."

The National Governors Association has sent a letter to congressional leaders asking for immediate action to aid states. New York Gov. David A. Paterson (D) has urged federal assistance, telling Congress in recent remarks, "We are cutting all we can, and we will cut all that we are able to, but inevitably, the deficit is too voluminous for us to address." He added, "Targeted, sensible action by the federal government could provide relief for us now." California Gov. Arnold Schwarzenegger (R) also demanded federal action, blaming the subprime mortgage crisis for the economic downturn. "Government is really at fault, and this is why government has to get us out of this mess now and figure out very quickly how to get us out of it," he said. "And I'm talking about Washington."

The reason for the alarm is the numbers, which were bad just two months ago and look dire today. California, which has the worst fiscal crisis, is facing a $28.7 billion shortfall over the next 20 months, and Schwarzenegger has outlined a package of proposed tax increases and cuts to services including health care, education and state aid to localities. State workers would have to give up two holidays, Lincoln's birthday and Columbus Day, and many would be furloughed for one day each month. California's nonpartisan Legislative Analyst's Office said the state's revenue collapse is so dramatic, and the underlying budget problems so severe, that the Golden State can expect large shortfalls for years to come.

In New York, where the legislature is coming back for a lame-duck session this week, Paterson has outlined a series of fee increases and spending reductions that would slash $5.2 billion from the state budget over the next 16 months. The largest cuts would come from state Medicaid reimbursements, school aid and salaries of state workers, who would give up five days of pay. The pain is already being felt. Around the country, state-supported colleges, universities and community colleges have already increased tuition or announced plans to do so next year. Tuition has increased as much as 14 percent in Rhode Island, 13 percent in Alabama, as much as 9 percent in Kentucky and 15 percent for undergraduates in Florida's university system. California's two public university systems warned that tuition could go up 10 percent next year.

Experts said the aid cuts to higher education are coming at a time when families can least afford increased tuition, and many young people may delay going to college. According to the Center on Budget and Policy Priorities, a liberally oriented Washington think tank, about 41 states face budget shortfalls this fiscal year or next. Half of them took steps -- cutting services and raising fees -- to bring their budgets into balance for the fiscal year that began in July, only to see those budgets fall out of balance again as economic conditions further deteriorated. Iris J. Lav, the deputy director of the center, said shortfalls for the states could total $100 billion. "How can a state cut that much? They can't," she said, joining the chorus calling for federal assistance. "The states have balanced-budget requirements -- the federal government does not," meaning Washington can go into deficit and borrow more to funnel aid to the states.

Governors, state officials, economists and others are careful not to use the term "bailout" when speaking of federal aid to states. Schwarzenegger told the Greater Fresno Area Chamber of Commerce last week that the federal government gives California 80 cents for every tax dollar the state sends to Washington -- meaning there is $40 billion being held back. "So it's not like we're asking for a bailout, because it's our money. We're just saying, 'Hey, give us some of our money back,' " he said. In New York, Errol Cockfield Jr., the governor's spokesman, said the state each year gives the federal government $89 billion more than it gets back, so Paterson prefers the term "handback." Lav said: "It's federalism. . . . I wouldn't call it a bailout -- it's government to government."

One of the costliest problems for the states now is Medicaid reimbursements, and governors are calling on the federal government to increase its share. Paterson's plan, for example, would save $572 million by reducing New York's reimbursements for certain procedures and eliminating the automatic inflation adjustment. But the problem experts foresee is that during a recession, many more people go onto Medicaid, typically as they lose their jobs and company-sponsored health insurance. During the 2001-2004 recession, Medicaid enrollment increased by an estimated 17 percent, or about 6 million people.

The economic crisis has aggravated another problem for some large states: funding their unemployment insurance funds. State trust fund reserves had fallen to $36.7 billion by Sept. 30, a 10 percent decline from a year ago, according to the National Employment Law Project, a New York-based organization that advocates for low-wage and unemployed workers. As of September, five states -- Michigan, Indiana, New York, South Carolina and Ohio -- were not solvent, with reserves covering three months or less of their average monthly payments, according to the project. Eight states -- New Jersey, California, Kentucky, Missouri, Wisconsin, North Carolina, Rhode Island and Arkansas -- are nearly solvent, with reserves to cover four to six months of average payments.

And an additional six states fall into the seven- to 11-month range -- Pennsylvania, Minnesota, Idaho, Illinois, Connecticut and Massachusetts. No unemployed people should see their benefits affected. But at least six and as many as 10 states will have to borrow from the federal government in the first half of next year to keep their funds solvent, according to Andrew Stettner, deputy director of the Employment Law Project. States have had to borrow before, Stettner said, but not so early in a recession. Michigan is already borrowing. Indiana is on the brink. And a handful of other states are in line. "This isn't the way the system is supposed to work. The system is supposed to stand on its own two feet," Stettner said. "You'd hope states would have enough money in the first year of this kind of job market. "The concern is really that there's going to be sustained trust fund deficits for years to come," he said.

UK recession to be 'tougher and longer', job cuts, borrowing to soar
Recession in Britain will be tougher and longer than previously thought, the Confederation of British Industry warned today, with the economy expected to contract by 1.7% next year. It also expects unemployment to hit 9% in 2010, leaving almost 3 million people out of work. The CBI has cut its growth predictions to 0.8% from 1.1% in 2008 and slashed its forecasts for next year, saying it now expects the economy to contract by 1.7%.

Its previous survey had forecast growth of 0.3% but was carried out before the September collapse of Lehman Brothers pushed world markets deeper into financial turmoil. The UK economy is expected to shrink quarter-on-quarter by 0.8% between October and December this year, and to contract again for another three quarters before beginning a slow recovery through 2010. John Cridland, deputy director-general at the CBI, said: "Since our last forecast was published in September the banking system has come under immense strain, sending consumer and business confidence plummeting in its wake.

"Given the speed and force at which the downturn has hit the economy, we have reassessed and downgraded our expectations for UK economic growth. But the fast-moving and global nature of this crisis means it is impossible to look far ahead with any certainty. What is clear is that the short and shallow recession we had hoped for a matter of months ago is now likely to be deeper and longer lasting." Inflation is expected to fall from 4.2% this quarter to 1.7% by the end of 2009, undershooting the Bank of England's 2% target. In 2010, inflation is likely to fall back further to a low of 1.1%, averaging just 1.2% over the year.

The industry trade body believes that the Bank of England's monetary policy committee will further reduce interest rates by at least one percentage point in 2009. The Bank slashed 1.5 points off rates earlier this month, taking them down to 3%. The CBI said that unemployment will reach 2 million before Christmas, with the jobless rate rising to 6.5%, and it is expected to peak at around 2.9 million by mid 2010, which would account for 9% of the workforce. Household spending is also set to be dampened by a lack of consumer confidence. The CBI predicts that household consumption will contract by 1.8% in 2009. Investment forecasts have also been downgraded on the back of the falls in business confidence. The CBI predicted that fixed investment will shrink by 3.8% in 2008 and 10.5% in 2009.

Ian McCafferty, the CBI's chief economic adviser, said: "This latest forecast shows that 2009 is going to be a very tough year for business, with the sharpest fall in GDP since 1991. "Most worrying are the increasing signs that the credit crunch is now reaching the corporate sector. Since October's financial turmoil, companies have started to report that, for the first time, they are finding it increasingly difficult to access capital. If this were to be more than a temporary phenomenon, it would result in otherwise healthy companies going to the wall for lack of short term finance. This would have serious implications for both employment and investment." Public borrowing is set to increase sharply. Net borrowing for 2008/09 is expected to hit £69.9bn and £93.8bn in 2009/10, which represent 4.8% and 6.4% of GDP respectively.

Britain’s house price falls hit 20%
Evidence suggests that prices will continue to fall sharply, with sellers dropping their asking prices by almost 3pc last month. They fell by almost 3pc, Rightmove reported. The average home coming on to the market in England and Wales cost £222,979 during the four weeks to November 8 – a fall of 7.1pc compared with the same period last year. Despite a fall of 2.9pc in asking prices, the largest Rightmove has ever recorded for that time of year, the company warned that new sellers were still failing to price their properties realistically.

"Some sellers could avoid months of disillusionment and despair if they started marketing at an asking price a lot closer to where the evidence indicates they are likely to end up," said Miles Shipside, Rightmove's commercial director. "While average asking prices have fallen by 7.1pc over the past year, in most parts of the country you should look to at least double that discount to achieve a sale," he added. An average of just 20,000 people a week put their property up for sale during the period, the lowest level recorded by Rightmove since 2002, and well down on the level of around 35,000 a week 12 months ago.

Rightmove said the low level of sellers suggested that people were not currently under pressure to sell their home, with many unwilling to enter the market until the outlook for prices had improved. Halifax, the country's biggest mortgage lender, recently reported that nearly £1,000 was being wiped off the value of the average house each week, leaving homes now worth no more than they were three years ago.

US Cost of Living Falls Most in 60 Years
The cost of living in the U.S. probably fell in October by the most in almost sixty years, while manufacturing and homebuilding sank deeper into a recession, economists said before reports this week. Consumer prices probably dropped 0.8 percent last month, the most since 1949, according to the median estimate in a Bloomberg News survey. Builders broke ground on the fewest houses in at least a half century and factory output weakened further, other reports may show.

Commodity costs plunged in October when the economy, which descended last quarter, went into freefall as credit and financial markets collapsed. Slumping sales are forcing retailers to lower prices, giving the Federal Reserve scope to keep cutting interest rates to limit the damage. "Tumbling energy and commodity prices have altered the inflation landscape," said Ryan Sweet, a senior economist at Moody's in West Chester, Pennsylvania. "More rate cuts are needed as the economy is sinking deeper into recession."

The Labor Department's consumer-price report is due Nov. 19. Fuel, clothing and auto costs probably dropped last month as sales at U.S. retailers fell 2.8 percent, the most since records began in 1992, economists said. The slump in crude oil is feeding through to prices at the pump. The average cost of a gallon of regular gasoline plunged 17 percent last month to $3.08, according to AAA. "We are seeing the fallout of global recession on inflation," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. "In commodity prices, it's leading to deflation."

Core prices, which exclude food and energy, rose 0.2 percent last month after a 0.1 percent gain the prior month, according to the survey median. A report from the Labor Department on Nov. 18 may foreshadow the drop in retail costs. Wholesale prices fell 1.8 percent last month, the most since records began in 1947, according to economists surveyed. As sales fall, manufacturers are cutting output and firing workers. Ford Motor Co. plans temporary shutdowns at nine North American plants this quarter after an 18 percent drop in U.S. sales this year, Angie Kozleski, a spokeswoman for the Dearborn, Michigan-based automaker, said last week.

Auto cutbacks probably pushed down manufacturing output last month, economists said a report from the Fed tomorrow may show. Overall industrial production, which includes factories, mines and utilities, rose 0.2 percent in October, led by a resumption of work at Gulf Coast refineries after Hurricane Ike shut down oil rigs the prior month, economists forecast. A report from the New York Fed the same day may show manufacturing in the state contracted this month at the fastest pace since at least 2001. A similar report from the Philadelphia Fed on Nov. 20 may show regional activity shrank for an 11th time in 12 months.

The economic slump will intensify this quarter and persist into the first three months of 2009, making it the longest downturn since 1974-75, according to economists surveyed this month. The housing recession at the heart of the economic downturn shows no signs of letting up. New-home starts in October dropped to a 780,000 annual pace, the lowest level since records began in 1959, the Commerce Department is forecast to report Nov. 19. A gauge of the economy's course will point to continued weakness, economists project a private report on Nov. 20 will show. The New York-based Conference Board's index of leading economic indicators probably fell 0.6 percent after increasing 0.3 percent in September.

Central bankers are battling to cushion the economy from the worst financial crisis in seven decades. "Policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant," Fed Chairman Ben S. Bernanke said Nov. 14 at a panel discussion in Frankfurt hosted by the European Central Bank. Heads of state of the Group of 20, which represents almost 90 percent of world output, met in Washington Saturday to lay the framework for coordinated actions to stem the global recession.

A Recession Can Clear The Air
Virtually all of America's financial and political artillery has been dragooned into the great task of heading off a recession. This is exactly the wrong way to go. As painful as it will be in the short run, a recession is just what we need. Our economic model is broken, and trying to restart it will just dig us deeper into a hole. The massive changes that are required can be made only through the violent rejiggering that takes place during recessions. That may sound coldhearted, but there's a precedent.

From 1979 to 1981, then-Federal Reserve Chairman Paul Volcker masterminded a nasty slowdown that broke stagflation -- the noxious combination of rising prices and no growth. Among other moves, Volcker pushed the yield on three-month Treasury bills up to an unheard-of 20 percent, stopping the economy in its tracks. Millions lost their jobs; Volcker was burned in effigy on the Capitol steps. But when Volcker finally broke inflation's back in 1983, healthy growth resumed almost immediately, and Ronald Reagan rode the result to a landslide victory in 1984 -- a little fact that people worried about a one-term presidency for Barack Obama should note.

The arithmetic of our current problem is pretty simple: From 2000 through 2007, U.S. households borrowed $6.2 trillion, nearly doubling their debt. Most of it was borrowed against houses, and about two-thirds was spent on things other than another house or paying down mortgage debt -- including SUVs, flat-screen TVs and all the other consumer baubles of an American lifestyle. But when house prices collapsed, the home-equity cash spigot shut tight. U.S. consumer spending has fallen off the cliff, devastating car companies and shuttering factories throughout China.

The Treasury Department and the Federal Reserve have responded with pyrotechnics. The Treasury has infused hundreds of billions in cash into banks and other financial players. Even more remarkably, the Fed has distributed more than $1 trillion in new loans and credits to a broad range of financial and non-financial companies. The automobile manufacturers have now joined the queue, and President-elect Obama has signaled that he'd like them to be included in the bailout. So far, none of this has worked very well. Banks continue to tighten credit and lending standards. Even interbank lending came close to freezing up last month -- a level of disruption not seen since the 1970s.

All these frenzied attempts at staving off recession seem to be aimed merely at jump-starting the consumer borrowing-spending binge that underpinned the ersatz growth of the 2000s. But the real need is to shift to a more balanced system that's less addicted to high-leverage finance. Pouring money from the Fed into the banks just delays the day when banks -- and now we taxpayers -- will have to tally up our losses. The Fed is exchanging Treasury bonds for bundles of subprime mortgages at 98 cents on the dollar. But in the real world, those bundles could barely fetch 30 to 50 cents on the dollar. Does the Fed seriously believe that subprime mortgages are going to recover their value? The Japanese tried papering over bad assets during their 1990s credit crunch, and their economy has barely budged in 20 years.

At the same time, Congress and Treasury Secretary Henry M. Paulson Jr. are insisting that banks increase lending. To whom? House prices are still falling at double-digit rates. Credit-card defaults are spiraling upward. Companies are weak. Banks know how fast their loans books are deteriorating, and they desperately need cash to build up their reserves against all the bad loans they've made. Forcing them to ratchet up lending now is just pushing them back into the quicksand they're struggling to climb out of. It's financial folly. It would also be political folly for the new Obama administration.

For years now, even Democrats have been drinking the free-market Kool-Aid that the best economy is whatever markets decree it should be. So for most of the past two decades, the U.S. economy has been driven by whatever Wall Street is best at financing -- mostly bigger houses, fancier cars and more electronic toys from Asia. We have become a nation where people struggle to make payments on four-bedroom houses with faux-marble bathrooms and two SUVs in the driveway even as they worry about their lousy health insurance, evaporating pensions, shaky Social Security benefits and tapped-out 401(k)s.

Wall Street, meanwhile, prospered mightily. Financial-sector profits, which typically average about 10 to 15 percent of corporate profits, had leapt to 40 percent by 2007. Total corporate profits also soared, nearly doubling as a share of national income. But instead of triggering an investment boom, the gains were mostly distributed to shareholders. Exxon brags that it has invested $90 billion in exploration and new plants since 2003, but it has distributed even more -- nearly $120 billion -- to shareholders. The cash incomes of the top 1 percent hit an all-time high in 2006, just a tad higher than the previous record in 1929. That's the cash that fed the hedge funds, private-equity funds and the other yield-chasers that inflated the decade's asset bubble.

The scale of that bubble is reminiscent of the price-inflation bubble that bedeviled President Jimmy Carter. So are the policies being used to deal with it. Carter and his hapless Fed chairman, G. William Miller, flooded the economy with dollars even as consumer price inflation spiraled out of control. Volcker took over the Fed in 1979 and, by previous standards, moved aggressively his first year in office. But he made little headway. Finally, in late 1980, he cracked down hard and significantly raised interest rates. Unemployment soared from 5.8 percent to 9.7 percent. Inflation stubbornly held on but finally broke in 1983.

For the next several years, Volcker continued to crack down at the slightest hint of price buoyancy, until the markets took for granted that the United States was a low-inflation economy. The 2008 analogue to the Volcker strategy would be to force a harsh, fast marking-down of all bank assets to real values. A one- to two-year bloodbath is far preferable to a decade of death by a thousand cuts. Many banks will fail and will have to be re-equitized by the government -- the terms should be neither punitive nor excessively generous -- but the weakest and the most irresponsible should simply be let go. The banking system that emerges should be dull -- one where credit analysis trumps financial engineering and where everything is on the balance sheet.

The big Canadian banks, RBC and TD Bank, have been determinedly dull in the 2000s and have turned in superb profits, far outperforming their supposedly brilliant American cousins. Shrinking the banking sector will curtail bubble-style lending and force the share of GDP represented by consumer spending back down from its current 70 percent to a more sustainable 65-66 percent. It will be very painful, putting many companies in jeopardy, but it is the only way to engineer a transition to a world in which we spend less on houses and TVs and more on infrastructure and health care. Interest rates will be higher to encourage savings and taxes will go up, but debt should go down and the bottom half of the population should be more secure. It will also be very important to shore up our tattered social safety net to cushion the recession's impact on that lower half.

Democrats should seriously study the 1979-84 period. The political lesson is that Reagan backed Volcker all the way, even when the Republican Party was calling for Volcker's head. The deep recession cost the Republicans seats in the 1982 midterm elections. But when inflation suddenly cleared and growth resumed, Reagan won the 1984 election in a landslide. The dollar was once more the world's strongest currency, and the Reagan era had been launched. If Democrats insist on piling on the palliatives, as the party's congressional leaders seem to be advocating, and the country hobbles along at 0 to 1 percent annual growth, they may get through the midterms, but they may also ensure that President Obama gets an early release from the burdens of office.

Charles Morris is the author of "The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash."

GM Buys 3.5 Days By Selling Suzuki Stake (or is it just 1 day?)
GM is selling its 3% stake in Japanese automaker Suzuki, which will raise about $230 million. GM has had an investment in Suzuki since 1981. At one point, I held about 20% of the company. GM and Suzuki have partnered on technology and a few vehicles over the years. Who could forget the Chevy/Geo Metro or the Geo Tracker, which were both Suzuki designed and built?

Suzuki says it will continue its relationship with GM, and understands the automaker’s need to raise cash. If GM is burning about $2 billion in cash a month, then the Suzuki sale just bought GM 3.5 days of life. GM says it is burning cash at a rate that will leave it empty by mid 2009.

But, in truth, it needs at least $8-$10 billion to operate. If it falls below that level, it will have difficulty meeting payroll, producing vehicles or paying suppliers. Congress is meeting this week to decide whether or not to float the Big Three as kuch as $50 billion in bridge loans to help it get through the Recession.

Senator Shelby Opposes $25 Billion to Aid Automakers
U.S. automakers should not get $25 billion in proposed federal loans to save them from possible bankruptcy, Senator Richard Shelby, the top Republican on the Banking Committee, said. "Companies fail every day and others take their place," Shelby said on CBS's "Face the Nation" today. "There's not a bank in this country that would loan a dollar to these companies."

Shelby's opposition could complicate the already-difficult prospect of passing legislation this year to aid General Motors Corp., Ford Motor Co. and Chrysler Corp. When Congress reconvenes this week for a lame-duck session, it will contend with different bailout proposals from Senate and House Democrats as well as the Bush administration. Shelby and other Republicans could prevent the Democrats from getting the 60 votes needed in the 100-member chamber to bring the measure to a vote. Last month he failed to rally enough lawmakers to defeat the $700 billion financial industry rescue measure. Democrats control the Senate with a 51-49 majority.

House Financial Services Committee Chairman Barney Frank said he will push for $25 billion in loans anyway. The measure "may not happen," said Frank, a Massachusetts Democrat, on "Face the Nation." Yet "the question is, how much pain do you inflict on an already very weakened economy by blithely saying, well, let them have Chapter 11" bankruptcy protection, he said. A GM collapse alone would cost the government as much as $200 billion for costs associated with unemployment insurance and other programs after millions of auto-related job losses, according to a forecast from IHS Global Insight Inc. in Lexington, Massachusetts. A GM shutdown would cost jobs among suppliers as well as at the automaker itself, pushing the U.S. unemployment rate next year to 9.5 percent, compared with current projections of as high as 8.5 percent owing to the weakened economy, said Nariman Behravesh, chief economist at IHS.

Federal, state and local governments would lose $108.1 billion in tax revenue over three years in the event of a 50 percent reduction in U.S. automaker operations, according to a Nov. 4 report by the Center for Automotive Research in Ann GM also used data from the center's report and other information for a video posted today on its own Web site as well as on YouTube. The video frames the debate as a choice between $25 billion in loans now or $156 billion in lost taxes in the future and raises a threat to national security from the lost manufacturing capacity if needed in war. Some Senate Democrats favor getting the money for loans to automakers from the already-approved $700 billion financial industry rescue plan, a move Frank said he would oppose for now.

Frank backs the idea of providing an additional $25 billion for the industry, while President George W. Bush supports a plan to provide $25 billion from Energy Department loans set aside by the 2007 energy measure to encourage more environmentally friendly cars. Senator Carl Levin, a Michigan Democrat who supports using part of the $700 billion to help the auto industry, said he wouldn't object to Congress requiring the resignation of company executives as a stipulation for the loan. "If it was the difference between getting this kind of support or not, obviously the management should consider resigning," Levin said on NBC's "Meet the Press."

GM Chief Executive Officer Rick Wagoner, who has worked for the company for 31 years, told Automotive News last week he won't offer to step down. House Speaker Nancy Pelosi said yesterday that U.S. automakers need to restructure "to ensure their long-term economic viability." Ron Gettelfinger, president of the United Auto Workers, said yesterday the government must provide aid before President-elect Barack Obama takes office on Jan. 20. "Companies should commit to investing in green technologies" as a condition of getting the Bush administration proposal of $25 billion in loans, Commerce Secretary Carlos Gutierrez said today on CNN's "Late Edition" program. "They also have to commit to either demonstrate that they are viable or commit to a plan that makes them viable."

GM, Ford and Chrysler are using up cash as U.S. auto sales have fallen 15 percent this year through October. Detroit-based GM said last week it may run short of funds before the end of this year, and Auburn Hills, Michigan-based Chrysler said Nov. 13 that survival would be difficult without aid. Ford, based in Dearborn, Michigan, burned through $7.7 billion of cash reserves during the third quarter. Chief Executive Officer Alan Mulally said Nov. 7 that Ford has "sufficient liquidity."

If Detroit Falls, Foreign Carmakers Could Be Buffer
The failure of one or more of Detroit’s Big Three automakers would put a huge initial dent in American manufacturing, but in time foreign car companies would pick up the slack by stepping up production in their plants here, many industry experts and economists say. Whether Washington should let that play out — risking hundreds of thousands of jobs — is a central question Congress will weigh this week as it hears testimony from Detroit leaders who are pushing for immediate federal intervention, before the next administration takes over in January.

“Barack Obama has made it clear he understands the importance of the industry. The question is, do we get that far?” Ron Gettelfinger, head of the United Auto Workers, said in an interview Friday, raising the prospect of a General Motors bankruptcy. “At this juncture, we are in a crisis that could have a major negative impact on this country.” But many industry experts say the big foreign makers are established enough to take control of the industry and its vast supplier network more quickly than is widely understood. “You would have an auto industry in the United States more like that of Mexico and Canada: foreign-owned,” said Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich., which describes itself as a nonprofit organization that has “strong relationships with industry, government agencies, universities, research institutes, labor organizations” and other groups with an interest in the auto business.

The transition to that new equilibrium would surely be painful. The big American companies employ about 240,000 workers, and their suppliers an additional 2.3 million, amounting to nearly 2 percent of the nation’s work force. The outright failure of General Motors would eliminate the biggest auto employer and more than 100,000 manufacturing jobs. That is roughly the number of jobs already lost this year at the nation’s automakers and their suppliers. G.M. is rapidly running out of cash and appealing to Washington for a multibillion-dollar bailout to keep operating and continue the costly conversion to a leaner company producing efficient vehicles that people will buy.

G.M.’s collapse would probably bring down some of its suppliers as well. Since many of them ship parts and subassemblies to the other auto makers — domestic and foreign — auto production could be crippled until the supply system was reorganized around the newly dominant foreign car makers. “The transplants, deprived of enough suppliers, would have to rely on imported vehicles while they scramble to reorganize the supply system,” Mr. McAlinden said, speaking of the foreign companies with manufacturing plants in the United States. “That would take them about a year.” Given Chrysler’s weakness, the new kings of the auto industry would presumably be Toyota, Honda, Nissan, Volkswagen, Ford, Mercedes-Benz, BMW and Hyundai-Kia. (Volkswagen has not yet opened a plant in the United States, and BMW and Hyundai each have one plant.)

Like the Big Three, they would together dominate manufacturing in the United States, becoming big customers for steel, aluminum, plastics, glass, machine tools, computer chips and rubber. Even in this year of plunging car sales, the automakers and their vast supplier network still account for 2.3 percent of the nation’s economic output, down from 3.1 percent in 2006 and as much as 5 percent in the 1990s, according to government data. More significant, economists say, 20 percent of the shrinking manufacturing sector is still tied to the automobile industry. “I don’t think people appreciate the importance of this backward linkage to the rest of manufacturing,” said Sanford Jacoby, an economic historian at the University of California, Los Angeles. “The automakers play a big role in sustaining other manufacturers.”

Gradually, the auto industry has already become less American. The smallest of the Big Three, Chrysler, was owned for a while by the German company, Daimler, before it was returned to American ownership in the form of a privately held company in a much slimmer state than its once starring role in Detroit. The American automakers, of course, have bought more and more parts from overseas. But 85 percent of their products are made in North America, compared with 60 percent for the foreign-owned automakers, said Dan Luria, research director at the Michigan Manufacturing Technology Center. Vehicles built entirely abroad drive down the percentage at the foreign-owned automakers. The popular Toyota Prius, for example, is not yet manufactured in the United States. That will come soon, Toyota says. But given worldwide demand for the car, Toyota achieves economies of scale by centering production in Japan rather than using multiple sites.

Such an inclination on the part of foreign companies to keep their production out of the United States helps to explain the push by the Democrats in Congress to provide aid to keep the American automakers alive. The federal help would probably go first to G.M., which says it will run out of cash by early next year and be forced out of business without federal help. Rather than collapse outright, a carmaker could file for bankruptcy protection. If it obtained financing, the company could then continue operating and slim down to a more manageable size, with cuts occurring over a period of months or years. But some of its operations could be taken over by another automaker or it could even be forced to liquidate.

“If the Big Three go down, a bunch of the suppliers go down, and the transplants share a number of the suppliers,” said Alan Reuther, director of the United Automobile Workers’ Washington office — trying in effect to enlist the foreign-owned makers in the effort to save the Big Three. So far those manufacturers have stayed on the sidelines, avoiding any suggestion that they would like to see any of the American automakers disappear. “Toyota strongly believes that a strong market with vigorous competition is in everyone’s interest,” said Tina Ewald, a Toyota spokeswoman. The Japanese automakers broke into the American market in the 1970s by exporting small, high-quality, fuel-efficient vehicles during an energy crisis. They began putting factories here in the 1980s, when import quotas and anti-Japanese sentiment threatened to restrict their American sales.

Fuel-efficient vehicles are still the strength of the Japanese and other foreign automakers at a time when such vehicles dominate what auto sales there still are in a rapidly sinking economy. The Big Three have not yet developed fuel-efficient cars as the mainstays of their fleets, and some in Congress are insisting they do that in exchange for any bailout. But if the current downturn is prolonged, it might be too late. In an industry capable of making 17 million cars a year, sales have dropped to an annual rate of only 10 million vehicles made here. “None of the Big Three — and perhaps not the transplants — can make money at 10 million,” Mr. Luria said. “The transplants are O.K. at 12 million and the Big Three at 15 million or so.”

Annual sales of autos and light trucks have been at least 15 million through most of the last decade. The downsizing in response to the slump has been harsh. More than 100,000 jobs have disappeared since January at the automakers and their suppliers, one in every 10 jobs lost in the United States this year. The three American-owned companies were responsible for most of the loss. They employ 75 percent of the nation’s 333,000 total auto workers when foreign-owned companies are included. The elimination of many more workers, most of them union members and earning upwards of $20 an hour, would be devastating in Michigan, Ohio and Indiana, where the American automakers and many of their suppliers are concentrated. In fact, many of those jobs may disappear even if the companies win government assistance.

But other employers would take their place over time. As the foreign companies stepped up production to replace what would be lost by an American company’s collapse, the transplants would add to their existing work force of 78,000, replacing many of the lost jobs, although at lower wages, with fewer benefits and at nonunion factories in other parts of the country. The auto industry’s share of the gross domestic product would probably also revive, if the transplants were to build in the United States the vast majority of the cars they sold here, holding down imports.

Still, there would be one irreplaceable loss, Mr. McAlinden argued. “Right now, we do $18.5 billion of automotive research and development in a year,” he said, referring to innovative projects like the development of new types of batteries. G.M. in particular is involved in the development of lithium ion batteries to power the next generation of cars. If G.M. disappeared, “the foreign companies would develop the batteries, but not here,” Mr. McAlinden predicted. “We would lose all the additional development connected to that technology. It would be a technology opportunity lost.”

Supplier woes put auto industry in danger
The financial woes of U.S. automakers have grabbed Washington's attention, but similar problems at auto suppliers have the potential to set off a cataclysmic chain of events in the industry if key parts makers run out of cash and fail. As with the automakers, auto suppliers' sales have tumbled this year because of the steep drop in demand for new vehicles. That has forced suppliers to burn through their cash reserves and slash their costs to stay in business, said Craig Fitzgerald, an automotive analyst with Southfield, Mich.-based Plante & Moran PLLP, which advises about 400 small and midsize auto suppliers.

Meanwhile, banks and other credit providers have become dead-set against lending to any company in the faltering automotive industry, making it difficult and expensive for suppliers to get needed financing. But if the companies at the bottom of the supply chain don't find a way to recapitalize, Fitzgerald warned, numerous bankruptcies and liquidations among the small companies will set off a string of parts shortages that could reach all the way to the vehicle assembly line. The resulting disruptions could negate any help the government might give General Motors Corp., Ford Motor Co. and Chrysler LLC.

"Either they deal with the liquidity issues at the lower tier, or these problems have the potential to just devastate the Detroit OEMs and the other automakers," Fitzgerald said, referring to so-called original equipment manufacturers GM, Ford and Chrysler. "It's an issue equal to what's going on at the Big Three, they just don't have the heft, so it doesn't get quite the play." In most cases, auto suppliers have their own suppliers, who in turn receive their parts from other companies, meaning that many automotive components pass through a chain of several companies before they're sold to an automaker. "The fragility of the whole thing is very much like a house of cards," said Bob Viswanathan, an assistant professor of operations management at the University at Buffalo School of Management. "Everybody knows that the finance markets are so interconnected, but the auto industry is worse."

Tom Wiethorn, co-owner of Craig Assembly, said orders for his St. Clair, Mich., company's hose connectors — used in radiators that end up in GM and Ford vehicles — have fallen significantly in recent months. As a result the company, which has $12 million in annual sales, has cut its work force by 20 percent to about 60 people and is worried that it could end up violating its debt agreements. "This is very serious," said Wiethorn, who also serves as a manufacturing representative setting up contracts for other auto suppliers. "Some of the suppliers I know are teetering on bankruptcy." The Motor & Equipment Manufacturers Association is hoping to win a piece of a proposed rescue package that would use $25 billion of the $700 billion financial industry bailout to help GM, Ford and Chrysler.

"We are all connected by some very thin threads and if any piece of the chain from the manufacturers to the small suppliers fails, the whole thing could fail," said Ann Wilson, the association's vice president of government affairs. Top Republicans, however, have said the Wall Street money should not be used for the auto industry and would only postpone its demise. Sen. Richard Shelby of Alabama on Sunday called the industry "a dinosaur." Yet even foreign automakers that build cars and trucks in the United States could be affected. Companies like Toyota Motor Corp., Nissan Motor Co. and Honda Motor Co., with plants scattered throughout the South and Midwest, get their parts from the vast, multilayered network of U.S. suppliers that employs about 800,000 people.

Dave Andrea, vice president of industry analysis and economics for the Original Equipment Suppliers Association, a division of the Motor & Equipment Manufacturers Association, said that's why lawmakers need to be looking at the U.S. auto industry as a whole. "We need to be talking about this at the U.S. level, not talking about the Detroit Three and then putting the other automakers in another bucket," he said. "If we have major failures of suppliers, the foreign automakers are going to be affected as well." Automakers generally only have a one- to two-shift supply of some key parts, Andrea said, making them very susceptible to supply chain disruptions.

The nearly 3-month-long strike at American Axle and Manufacturing Holdings Inc. this spring crippled truck production at GM, showing how fast a parts shortage can shut down assembly lines. GM's production cuts led to millions in lost sales at other suppliers such as Lear Corp., Superior Industries International Inc. and Magna International Inc. Andrea noted that automakers have contingency plans for sourcing their parts should one of their suppliers shut down. But those plans can come with hefty hidden costs, such as the expense of importing parts from overseas, he said. "It's really the logistics part you don't see," Andrea said. "And those are the kinds of costs the industry can't bear in these troubled times."

Tough Conditions Planned for Detroit
Auto-parts makers are requesting access to the government's $700 billion financial-industry rescue fund, and Democratic lawmakers are planning tough conditions -- including a government oversight board -- on a proposed aid package for Detroit's troubled auto companies. Democratic lawmakers Monday plan to unveil a bill that would give the Big Three auto makers access to the $700 billion Troubled Asset Relief Program set up in October to help ailing banks and other financial firms.

As written, the legislation wouldn't include auto-parts makers. Parts makers are seeking to change that in a letter signed by nearly 100 companies and being sent to the House and Senate on Monday. In the letter, the Motor and Equipment Manufacturers Association, a trade group, will ask that its members get equal access to TARP funding sought by the car makers. General Motors Corp., Ford Motor Co. and Chrysler LLC are seeking $25 billion of new loans, on top of $25 billion already approved for loans. The latter were intended to help the car makers retool their fleets and make more energy-efficient vehicles.

Lawmakers and congressional aides said the bill to assist the auto industry will include more-stringent limits on pay for auto executives than have been imposed on executives of finance firms using the TARP funds. TARP rules bar firms from giving "golden parachute" exit payments to certain executives and restrict compensation above $500,000 from being tax-deductible. The legislation would require the auto makers and their unions to draw up plans on how the companies would return to financial health in the longer term. The bill would "provide immediate, targeted assistance" in return for industry commitments to meet "new fuel-efficiency standards" and develop technologies that would allow the industry to compete in the global marketplace, House Speaker Nancy Pelosi (D., Calif.) said Saturday.

House Financial Services Chairman Barney Frank (D., Mass.) said on CBS's "Face the Nation" on Sunday that the legislation would bar the companies from paying dividends or issuing bonuses to executives making more than $200,000 a year, for as long as the companies are receiving government support. The legislation also calls for the establishment of a government oversight board that "could veto ventures," Rep. Frank said. The board's members would include executive-branch officials with jurisdiction over the industry, he said. Congressional staff declined to elaborate on how the board would work.

Democrats hope to force action on the bill this week, but the Bush White House and many Republican lawmakers are reluctant to give the industry access to the rescue fund. Instead, they want Congress to speed release of the $25 billion that has already been approved. On Sunday, Alabama Sen. Richard Shelby, the senior Republican on the Senate Banking Committee, suggested bankruptcy court would be a better option to help the industry restructure and argued that government aid isn't going to halt the industry's long-term decline. "Should we intervene to slow it down, knowing it's going to happen?" Sen. Shelby said on NBC's "Meet the Press." "I say no."

Auto-parts suppliers -- which employ 600,000 people concentrated in seven states, nearly triple the number working for Detroit's Big Three auto makers -- said the car companies' woes are already being felt downstream. Their request for equal access to any new loans made to the car companies shows the challenges Congress faces in drawing the line on which sectors to assist. In its letter to Congress, the parts makers' group argues that aiding auto makers won't address the difficulties facing suppliers. Even if auto makers get government aid, the group says, their factories won't necessarily be running at full capacity as long as consumer demand remains low.

Parts makers supply auto makers beyond the Big Three, including foreign-owned manufacturers with operations in the U.S. Led by GM, the auto industry has launched a broad lobbying campaign to persuade the White House and lawmakers to extend aid to the auto makers. On Sunday, Chrysler said it would send a team of 33 dealers from 25 states to visit lawmakers and administration officials on Tuesday and Wednesday to press for federal loans for domestic automakers. Dealers and suppliers contacting the White House and lawmakers are armed with statistics compiled by a research group close to the auto industry, to support the argument that the failure of U.S. auto makers would have systemic consequences.

The study, produced by the Center for Automotive Research, predicted a collapse of the Big Three would result in the loss of three million jobs within a year. Douglas G. Baird, a professor at the University of Chicago Law School who specializes in bankruptcy law, disagreed. "This three million figure is laughable ... modern bankruptcy law is designed to protect against that," he said. Kristin Dziczek, a senior project manager at the center, said that while a portion of the nonprofit group's research is paid for by auto makers, that wasn't the case with this research.

Retirees fear for pensions and health benefits
On the second Thursday of every month, hundreds of retirees from United Auto Workers Local 668 gather for a catered meal, bingo and socializing at their union hall on Farmer Street. That meeting struck a different tone last week. With General Motors Corp.'s stock tanking and the automaker possibly running out of cash before the end of the year, 73-year-old Kenneth Rathje and other retirees posed questions about pensions and health benefits. UAW Local 668 president Matthew Ebenhoeh has spent part of last week in Detroit, learning where General Motors is headed.

Industry analysts speculate that GM could file for bankruptcy to seek protection from its creditors. Several hundred retirees wanted Ebenhoeh to tell them the consequences. "My job is to make sure my membership is safe," Ebenhoeh said. "I don't want to see anybody lose anything." Rathje retired from Grey Iron in 1995 after a 40-plus-year career that included a stint as a labor liaison, aiding workers on layoff with new jobs or training. Losing his pension would cost him about $12,000 per year; his insurance much more. An independent federal agency designed to protect the protect the retirement funds and benefits for people such as Rathje.

The Washington, D.C.-based Pension Benefit Guaranty Corp. insures private-sector pension plans and pays benefits to workers if the plan fails because the company folds or files for bankruptcy. In 2007, the agency rewarded more than 80 percent of retirees full pensions. The maximum insurance benefit for participants in underfunded pension plans terminating in 2009 is $54,000 per year for those who retire at age 65. Early retirees bring home less. Rathje, president of the Local 668 retiree executive board, has his doubts about hourly employees keeping their benefits.

The pensions for retirees of Delphi and other auto suppliers remain intact, said Marc Hopkins, spokesman for the Pension Benefit Guaranty Corp. The agency pays benefits to hundreds of thousands of retirees and beneficiaries whose retirement plans were terminated. That number would swell if GM is added to the rolls. Since last October, the agency has assumed pension payments for another 70 companies, records indicate. Declines in the worldwide financial markets have impacted the public agency and private-sector plans. Since the end of 2007, the funded status of pension plans sponsored by large U.S. companies has fallen by almost $100 billion, report analysts with Mercer, a global consulting and investment services company.

Last fiscal year, the pension benefit agency lost $4.8 billion in equity investments. The market upheaval has left many retirees with depleted 401 (k) accounts, making their pensions crucial. General Motors stock is worthless if the company is granted bankruptcy, leaving workers who stocked up on their employer's shares shortchanged. "It's kind of discouraging, wondering what's going to happen and how it's going to happen," said Rathje, a Caseville resident. "I've seen it bad, not quite as bad as it is now."

As GM Falters, Opel Seeks Government Help
German automaker Opel, a subsidiary of the existentially threatened American firm General Motors, is trying to get the German government to secure its future. Its request raises a number of prickly issues. Executives from troubled automaker Opel are attending emergency meetings with German Chancellor Angel Merkel on Monday in a bid to negotiate €2 billion in government loan guarantees. Opel, which since 1929 has operated as a subsidiary of Detroit-based General Motors (GM), is trying to take steps to protect itself from disaster should its American parent company be forced to declare bankruptcy.

As GM teeters on the edge of financial oblivion, many in Germany are worried it might take Opel down with it. Back in April, before the world sunk into what many consider the biggest financial crisis since the Great Depression, GM had pledged to invest €9 billion euros in Opel through 2012 with the goal of developing 20 new car models. But now, as GM tries to negotiate its own emergency bailout from the US government, that pledge is looking increasingly shaky. If GM were to file for chapter 11 bankruptcy, it would free itself from a range of debt obligations. It could further result in the transfer a number of contracts from Opel's development center in Rüsselheim to centers in Michigan, where GM is based. According to Deutsche Bank analyst Rod Lache, as things now stand GM can only continue to finance itself through December.

Opel, which targets low-income buyers, has been especially hard hit by a drop-off in consumer demand. Its sales have dropped 12 percent this year -- twice the industry average -- and it has been forced to temporarily halt production at several plants. Still, the unit is in considerably better shape than its American parent. Opel's General Works Council Chairman Klaus Franz insisted on a German news show on Sunday: "Opel is doing well, Opel is liquid, period!" The automaker directly employs over 25,000 people and Germany and is indirectly responsible for 75,000 jobs. Opel is seeking €1 billion in loan guarantees from Germany's federal government and an additional €1 billion from four German states to ensure that its ambitious development plans go forward. At issue, however, is whether Opel can guarantee that funding made available by the German government would stay in Germany and not be sucked back into the wider financial black hole of General Motors.

Although Opel insisted last friday that state aid would "under no circumstances" be used outside of Europe, their request for assistance raises special concerns about how and whether a national government should bailout a subsidiary owned by a foreign multinational. German Economy Minister Michael Glos emphasized on a Sunday news show that the government "needs to know whether the money will stay in Germany." He is far from alone with his concerns. Armin Schild, a union leader with IG Metall, told the Berliner Zeitung on Monday that any assistance for Opel should be contingent on the funding be used to keep plants open in Germany and thereby guarantee the jobs of German workers.

Managers at Opel would ideally like to see the unit spun-off from GM, a move which would decisively disentangle the company from the financial and political dramas unfolding in Detroit. German politicians and union leaders like Armin Schild also support the idea. Schild declared on Monday that GM must "let Opel go free." That, though, would be difficult. When GM took over Opel in 1929, the German carmaker was itself on the brink of bankruptcy. In the decades since being saved by GM, the two companies have become intimately intertwined. Opel develops cars for all parts of the GM empire, contributing technical know-how not only to the production of vehicles in the American and European markets but also, for instance, for the South Korean subsidiary Daewoo. Further complicating a separation is the fact that prevailing market conditions would make it difficult to find a buyer.

Opel's efforts to secure government assistance have triggered controversy in Germany, sparking fears among economic liberals that helping one company could force the government to undertake a general bailout of the German auto industry. Indeed, Roland Koch, governor of the German state of Hesse where Opel is based, has called for a "protective shield" for the entire auto sector. Finance Minister Peer Steinbrück announced his opposition to a general bailout on Monday, telling Bild newspaper on Monday that a such a plan "doesn't make any sense." Steinbrück argued that the government couldn't do anything about the decline in consumer purchasing power, which lies at the heart of the auto industry's woes, and that it shouldn't make itself responsible for the "errors" committed by the auto companies.

Klaus Zimmerman, a well-known neoliberal analyst with the German Insitute for Economic Research told the Berliner Zeitung that devoting tax-payer funds to an industry-wide bailout would be like throwing money into a "bottomless pit," adding that directing money at Opel would only make sense in the event of an actual GM bankruptcy. Still, the government could decide to help Opel while refraining from taking any industry-wide steps. Economy Minister Michael Glos, appearing on a Sunday news show, evinced considerable sympathy for Opel even while sounding skeptical about a more general bailout. Glos nostalgically recalled that his own first car was on Opel and that his grandfather had driven one before World War II. Glos acknowledged that the global auto industry finds itself in serious trouble due to a fall-off in global demand, but said it "wasn't clear" why "Opel, of all companies, ought to pay the price."

Opel's misfortunes, along with the wider crisis engulfing the German auto industry, are sure to become campaign issues as Germany's political class gears up for the 2009 parliamentary elections. While Angela Merkel meets with Opel executives Monday afternoon, German Foreign Minister Walter Steinmeier, a Social Democrat and the party's candidate for Chancellor, will be holding his own meetings with union leaders representing Opel workers. Steinmeier has declared that workers in the German auto industry will "not be left on their own," and seems to favor a more interventionist approach.

Steinmeier's meeting has raised a few eyebrows. Ronald Pofalla, general secretary for Chancellor Merkel's center-right Christian Democratic Party, told the German press agency DPA that Steinmeier's portfolio does not include economic policy and that he had no business conducting such a meeting in the foreign ministry. The ministry countered that no branch of the economy is as internationally embedded as the auto industry. Whether GM's meltdown becomes a crisis large enough to actually warrant diplomatic intervention will be borne out in the weeks ahead.

Opel To GM: Hands Off Our Bailout Funds
General Motors might be burning through cash but it won't see a cent of the bailout money its European subsidiary might get. Adam Opel has said it will keep any funding it gets from the German government, even as its ailing parent company has revealed it is close to bankruptcy. "We as employees will make our contribution in this difficult time to ensure future investments," said Klaus Franz, deputy supervisory board chairman of GM in Europe said Saturday. "But we won't provide a single cent, which then would be burned from GM."

On Monday, German Chancellor Angela Merkel, Finance Minister Peer Steinbrueck and Economy Minister Michael Glos were scheduled to meet with top Opel executives to discuss the company's request for loan guarantees. Franz, who is also the top labor representative of General Motors' European division, said that "Opel has no liquidity problem. This is purely a precautionary measure." Opel, which employs some 26,000 people in Germany, on Friday became the first European carmaker to request financial help from the state to maintain its business, a sign that it could no longer rely on its Detroit parent to cope with sliding demand.

Germany's finance minister Peer Steinbrueck said help for the struggling auto sector will be judged on a case-by-case basis. "I don't want to invite all kinds of bandwagon jumpers to come to the German government and say, 'If you're helping Opel, I will tell my story in such a way that you can't refuse to help me too'," Steinbrueck told Deutschlandfunk radio. Michael Tyndall, an analyst with Nomura International in London, said it made sense for Opel to look after its own interests. "It's a case of local government needing to address the concerns of local businesses," he said. "Likewise, I'm not sure a rescue package in the U.S. will flow through to GM in Europe."

Earlier this month, GM posted a net loss of $2.5 billion for the third quarter, compared with a net loss of $38.9 billion, in the third quarter of 2007. The company, which spent around $6.9 billion in the last three months, said it could run short of cash in just two months. Automakers in both the United States and Europe are facing slower sales as faltering economies spell weaker consumer demand and a lack of confidence in the financial sector affects their own financing. Consumers are also struggling to get loans to buy their cars, which is hurting the industry enormously.

Earlier this year, the U.S. Congress approved a $25.0 billion rescue package to help the three biggest carmakers in the United States survive a steep decline in consumer spending. European car manufacturers are currently pushing for a similar 40.0 billion euro ($50.7 billion) bailout package. Meanwhile, Swedish Finance Minister Anders Borg said Monday that his government was considering measures for Swedien's auto industry, according to TradeTheNews, which could mean assistance for truck makers Volvo and Scania. Shares of Volvo rose 0.3% and Scania was down 0.9% on Monday in Stockholm.

Iceland to Close $6 Billion IMF-Led Deal This Week
Iceland may sign a $6 billion International Monetary Fund-led loan deal by Nov. 19 after it reached an agreement on how to repay depositors at the overseas unit of one of its failed banks, Prime Minister Geir Haarde said. "This means the IMF can conclude its discussion of Iceland's request for financial assistance," Haarde said in an interview in Reykjavik yesterday. The comments confirm an announcement by IMF Managing Director Dominque Strauss-Kahn on Nov. 15 that the fund would approve a loan within four days.

The island, which had the fifth-highest per capita income in the world last year, needs the financing for imports and to create enough foreign reserves to support a free-floating currency. The central bank has predicted the economy may contract 8.3 percent next year after the currency plummeted following the collapse of the country's three largest banks . Iceland yesterday reached a European Union-backed accord with the U.K. and the Netherlands on repaying depositors at Icesave, the online banking unit of Landsbanki Islands hf, clearing the way for a loan deal.

"We accept the EU directive on deposit guarantees and will undertake the obligation to pay what Landsbanki assets will not cover," Haarde told reporters yesterday. "Over what period the payments will be made and the annual payment obligation is still to be negotiated." Under a preliminary agreement reached on Oct. 24, the IMF will provide a $2.1 billion loan, with the rest of it coming from a group of countries. The government will be able to draw $830 million when the IMF- led loan is completed, Haarde said.

Nordic countries would "play the biggest part" in the package, he added. Norway has pledged 500 million euros ($635 million), the Faroe Islands 300 million kroner ($50 million) and Poland $200 million, so far. Denmark's central bank is "considering" extending a 500- mllion euro swap facility, of which 300 million euros have yet to be drawn, spokesman Karsten Biltoft said today. The full $6 billion loan "is a prerequisite for our economy, currency market and businesses to function," Foreign Minister Ingibjorg Solrun Gisladotttir said yesterday. "Of course it's positive," said Thomas Haugaard, a Copenhagen-based economist at Svenska Handelsbanken AB. "But Iceland will always be a small economy with a small currency that can become the target of speculation again. It's well known that the krona has been a sort of lottery ticket in portfolios around the world."

The krona collapsed last month, losing more than two thirds of its value since the start of the year, following the failure of the three biggest banks. The central bank tried pegging the krona to a basket of currencies on Oct. 7 and abandoned the effort the following day. Policy makers are now striving to resurrect the currency through daily auctions with local banks. Iceland had been told in "no uncertain terms that nobody will take part in lending" to the country until the Icesave dispute was finished, Haarde told reporters yesterday. "We were not just holding talks with the U.K. and the Netherlands, but the whole of the European Union and then some, because other nations that were connected with this issue later also set the condition that Icesave would be resolved," Haarde said.

Deposits at Icesave may amount to as much as 5.5 billion pounds ($8.2 billion), the size of Iceland's economy, according to a report by Jon Danielsson, an economist at the London School of Economics. Finance Minister Ingibjorg Solrun Gisladottir put the figures at 640 billion kronur ($3.7 billion) on Nov. 14. "We obviously welcome the announcement by Iceland" that it "will apply the EU rules on protection" for deposits, said Amelia Torres, a spokeswoman for European Union Economic and Monetary Affairs Commissioner Joaquin Almunia. "This should open the way for the financial assistance that has been requested by the country."

Iceland Reaches Accord With U.K., Holland on Icesave Deposits
Iceland has reached an accord with the U.K. and the Netherlands on repaying depositors at Icesave, the online banking unit of failed lender Landsbanki Islands hf. "We accept the EU directive on deposit guarantees and will undertake the obligation to pay what Landsbanki assets will not cover," Prime Minister Geir Haarde told reporters in Reykjavik today. "Over what period the payments will be made and the annual payment obligation is still to be negotiated."

An agreement may pave the way for the Atlantic island to clinch a $6 billion loan led by the International Monetary Fund. The IMF has withheld its $2.1 billion share of the package until other countries pledge more money. British and Dutch officials have insisted that the government reimburse international depositors and not just those in Icelend. "Talks between Iceland and several EU member states, initiated by the French EU Presidency, lead to a common understanding that will form the basis for further negotiations," Prime Minister Haarde told reporters today.

To help resolve the conflict, Iceland agreed to accept liability on deposits up to the 20,887 euros ($26,563) required under EU law, Foreign Minister Ingibjorg Solrun Gisladottir said on Nov. 14. Iceland had initially said its deposit guarantee would only cover domestic savings. "We are isolated when all 27 EU member states agree that we have to reach an accord on Icesave," he said. Deposits at Icesave may amount to as much as 5.5 billion pounds ($8.2 billion), the size of Iceland's economy, according to a report by Jon Danielsson, an economist at the London School of Economics. Gisladottir put the figures at 640 billion kronur ($3.7 billion) on Nov. 14.

Iceland's loan from the IMF will be completed Nov. 19, Managing Director Dominique Strauss-Kahn said at a press conference after G-20 talks yesterday in Washington. The island, which had the fifth-highest per capita income in the world last year, needs the financing for imports and to create enough foreign reserves to support a free-floating currency. The krona collapsed last month, and has lost more than two thirds of its value since the start of the year, following the failure and state takeover of the country's three biggest banks.

Sum of the parts: when supply chains fail
The idea of a “crisis cell” might suggest counterterrorism more than it does corporate risk management. But at Safran, the French aerospace and defence company, it is the name of a team charged with responding to the ever-increasing pressure on its global supply chain. Safran’s crisis cell monitors the group’s 4,000 suppliers, which receive €5.3bn ($6.7bn, £4.5bn) in total a year in return for products and equipment. Xavier Dessemond, Safran’s purchasing director, says the aim is to deal with the problem in “a preventative manner”.

He adds that while no supplier has yet experienced great difficulties, “We know there is a crisis and we know our industry will be probably affected”. It is a growing concern for manufacturers worldwide. Companies’ supply chains have become far more global in the past decade, with the consequence that stress from the financial crisis is spreading quickly to suppliers large and small. It is testing the global supply chain to an extent rarely seen and spurring companies in industries from aerospace to retailing to take extraordinary measures.

VT Group, a leading British defence group, is a good example. The former Vosper Thornycroft has a solid business, as many of its orders come from the UK government. But in the past two weeks it summoned its leading 100 suppliers – which account for about 70 per cent of its £500m ($740m, €580m) annual supply budget – to a meeting. The message from Paul Lester, chief executive, was stark: “If you get into financial difficulties, don’t delay but come and talk to us. You are probably better talking to us than banks, because banks aren’t really doing their jobs right now and we can help.”

Possibilities for help include paying suppliers in cash earlier, giving them longer orders or even lending them workers, says Mr Lester. At Safran, Mr Dessemond says his company could put capital into its suppliers, help them obtain aid from government agencies or change payment terms – but all only in “exceptional cases”. Mr Lester says simply: “We want a bloody good supply base. And we are just nervous that, particularly among SMEs [small and mid-sized enterprises], somebody will get into difficulties.” A small software supplier to VT did go bust recently – the latest in a number of European supplier collapses, from Stankiewicz, the German car parts supplier, to several manufacturers that serve UK retailers.

All this marks a huge shift for many large industrial groups. During the summer, much of the talk focused on whether their suppliers had the capacity to keep up with demand. “It is amazing how the conversation has changed in the last few months,” says Aaron Davis, the marketing director of Schneider Electric, the French energy management company. Now, many suppliers are more likely to be calling to ask for bail-outs. The culprit is obvious, according to manufacturers: it is the banks. VDA, the German carmakers’ association, accuses some banks of “making credit lines more expensive, withdrawing them or making credit due in the short term”. Ratings agencies such as Moody’s and Fitch point to the increased difficulties small and medium-sized companies face in securing credit from banks.

But the big companies may also be partly to blame. Many have squeezed suppliers mercilessly for years. The car industry is renowned for manufacturers suddenly imposing demands for 10 per cent across-the-board cuts in component prices. Likewise, UK retailers led by Tesco have succeeded in pushing payment terms with suppliers increasingly in their favour. Tesco has increased the time it takes to pay for some goods from 30 to 60 days. Bart Becht, chief executive of Reckitt Benckiser, the consumer goods group, last month criticised such moves as making no sense. According to an industry insider, meanwhile, suppliers have complained in recent days that another large supermarket group has just asked for 15 per cent price cuts.

Julie Metelko, a business improvement specialist at PA Consulting, says that approach risks backfiring on large companies: “If suppliers aren’t getting cash, then you risk taking them out.” That is why companies such as Daimler, the German luxury carmaker, and some of its rivals are looking at giving cash straight to suppliers in difficulties. “Three hundred thousand jobs are at risk in this industry – due to a crisis that was not caused by small and mid-sized companies but [which] is making them suffer massively,” says Dieter Zetsche, Daimler’s chief executive. Volkswagen, Europe’s largest carmaker, has set up a special team to stop suppliers from collapsing.

Counterparty risk is well-known in the financial world, where it refers to the chance one side of an agreement will default. As it becomes a concept to be reckoned with in the real economy, manufacturers are checking their exposure. “We have got to look at risk in the supply chain much more closely. Is your Chinese supplier financially sound? Are they capable of maintaining your supply?” asks Tim Lawrence, a supply chain expert at PA Consulting. Many counter that they have double or triple sourcing, with suppliers for the same part spread across the world. “In tough times like these, you need as much as possible to keep two suppliers. Globalisation helps here,” says Pierre-Jean Sivignon, chief financial officer at Philips, the Dutch electronics group. Don Gogel, chief executive of Clayton, Dubilier & Rice, the US private equity firm, says: “Globalisation is a big positive, as it has led to multiple suppliers around the world.”

But doubts remain. One is over how quickly a supplier can respond to take over the capacity if one of its rivals collapses. Another is the fact that some components are so complex they are manufactured only by one supplier. Additionally, companies such as carmakers often use one supplier for each model or project, meaning changing component makers could take months. Just-in-time delivery – long the mantra of many manufacturers worldwide – is also turning into a possible weakness in the supply chain. A problem with just one supplier can throw the entire system into chaos, as can shipping difficulties. Manufacturing experts say that for those and other reasons they are starting to see western companies bring back operations or suppliers from far-off countries in Asia to closer to home: eastern Europe or Mexico.

“We are hearing about it more and more – that companies that went to China and elsewhere in Asia for the low costs are facing rising energy and labour costs. So they are bringing production back closer to home either to the UK or more likely to eastern Europe,” says Jane Lodge, head of the manufacturing industry team at Deloitte in London. Reports suggest 67,000 factories in China closed in the first half of this year because of the slowdown in exports. Richard Meddings, chief financial officer at Standard Chartered, says the Asian-focused bank is looking much more closely at what is happening to small and mid-sized companies as well as exporters. But he says Asia is still holding up well: “It is coping quite well but the world is obviously slowing. The order chains are still working.”

Once-booming countries such as Russia are suffering more. Yann Vincent, chief operating officer of Avtovaz, the country’s largest carmaker, says: “We have suppliers that are crying. They say, ‘If you don’t pay us x million roubles, we won’t be producing – because we don’t have credit’.” Other big risks remain in the supply chain. One is the reduction of inventory levels – known as destocking – that is taking place across many industries. “There is a huge effect of massive destocking in all supply pipelines. Lots of people are waiting to buy things as they believe raw materials will only become cheaper. It is a vicious spiral,” says Feike Sijbesma, chief executive of DSM, the Dutch life sciences company. Destocking has also occurred in retail supply chains in a big way despite Christmas being so close.

One factor driving the cuts in stock is the approach of the end of the year for accounting. Many companies are keen to have as much cash on their balance sheets as possible by year-end. Ms Metelko says: “Everybody is being much more aggressive this year, especially as they’re looking at weaker demand.” Daniel Corsten, a professor at the IE Business School at Madrid, says these are desperate times for some otherwise solid suppliers: “Supply chains are generally in good shape ... But what we see now is very worrying. Previously robust suppliers in terms of quality and reliability cannot finance their production cycle any more. Shrinking demand means that customers pay late, less, or default, and as a consequence suppliers receive theirs less and late. Counterparty risk has reached the real economy.”

Limited options for Land Rover

The troubles faced by Land Rover’s Discovery four-wheel-drive vehicle shows how much havoc can be wreaked by a problem in the supply chain. In 2002 Land Rover, then owned by Ford, said it might have to stop production of the Discovery because the only supplier of its chassis – UPF-Thompson – had gone bankrupt. The carmaker estimated it would have taken six to nine months to find an alternative supplier, putting 11,000 jobs at risk at Land Rover and its suppliers. The cost of having dual suppliers would have doubled the £12m ($18m, €14m) investment needed for the chassis, the company said at the time.

The end result was messy. KPMG, the receivers for UPF, demanded about £60m from Land Rover to maintain supplies of the chassis. Land Rover accused KPMG of holding it to ransom and the matter ended up in court. Under a settlement, Land Rover paid an estimated £15m to take on UPF’s debt. Land Rover said the case underlined the need to reform bankruptcy law. But, in an illustration of the complexity of such issues, UK ministers were unsympathetic as they believed the carmaker had negotiated an original price on the chassis that left UPF making a loss on every component.

Cotton Exports Drop at Fastest Pace in Decade as Demand Slows
Cotton users are halting orders from the U.S., the world's biggest exporter, at the fastest pace in at least a decade as the economic slowdown erodes demand from China and sends prices to a six-year low. Delays, cancellations and order reductions of U.S. upland cotton by foreign buyers rose almost sevenfold from a year earlier to 329,600 running bales (74,752 metric tons) in the first 13 weeks of the marketing year that started in August, data from the U.S. Department of Agriculture show. The level is the highest since at least 1998. A bale weighs 500 pounds.

Cotton prices fell 54 percent from a 12-year high in March, and Barclays Capital says demand is so weak no rally is likely to last. Commodity buyers from metal recyclers and sugar processors to clothing makers are struggling to honor contracts signed when prices were higher. "We are seeing quite a few delays," said Andy Weil, president of Weil Brothers Cotton Inc. in Montgomery, Alabama, and past president of the American Cotton Shippers Association. "Demand is in a terrible state of affairs. When Chinese exports depend on American and Europeans economies, which are now in a recession, they have no demand for raw materials."

China, the world's biggest cotton importer, canceled or delayed 34,100 bales of U.S. orders in the week ended Oct. 23, or 4,100 bales more than its new orders, according to the USDA. Total reductions reached 41,300 bales that week, including buyers in Bangladesh and Indonesia. A week later, cancellations and delays were 11,500 bales from buyers in China, Turkey and Indonesia, government reports show. The USDA said on Nov. 10 farmers will sell upland cotton, the most common variety in the U.S., for 45 cents to 55 cents a pound in the year through July 31, down from an October estimate of 51 cents to 62 cents, and below 59.3 cents in the previous year.

Cotton for March delivery closed Nov. 14 at 42.51 cents a pound on ICE Futures U.S. in New York, down from 92.86 cents on March 5, at the time the highest price for a most-active contract since September 1995. The 23 percent drop in October was the biggest monthly decline since at least 1986. Global cotton use will drop 3.3 percent to 119.3 million bales in the current marketing year, the USDA estimates. China will consume 51 million bales, down from an initial estimate of 55 million and the first annual decline in a decade, as consumer spending falls, the USDA said. China's cotton imports from January through September dropped 6.7 percent from a year earlier to 1.77 million metric tons, according to the Beijing-based Customs General Administration.

Jiangsu Yulun Textile Group Co., a yarn spinner in Jiangsu province, buys cotton to last less than a month, compared with three months of inventories in the past. "We are having difficulty with financing," Zhang Jianhong, manager of materials at Jiangsu, said by telephone from Qingjiang. "The risk of importing cotton is very high. The downstream businesses, the clothing manufacturers, owe us money. All we have are bunch of IOUs. It's a very difficult time." Cotton consumption will be lower than previously expected in Pakistan and Turkey, the largest importers after China, according USDA forecasts.

"For my company, the demand is fairly non-existent," said Angie Goodman, president of Lubbock, Texas-based ACG Cotton Marketing LLC, which ships cotton mainly to Turkey. "They are buying in a hand-to-mouth method." Same-store sales by department stores in the U.S., the world's largest economy, fell 11 percent last month and 19 percent for luxury retailers, the International Council of Shopping Centers said Nov. 6. Macy's Inc., the second-biggest U.S. department-store chain, is buying less merchandise and reducing capital spending to prepare for a disappointing spring shopping season, Chief Financial Officer Karen Hoguet said on an earnings conference call with analysts Nov. 12.

Credit insurers are well-placed ... and unpopular
When a piece of big machinery breaks, it is often due to the failure of a minute, previously unnoticed component. Supply lines are no different, writes Kiran Stacey Credit insurers have operated quietly and unobtrusively, helping facilitate national and international trade for decades, but only now that they are withdrawing from the market has anyone apart from those closely involved noticed what they do. Credit insurance is, in the words of Luke Johnson, entrepreneur, chairman of Channel 4 and Financial Times columnist, the “lubricant vital for everyday transactions”.

Supply lines start with small companies manufacturing small components. When they supply goods to their larger, more profitable counterparts, those buyers will often use their relative might to demand that suppliers hand over goods on credit. It can then take months before the buyers pay their bills. In that time, there is a risk, however marginal, that a company undertaking the purchase will fail and so be unable to settle its account. For small suppliers, the failure of one of their bigger customers can be terminal. So they take out insurance for a small premium, usually with a 10 per cent excess for which they themselves remain liable. If the buyer collapses, at least the insurance company will settle some of their debt.

Times of crisis should therefore be ideal for credit insurers. As big companies come closer to failure, suppliers are hammering at the doors of the big three credit insurers, Atradius, Euler Hermes and Coface, to demand protection for their supply lines. Fabrice Desnos (right), chief executive of Euler Hermes UK, says bullishly: “This is a great time to be in the business.” But even the credit insurers realise there is a danger of flying too close to the sun. The worst scenario for them would be to be left facing claims from thousands of suppliers as a result of a big buyer going bust. So these companies have to manage a balance between attracting business and making sure they do not take on excessive risk.

It is understandable, therefore, that these insurers refuse to cover suppliers to particularly risky businesses. But when they start withdrawing cover on historically blue-chip companies such as General Motors and Ford, as happened last week, it is a sure sign the financial crisis is reaching parts of the economy few people ever thought it would touch. The withdrawal of such cover leaves the buyers with three scenarios: they can hope their suppliers will continue to supply without credit insurance; they can start paying cash up-front; or they will simply have to face not receiving the supplies on which they have relied. Each of these scenarios only helps bring an already troubled company closer to failure, as both the UK’s ScS Upholstery and Fopp music chain found when their suppliers were not able to take out credit cover. Their demise followed soon thereafter.

But even if supply lines keep moving, the withdrawal of credit cover gives an important signal to the market on the perceived health of a company. Credit insurers have regular conversations with buyers and are privy to information to which the market is not, so when they make a judgment call on the risk of a company failing, the market listens. It is not surprising, therefore, that at times of crisis, credit insurers can find themselves suddenly unpopular. Solvent companies and suppliers complain these insurers are panicking and pulling the rug from under them. To an extent, they have a point. Credit insurers have withdrawn cover before on big companies only to see them recover and dominate the market once more. This happened to Apple of the US during its low period in the 1990s.

But insurers point out that taking a risk-averse position is only prudent. Already the insurers are facing mounting losses. Atradius, the UK’s biggest credit insurer, saw its losses increase to account for more than 70 per cent of revenues, up from a norm of 50-60 per cent. Things in the business are likely to get worse. In the words of one credit insurance broker: “It’s bloody tough out there.” As the insurers retreat, the grinding of unlubricated supply chains can be heard round the world.

Credit insurers face huge rise in premiums
Credit insurers face having to pay big increases in reinsurance premiums in the coming months as the effects of the credit crunch worsen. Ahead of the so-called renewals season, brokers are predicting that the leading credit insurers, which seek to offload some risks to reinsurers via markets such as Lloyd's of London, will face premium hikes of more than 10 per cent.

One Lloyd's broker said: "I guess it's not really a surprise that they will have to pay up in this environment, but the kind of rises being mooted are much higher than we'd imagined. I think there'll be a lot of people in the wider economy who think they are getting their just desserts, given that they have pulled coverage on so many companies recently." Credit insurers cover businesses against the risk of bad debt due to insolvency or protracted default of their buyers. With the number of claims being made by suppliers increasing, underlying reinsurers are reappraising the rates they charge to buy risk.

Leading players in the credit insurance market – including Euler Hermes, Atradius and Coface – which together control more than 80 per cent of the market globally, have hit the headlines recently for withdrawing cover for suppliers to household names including Woolworths, JJB Sports, DSG, the owner of Dixons and PC World, and retailers owned or part-owned by Baugur, the troubled Icelandic investment firm. The decision by Atradius to pare back cover to suppliers of DSG last week sent its shares into a tailspin, losing more than 30 per cent of their market value in one trading day.

The trio also pulled cover last week on suppliers to ailing US giants General Motors and Ford Motor, which are lobbying Congress for bailout funds amid an unprecedented slump in car sales. One leading restructuring expert said the credit insurers were overreacting: "The knee-jerk reactions of the insurers shows a lack of intelligence and understanding of companies in many instances. "I'm simply not sure they have the right tools to make a proper assessment, so they just pull cover to be on the safe side in many instances."

A senior manager at one leading credit insurer dismissed the criticism: "The press loves to get hold of stories about cover being pulled, but there are lots of companies that have benefited from credit insurance, which will become more important in this difficult environment. If a train is coming straight at you, you don't just wait for it to hit. You do something about it."

Euler Hermes recently made the gloomy prediction that business failures in Britain would rocket by more than 50 per cent in the coming year, while Atradius warned that the construction industry was likely to see a wave of failures in 2009. It is believed that around a quarter of all the UK's credit insurance policies are written for suppliers in the construction arena.

Goldman Targeted by Investor Complaints of Naked Short-Selling
Investors in the $591 billion high- yield, high-risk loan market are accusing Goldman Sachs Group Inc. of naked short selling to profit from record price declines. At least two fund managers complained verbally to officials of the Loan Syndications and Trading Association, saying they believe Goldman helped drive down prices by using the technique, according to people with knowledge of the objections. New York- based Goldman is acting against its clients by trying to profit at their expense, the investors said.

A $171 billion drop in the value of the loans in the past year is pitting banks against investing clients on assets once considered so safe they typically traded at par. The drop exposed flaws in an unregulated market where trades can take from several days to months to settle and banks may have information unavailable to investors. In a naked-short transaction, a firm would sell debt it didn’t already own, betting the price will fall before it purchases the loan and delivers it to the buyer. “The LSTA is closely monitoring issues of naked short selling,” Alicia Sansone, head of communications, marketing and education at the New York-based industry association, said in an e-mail.

The group, comprising banks and money management firms that trade the debt, plans to tighten rules to ensure transactions are settled more quickly and prices reported accurately, Sansone said. She wouldn’t elaborate or discuss the claims against Goldman. “Increased volatility in the secondary market has been broadly documented and loan portfolio managers have suffered negative returns since July 2007,” Michael DuVally, a spokesman for Goldman, said in a statement. “Investors are understandably focused on the many different causes of this volatility, but Goldman Sachs’ trading positions should not be one of them,” he said, declining to comment on whether the firm was short-selling loans.

Goldman rose to the fourth-largest U.S. originator of leveraged loans last year from eighth in 2005, according to data compiled by Bloomberg. The firm helped arrange financing for First Data’s purchase by Kohlberg Kravis Roberts & Co. as well as the $32 billion acquisition of First Energy Holdings Corp., formerly known as TXU Corp. by KKR and TPG Inc. The bank was seen as the most aggressive in recent months in selling loans at prices below other dealers’ offers and taking longer than the LSTA’s recommended seven days to settle the deals, according to the investors complaining to the trade group.

There’s no rule preventing naked short selling of loans. The U.S. Securities and Exchange Commission this year banned the practice for 19 stocks including Lehman Brothers Holdings Inc. and Fannie Mae and Freddie Mac from July 21 to Aug. 12 as share prices plunged. New York-based Lehman, once the fourth-biggest securities firm, eventually went bankrupt and Fannie and Freddie, the two largest mortgage-finance providers, were brought under government conservatorship. The slump in loan prices during the global seizure in credit markets is causing particular disruption in the loan market because the debt typically trades close to 100 cents on the dollar. Prices never were below 90 cents until February this year. By October they had fallen to a record low of 71 cents, according to data compiled by Standard & Poor’s. The decline, which S&P said equated to losses of about $171 billion, helped drive the complaints from fund managers.

“Investors are shell-shocked” by the decline, said Christopher Garman, chief executive officer of debt-research firm Garman Research LLC in Orinda, California. “In many ways they’re all but wiped out.” Because prices were so stable, short sales of loans were unheard of until now, Elliot Ganz, general counsel of the LSTA, said at the group’s annual conference in New York last month. “No one ever shorted loans,” Ganz said. “Prices never went down.” High-yield, or leveraged, loans are given to companies with below-investment grade ratings, or less than Baa3 at Moody’s Investors Service and under BBB- at S&P. Banks typically form a group to arrange the financing. They then find other investors to take pieces of the debt, helping spread the risk.

Those loan parts can trade through private negotiations between banks and hedge funds or mutual funds. One of the lenders involved in the initial deal remains the so-called agent bank, which keeps track of who owns what piece. Unlike bonds and stocks, the debt doesn’t trade on an exchange and has no central clearinghouse. When a loan changes hands, the agent bank must sign off on the transaction, meaning it knows exactly who is buying and who is selling. The rest of the market is in the dark. Getting an agent to sign off, also can delay settlement. “An agent will have a bird’s-eye view of who owns what and when,” said John Jay, a senior analyst at Aite Group LLC, a research firm that specializes in technology and regulatory issues in Boston. “They have information that no one else has.”

Conflicts within the syndicated loan market have escalated since the credit crisis began. Banks, stuck with more than $230 billion of loans they’d promised to fund leveraged buyouts, tried to renege on some agreements and others broke ranks with the typical banking syndicate. Bain Capital LLC and Thomas H. Lee Partners LP, the Boston- based buyout firms that bought Clear Channel Communications Inc. sued banks including Citigroup Inc. and Deutsche Bank AG, in March accusing them of refusing to fund the acquisition. The banks counter-sued, claiming they were acting in good faith. The parties reached a settlement in May allowing the purchase to proceed at a lower price.

Tensions have also increased between investors that buy debt from banks. As banks ratcheted back credit and loan prices fell, fund managers that use borrowed money to buy loans have been forced to offload assets, further eroding prices and sparking more waves of selling. Black Diamond Capital Management LLC, a Connecticut-based manager, filed a lawsuit last month against Barclays Plc, the U.K.’s second-largest bank, over derivative agreements tied to leveraged loans. Black Diamond is demanding the lender return $302 million. The lawsuit is “without merit” and Barclays will fight it, Brandon Ashcraft, a spokesman for the bank in New York, said in an e-mailed statement.

Loans aren’t securities and are not governed by laws covering trading in bonds and stocks. While LSTA standards say a loan should settle within seven days of the trade, there’s no law governing the timing. The average trade of a loan to a company not classified as distressed took 19 days to settle in the second quarter, according to LSTA data. In the bond market, the standard settlement time is three days following the trade. In a bond short sale, a trader acquires debt by borrowing the security in a deal known as a repurchase contract. The two sides specify how long the bond will be borrowed with the right to renew the pact. Because loans can’t be borrowed through such agreements, any short seller would have to go naked.

While the LSTA doesn’t track the amount of loans currently unsettled, at least 700 trades made by Lehman Brothers Holdings Inc. before it filed for bankruptcy hadn’t cleared, Ganz told last month’s conference. The strains over settlement prompted LSTA president Bram Smith to call an emergency board meeting on Oct. 20, people with knowledge of the session say. The complaints of Goldman’s trading methods were also discussed, said the people, who declined to be named because the talks were private. Among those on the call was Lisa Opoku Busumbru, chief operating officer for loan trading at Goldman and a board member of the LSTA. Opoku Busumbru denied on the call that New York- based Goldman was short-selling loans, the people said.

Trading in the market is so opaque that it would be impossible to tell if a firm was short-selling, Jay Katz, managing director of Storm Networks LLC, a New York-based technology company launched in October with backing from Bank of America Corp. Credit Suisse Group AG and Morgan Stanley that helps settle loan trades within three days. A trade could be delayed for many reasons including not owning the debt, he said. While the delay in settlement had been an administrative issue for years, the tumbling loan prices and heightened concerns about creditworthiness of borrowers, banks and hedge funds have made it pernicious, said Ian Sandler, an executive director at Morgan Stanley and a board member of the LSTA.

A buyer or seller, or even the borrowing company, could go bankrupt in the time it takes for the loan to change hands, causing losses for the firm on the other side of the trade, Sandler said. “Delayed settlement is a real concern because you have to worry about the loan deteriorating and the failure of the counterparty until the trade is completed,” said Sandler. He wouldn’t discuss the claims against Goldman or the emergency board meeting. “There is a tremendous amount of open trades currently in the loan market.” Goldman has previously butted heads with investors, who are also clients through borrowing or advisory agreements.

In the early 1990s, the firm created the $783 million Water Street Corporate Recovery Fund to buy controlling stakes in the debt of financially distressed businesses. It was shut a year later when its negotiations upset clients such as Fidelity Investments and Tonka Toys. While other banks are reining in capital, Goldman raised $10.5 billion last month for a fund run by Thomas Connolly in New York to make loans to high-yield companies. The firm may write down its leveraged-loan portfolio by $1.3 billion in the quarter, Guy Moszkowski, an analyst at Merrill Lynch & Co., estimated last week.

Russia's banal reality lies in between energy superpower and bankrupt state
Russia has been losing $10bn in foreign reserves a week since it snatched South Ossetia and ramped up the new Cold War with nuclear threats. A fifth of the Kremlin’s fire-fighting fund has gone before the economic crisis even starts. Would the Medvedev-Putin duo have provoked the West so nonchalantly had they known that global recession would soon cut the price of Urals crude oil to $49.35 a barrel, knocking away the chief prop of Kremlin finance and Russian power?

The pace of capital flight quickened last week to $16bn after a botched mini-devaluation by the central bank. Tinkering with currency bands is hazardous in a country where memories of the 1998 savings wipeout are still fresh. The Kremlin already faces a run on Russia’s banks as depositors rush to switch their roubles into dollars, despite the $200bn financial rescue package. Russia’s Globex bank suspended withdrawals by depositors on Wednesday. Kommersant newspaper reports that the deposit loss from rouble accounts reached 54pc at Sobinbank in October, 27pc at Globex, 25pc at Raiffeisenbank, 24pc at Unicredit, and 22pc at Alfa.

“The deposit run has intensified to dramatic levels. The government’s attempts to slow panic migration to foreign currencies has failed,” said Marina Vlasenko, from Commerzbank. The central bank is caught in a fixed exchange rate trap. Pegs create the illusion of currency stability just long enough to lull everybody into a false sense of security (note Greece and Spain inside EMU). Russia either burns reserves propping up the rouble, or it risks a self-feeding devaluation spiral. There is a third way, of course. Premier Vladimir Putin issued a veiled threat on Monday to impose capital controls. Money flows out of the country would be strictly monitored, and “corporate egotism, any kind of corruption or abuse” would not be tolerated.

Yes, he also said that “legal movement of capital overseas is a civilized financial transaction. There is no question of any state bans”. Take your pick. The cost of insuring against Kremlin default tells us that somebody is worried. Credit default swaps (CDS) on Russia’s debt traded at 827 last week, higher than Hungary’s debt (605) before it secured an IMF rescue. Gazprom debt was off the charts at 1155. CDS contracts can overstate a case. But investors have rediscovered that the Russia story — stripped of BRIC’s happy talk — is still not much more than a leveraged play on oil and gas. Commodities made up 85pc of export revenues at bubble peak in May, just before the RTS index on Moscow’s bourse began its 73pc crash. A trillion dollars of paper wealth has vanished.

The government’ spending plan for 2009-2011 is based on a Urals oil price of $95. Finance minister Alexei Kudrin said the state would dip into its Reserve Fund (now 8.2pc of GDP) to cover any shortfall. This is not a strategy that can survive the global slump we face next year. The Kremlin lives off energy taxes. It has no other income to speak of. The domestic bond market is tiny. That is why it had to order oil companies last week to renew export shipments. They were selling at near $10 a barrel in the domestic market because crude prices have fallen to a level that no longer makes it rational to sell abroad given the state’s $40 export tariff. Russia must soon choose: either bleed its oil industry to death, or slash spending and face street riots. It is already mobilizing the apparatus of coercion. The Moscow Times bravely ran the headline “Police get orders to crush crisis unrest”.

Interior minister Rashid Nurgaliyev said: “Anti-crisis groups are to be set up in the regions to intercept any early indications of destabilization.” Marie Mendras, a Russia advisor to French president Nicolas Sarkozy, said the Kremlin is responding the only way it knows how. “The Putin regime is politically closed, won’t listen, and is incapable of adapting to this sort of financial crisis, so they are resorting to repression,” she told a Russia Foundation meeting. Will Russia go bankrupt again? Unlikely, said Charles Robertson, a strategist at ING. Foreign debt — at both state and private companies — was 10 times reserves before the 1998 default: it is roughly equal this time.

While oligarchs and state firms have built up $500bn of dollar and euro liabilities, the volume of short-term loans that must be rolled over within 12 months is modest compared to the Asian and Latin American crises of recent years. The money supply in the banking system is a super-low 1.2 times foreign reserves. “Today Russia is one of the safest countries in the world. We are aware of no case in history of a significant collapse in the currency with ratios this low,” he said. The price of oil will not stay low enough for long enough to destroy the system as it destroyed the Soviet Union in the 1980s. The International Energy Agency warned last week that the world’s oil fields were depleting at an alarming rate. We will require four new Saudi Arabias by 2030 to meet demand.

The inevitable energy rebound will bail out Russia again, but not enough to restore the country to superpower status soon, if ever. “Does Russia really have energy power?” asked Professor Alan Riley, from City University. “The giant gas fields are running down. Russia must turn to the High North where reserves are 560 kilometers into the Arctic, 360 meters down, and very expensive to extract. This is at an incompetent Russia with a Soviet-style gas system that has not made the investments needed,” he said. Somewhere between yesterday’s inflated talk of Russian riches and today’s talk of Russian bankruptcy lies the banal reality of a mid-ranking nation, run by a dysfunctional elite, with the worst aging crisis in the Western world, that happens to be sitting on a lot of resources. As the adage goes: Russia is never as strong as she looks: Russia is never as weak as she looks.

Russia's crumbling economy provides stiffest test yet for Putin
Subjected to more than a century of propaganda masquerading as news, Russians often seem to live in a different reality from the rest of us. And sure enough, at a time when their country is locked in its worst financial crisis in a decade, they are more optimistic about the economy than they have ever been. According to opinion polls, 57 per cent reckon it is flourishing, up from 53 per cent in July.

The survey's findings are a triumph for the state, proving that the Kremlin has not lost its touch when it comes to manipulating fact. Obeying orders from the top, Russian television has banned the use of words such as "crisis", "decline" and "devaluation". Coverage of the mayhem in the country's stock market, where shares have fallen by 75 per cent since August, is scant. Instead, just as in Soviet times, Russians are told how bad everything is in the West. The US, Russians are told, is in irreversible decline, while desperate Britons are throwing themselves into the Thames. The Queen, facing imminent penury, has been forced to pawn her diamonds and, according to one tabloid front page, we can no longer afford to bury our dead. It has fallen to Russia, one television commentator gravely intoned, to come to the rescue of Europe. Russia, another newspaper declared, was set to become the continent's lender of last resort.

As Russians are frequently reminded, this supposed stability is almost entirely thanks to the wisdom and leadership of Vladimir Putin. Yet if the state has been successful in projecting an image of calm confidence, there is growing evidence of panic behind the scenes. On November 4, Dmitry Medvedev, the protégé Mr Putin shoehorned into his old job as president in May, announced that he would seek a constitutional amendment extending the standard term of office from two consecutive terms of four years to two terms of six. Kremlin aides quickly announced that the change would not affect Mr Medvedev's current term. Mr Putin, who is now prime minister, then appeared to hint that an election could be held sooner than 2012, when Mr Medvedev's first term is due to expire. "As for who will run for office and when, it's too early to talk about that now," he told reporters.

Events proceeded at record pace. The amendment was presented to parliament on Tuesday and passed overwhelmingly at a first reading on Friday. Final votes are expected early next week, with approval from the upper house due shortly thereafter. Given that Russia has shied away from making any changes to its constitution since it was enacted in 1993, eyebrows were raised at the haste with which so momentous a reform was broached. Over the eight years that Mr Putin was president, he consolidated his grip on power by abolishing regional elections for governors and neutering pressure groups, the media and parliament itself. But each time, the Kremlin was careful to go through the motions of democracy, with long debates preceding each clampdown.

This time, there was none of that. Russia's leaders scarcely even bothered to justify the need to extend the presidential mandate, claiming that the measure was good for democracy without ever saying how. Most analysts do not doubt that the amendment is tailored entirely for Mr Putin, allowing him to return to the presidency for 12 years rather than eight. Whether he will choose to do so is another matter, although every independent analyst says they will be more surprised if Mr Putin is not president within two years than if he is. Only those close to the Kremlin claim Mr Putin has no designs on the presidency. "Medvedev will serve his term and may be re-elected for another," says Edward Lozansky, a former dissident. "It is none of the British press's business anyway. Go and teach your British wives to cook cabbage soup."

Before he stepped down as president, forced to do so by the constitution, many analysts predicted that Mr Putin would return as president in 2012. In the meantime, he would remain a powerful prime minister. So why the apparent change of heart? In part, it is to do with the financial crisis, which is far worse in Russia than Mr Putin would care publicly to admit. The prime minister has gloated over the woes of the United States, proclaiming the death of Wall Street and pledging to buy up Western companies on the cheap. Yet Russia's own stock markets have been the world's worst performers, with share prices falling by 75 per cent since the summer. The rouble is under heavy pressure, and the central bank has had to spend a fifth of its currency reserves to stop it going into freefall.

So far, the crisis has mainly affected Russia's super-rich. In May, the value of stock owned by Russia's wealthiest oligarchs stood at $300 billion. Today, it is worth just $70 billion. As a result, Russia's elite appears to be at war with itself. The Kremlin has always been heavily factionalised, with rival groups competing for control of Russia's lucrative energy and metals companies. As Russia's economy boomed after 1999, Mr Putin was able to maintain a veneer of unity between these factions, many of which acquired their fortunes during the carve-up of state assets in the 1990s, and protected them ruthlessly. But with oil and commodity prices plunging, there are no longer enough spoils to go round.

Russia's biggest businessmen owe Western banks more than $500 billion, borrowed using stock as collateral. The fall in share prices has triggered a wave of margin calls, prompting many banks to call in their loans. The state has promised $50 billion to rescue the oligarchs as part of a $200 billion bail-out – but not all will be saved. For Mr Putin, the crisis provides plenty of opportunities that he could take advantage of. Assets that were privatised in the 1990s will again come under the control of the Kremlin and can be palmed out to his closest allies. The oligarchs who are allowed to survive will be bound to him even more closely.

At the same time, the risk of internecine warfare among these powerful individuals is high and could destabilise Russia. There was a whiff of the potential danger last year, when contract killings rose dramatically amid uncertainty over Mr Putin's future. Because of the instability inherent in Mr Putin's duumvirate with Mr Medvedev, the business community, and maybe even the West, would welcome his return. "From the perspective of foreign businesses and governments, there would be a rhetorical outcry if Putin comes back," says Alex Kliment, a Russia analyst with the Eurasia Group. "But quietly, people outside the country would get used to it pretty quickly."

Yet it is by no means certain that Mr Putin would enjoy the same sky-high popularity as during his first term. After the penurious chaos of the 1990s, he presided over an era in which the economy grew by an average of 7 per cent a year and salaries increased by 15 per cent annually. But those years also saw a 275 per cent rise in metal prices and a 210 per cent gain in oil, both major exports. Last week, the price of Russian oil fell below $50 a barrel. At that price it would become impossible to balance next year's budget, which is predicated on oil prices of $95. Russian officials claim they can tap into a rainy-day fund and currency reserves that are still the third largest in the world. But Russia cannot do that indefinitely, and frittering reserves could frighten away foreign investors – who have already pulled out more than $150 billion.

There is compelling evidence that the crisis has started affecting ordinary people. The middle class has shrunk from 25 per cent of the population to 18 per cent in the past few months alone. Many companies are laying off jobs, and doing so in a manner likely to cause resentment. Until last week, Svetlana, a young mother of two, held decidedly middle-class ambitions. An executive at a construction company, she was hoping to save enough to send her children to school in Britain and buy a new flat in an upmarket part of Moscow. But then, without warning, she was made redundant along with about 70 colleagues. She received no severance pay and was instead forced to sign a letter saying she had voluntarily resigned.

"They said that if I didn't sign then I could look forward to burying my own children," Svetlana says. "What kind of country do we live in? I thought we were close to becoming a civilised nation, but I've been forced to realise that that is an illusion." Forecasts suggest that there is worse to come. Some banks are already predicting that growth could slow to between 2 and 3 per cent, a disastrous slowdown. The most pessimistic analysts say that if oil prices do not recover by about $10, Russia could even enter recession. That would present Mr Putin with his most challenging test yet. "I always thought Putin cared about ordinary people," Svetlana says. "But instead we see them bailing out oligarchs, while we are left without anything."

Freddie Mac to lose $20-$40 billion in 2009
Freddie Mac could post losses totaling $20 billion to $40 billion in 2009, hurt by higher credit costs and write-downs in mortgage assets, an analyst at Friedman Billings Ramsey said. As a result of the losses, the Treasury will have to infuse $30 billion to $50 billion in 2009, and postpone any thoughts of spinning the company back as a publicly traded one till 2010, analyst Paul Miller said in a note to clients.

Freddie Mac reported a $25.3 billion quarterly loss on Friday as the housing slump worsened, forcing the second-largest provider of U.S. home loan funding to draw on a $100 billion Treasury Department lifeline. The McLean, Virginia-based company's regulator had submitted a request for the Treasury Department to provide $13.8 billion for Freddie Mac to erase the shareholder equity deficit, which the company expects to receive by November 29.

"We believe shareholders will focus on the government sponsored enterprises' earnings losses and capital position, as losses should determine the magnitude of capital injections that may be required by the Treasury," Miller said in a note to clients. The U.S. government seized Freddie Mac and its larger rival Fannie Mae in September, pledging to inject capital as needed for the companies to operate and help stabilize the housing market. The move subordinated and nearly wiped out shareholders of Freddie Mac stock, which on Friday closed at 67 cents.

Analyst Miller maintained his "underperform" rating and a price target of 50 cents on the stock of Freddie Mac, reflecting the conservatorship status and the significant dilution to existing common shareholders through the Treasury capital injection. "Given the severity of the housing crisis and the ongoing turmoil in the mortgage market, we believe conservatorship will last beyond 2009, and that our price target accurately reflects little value in the common shares," Miller said.

Deutsche Bank CEO: End at hand for investment banks
Deutsche Bank's Chief Executive, Josef Ackermann, said he expected banks around the world to drop the model of investment banking as a standalone business as a result of the financial crisis. "We are seeing the end of pure investment banks," he said at the European Banking and Insurance Fair on Monday.

Banks would have to combine investment banking with other businesses such as retail banking and corporate client business in the future, he said. The current crisis, which he said was the worst the financial industry had ever seen, would remain a challenge for several more years. Ackermann said he expected banks to continue suffering loan defaults and resulting higher risk provisions as well as high costs to refinance, coupled with lower earnings from their capital markets business.

In the medium term, however, there would be good opportunities for the banks that weather the crisis, he said. To avert similar crises in the future, he called on legislation to allow stricter industry regulation that should include the option of flagging acquisitions that could exceed companies' financing abilities.

Goldman Chief Blankfein, Top Executives to Forgo 2008 Bonuses
Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein and six senior executive officers will go without year-end bonuses, a spokesman for the firm said. Blankfein, Chief Financial Officer David Viniar, Co- Presidents Jon Winkelried and Gary Cohn, and Vice Chairmen J. Michael Evans, Michael Sherwood and John S. Weinberg informed the compensation committee of the New York-based bank today that they would forgo the awards, according to Lucas van Praag, a company spokesman.

"They believe it's the right thing to do," van Praag said today in a telephone interview. "We can't ignore the fact that we are part of an industry that's directly associated with the ongoing economic distress." Goldman last year paid record-setting bonuses to Blankfein, Cohn and Winkelried, awarding more than $65 million to each after the company reported the biggest profits in Wall Street history. The firm's revenue is down 32 percent so far this year and some analysts predict it may report a loss in the fourth quarter.

Goldman, which converted from the largest U.S. securities firm into a bank holding company in September, is one of nine U.S. banks that received a total of $125 billion under a government-funded rescue plan for the financial industry. U.S. Representative Henry Waxman, a California Democrat, and New York Attorney General Andrew Cuomo, also a Democrat, have demanded that the companies provide information on pay plans for this year.

UBS clamps down on executive pay; explores clawbacks(!)
UBS AG Monday said it will reform its executive pay schemes after accepting Swiss government help to recover from more than $46 billion in mortgage-related write-downs. The Zurich-based bank said that beginning next year, bonuses in both cash and stock will be far more strongly tied to the bank's performance, and held in escrow as opposed to being paid out immediately. "Those who are rewarded will be those who deliver good results over several years without assuming unnecessarily high risk," the bank said.

UBS confirmed that Chairman Peter Kurer and the 12-person top management team led by Chief Executive Marcel Rohner will forgo 2008 bonuses. Other managers and UBS employees will have their year-end variable payouts reduced. The reforms come amid scathing public criticism of the bank in Switzerland after the government stepped in to assist it, with the Swiss National Bank set to manage a fund of up to $60 billion in largely illiquid UBS assets. The new pay structure was discussed with the Swiss banking regulator, which the government demanded of UBS in return for the aid. Other governments that shored up their banks, such as the U.K., have also demanded pay restrictions.

While analysts say the plan won't make a major financial impact, it aims to calm rattled shareholders and ensure that outsize payouts are a thing of the past. "Banks will still need incentives, and they will continue to pay high salaries to people who are particularly in demand, but it will have more of a long-term view instead of a short-term one," said Manuel Ammann, professor of banking and finance at the University of St. Gallen. Three UBS executives who were asked to resign in 2007 following mortgage losses - CEO Peter Wuffli, investment banking head Huw Jenkins and financial chief Clive Standish - received a combined 33 million Swiss francs ($30 million) in compensation last year, although Wuffli has since pledged to forfeit CHF12 million.

Investors will debate executive pay Nov. 27, when the bank convenes another shareholder meeting to approve the government aid. In addition to the pay scheme, UBS is looking into the legal grounds for reclaiming, or clawing back, bonuses made in past years. Pressure is mounting on former executives such as Marcel Ospel, the long-standing chairman who was forced to step down, to follow CEO Wuffli's example. UBS is in talks with other, undisclosed former executives, chairman Kurer said, and expects more past payments to return. One shareholder welcomed the reforms while voicing criticism that it doesn't go far enough to prevent what it would see as excessive pay.

UBS isn't capping bonuses or share awards, activist shareholder Ethos Fund said. While the bank is doing away with so-called golden parachutes, it can still pay out large signing bonuses. Pay is a hot topic at most Wall Street houses after major losses and the Lehman Brothers collapse. Deutsche Bank AG CEO Josef Ackermann is among the executives voluntarily waiving a year-end bonus, and the top seven executives at U.S.-based investment bank Goldman Sachs Group Inc. asked the board's pay committee to grant them no bonus for 2008, the Wall Street Journal reported.

UBS client to fight handover of bank file to US
An American customer of UBS AG will ask a Swiss court to stop his account details from being handed over to U.S. authorities probing alleged tax evasion, his lawyer said Monday. Thomas Fingerhuth said his client has been given 30 days to challenge the decision of the Swiss federal tax office to surrender his entire file to U.S. investigators, who are examining whether Switzerland's largest bank helped rich Americans dodge their tax obligations.

The case will test Switzerland's strict banking secrecy rules, which have come under sustained pressure from the United States, France and Germany in the wake of several high-profile tax evasion probes — including against UBS customers. "It's my contention that the documents were compiled illegally, and therefore cannot be surrendered or used in America, where the rules on permissible evidence are much stricter than in Switzerland anyway," Fingerhuth told The Associated Press by telephone from Zurich. Several other UBS clients are preparing similar cases, but this was the first, he said.

"In my client's case, it's not about a crazy amount of money," Fingerhuth said. "But I have a feeling that they want to push through one case to see how it goes, and then follow through with the others." Andreas Rued, a Zurich-based lawyer representing another of UBS's American clients, said the request U.S. authorities sent to the Swiss tax office on July 17 constituted an illegal "fishing expedition" because it lacked specific evidence of wrongdoing by individuals but rather hoped to find a few tax evaders by obtaining information on all customers. The Swiss tax office declined to comment on the grounds that legal proceedings in the matter were still ongoing.

Fingerhuth declined to identify his client, a retired U.S. citizen, but he said he will also file a criminal complaint against UBS for handing the documents over to Swiss authorities in the first place, in breach of Switzerland's banking secrecy laws. Earlier this month a senior UBS executive was charged in the U.S. with conspiring to hide $20 billion in assets from the Internal Revenue Service.

The indictment charges that from 2002 and 2007, Raoul Weil, as chief of UBS's wealth management business, helped about 20,000 U.S. clients conceal assets in offshore accounts. About 17,000 of the customers hid their identities and their Swiss bank accounts from the IRS and many of them filed false income tax returns. Calls placed to UBS in Zurich were not immediately returned. The bank has said in the past that it is cooperating with U.S. authorities on the tax evasion investigation.

Regulatory Filings Reveal Massive Selling in Hedgistan
The rumors of major selling by hedge funds earlier this fall seem to be accurate; 13-F filings from September 30th indicate the selling was fast and furious as September came to a close: Regulatory filings last week by 38 hedge funds with more than $1 billion in assets each show that selling and market declines cut the value of their reported holdings by about 30 percent to $273 billion. He who panics first, panics best, and the hedgies stampeded out of stocks, trampling everything in their paths:
  • At Tudor Investment Corp., the Greenwich, Connecticut, hedge-fund group founded by Paul Tudor Jones, 13F holdings fell to $453 million from $5.7 billion. Jones said markets face more selling from managers.
  • Atticus Capital LP, based in New York, disclosed that its holdings declined to $510 million from $8.1 billion. The firm, run by Timothy Barakett, 43, sold out of 39 stocks while adding no new holdings. ConocoPhillips, MasterCard Inc. and Burlington Northern Santa Fe Corp. were the three largest positions he exited, with a combined market value of $2.68 billion as of Sept. 30.
  • SAC Capital Advisors LLC of Stamford, Connecticut, said its holdings were $7.7 billion as of Sept. 30, down from $14.4 billion at June 30. Founder Steven Cohen, 52, had about half the firm's assets in cash in mid-October, after his main fund fell 5 percent through September.
  • Jeffrey Vinik, who once ran the Fidelity Magellan Fund, disclosed that his Boston-based Vinik Asset Management LP held $1.8 billion at Sept. 30, down from $11.8 billion at June 30.

Selling by the big guns no doubt accelerated after regulators changed the rules of the game and tried to protect the nation's largest banks and brokers from the predators. Too, they were quick to pick up on the post-Olympic hangover and jettisoned resource equities they had ridden to big gains over the past few years. As usual mutual fund investors were left holding the bag, and I would encourage Main Street to contact Hank Paulson with a list of grievances; the laundry list of unintended consequences from his actions are too numerous to list, but chasing capital out of the markets with his silly war against “bad hedge funds” tops the Webvan IPO on Hank’s List of Dubious Achievements.

The question now is what Hedgistan does next; we will know a bottom when we see it, and many charts are beginning to show tentative signs of improvement. Have the hedgies been slowly increasing their net and gross exposure? I am too punch drunk to decide at the moment; the markets should stay choppy as traders wind things down going into year end.

The holidays will given those still left standing a chance to reflect on the past and the future; more regulation is a certainty, but fewer participants, and a corresponding decrease in liquidity, are here to stay. A daytraders delight, to be sure, but an environment less suited to steering a battleship in a bathtub. The New Year will witness more than an Obama inauguration, perhaps old concepts like valuation will make a comeback. In any case the days of shooting against wounded hedge funds appears to be ending with a whimper, as the deleveraging process continues to wind down.

College Presidents' Pay Climbing
The latest survey on college presidents' pay showed most of their salaries continue to climb, as families struggle to cover tuition bills and congressional leaders scrutinize higher-education finances. Some of the largest increases lately have been at public universities, according to the annual pay survey by the Chronicle of Higher Education, a trade magazine. For the 2007-2008 academic year, the most recent covered by the survey, median compensation for public-university presidents was $427,400, up 7.6% from $397,349 during the previous academic year. That was about 2.6 percentage points above the inflation rate for the period.

Fifty-nine public-university presidents were paid $500,000 or more, up from 43 the previous academic year. During 2006-07, the latest academic year for which private-school data were available, median compensation at liberal-arts colleges hit $293,967, up 6.5% from the previous academic year. That exceeded the consumer-inflation rate for the period by 3.8 percentage points. Compensation at large private research universities -- a category that includes Ivy League and other selective schools -- was flat in 2006-07 compared with the previous year at $527,172, representing an inflation-adjusted decline. Overall, the number of private-school presidents earning $500,000 or more rose 10% to 89.

College officials said the pay increases are necessary to attract and keep leaders capable of overseeing their complex and often large institutions. Terry Hartle, senior vice president of the American Council on Education, a trade group, said the pay data included in the survey were gathered months before the current economic crisis began. He added that, given all the scrutiny the pay issue has received, if university trustees decide to increase a president's compensation, "they have probably acted in very good faith and in a way that is totally justified." But Patrick Callan, president of the National Center for Public Policy and Higher Education, a think tank based in San Jose, Calif., said that over the longer term, college presidents have been "disproportionately rewarded" compared with faculty and other employees. "I think these people should be fairly compensated," he said, "but I think we have gone a little bit overboard."

Sen. Charles Grassley of Iowa, ranking Republican on the Senate Finance committee, said pay raises for college presidents, like tuition increases, regularly outpace inflation. The Chronicle survey found that David J. Sargent, president of Suffolk University, an 8,900-student private institution in Boston, was the highest-paid president, earning $2,800,461. In addition to a base salary of $436,000, Mr. Sargent's compensation package included a $1.2 million "deferred sabbatical bonus" and $556,000 in certain deferred compensation. Suffolk spokesman Greg Gatlin said Mr. Sargent has never taken a sabbatical in 52 years at the university, 19 as president, and that the pay package was meant to make up for "woefully inadequate" past compensation.

Nicholas Macaronis, chairman of Suffolk's board of trustees, said the compensation was appropriate because Mr. Sargent's leadership is "critical" to Suffolk and its future. Among current presidents of public universities, E. Gordon Gee of Ohio State University was the highest paid. He received $1,346,225, which included $775,000 in salary, $225,000 in deferred compensation and a $310,000 bonus. According to a transcript, at a recent meeting of the Ohio State board of trustees where Mr. Gee's bonus was approved, Chairman Gil Gloyd told fellow trustees that Mr. Gee is the "best and most experienced university president in the nation" and that his accomplishments justified the board's faith in him.

AIG. CDOs. CDS. It's A Mess
American International Group has a plan to undo some of its most unprofitable financial missteps. Problem is, the company can't explain exactly how its approach is supposed to work, and not only is the government-controlled insurer using its own taxpayer-owned assets to pay for some of the program, the Federal Reserve is joining in with even more federal dough.

AIG seems to be planning to risk more than $70.0 billion to extricate itself from a sticky situation involving exotic bond and insurance products. That's nearly half of the $150.0 billionthe government is paying to bail out the insurer. The plan revolves around insurance contracts American International Group wrote on multi-sector collateralized debt obligations, a kind of slice-and-diced bond product that is at the heart of the worldwide credit crunch. These CDOs are mostly filled with subprimemortgage-backed securities that have plunged in value since sketchy U.S. borrowers began defaulting on their home loans in recent months.

The credit default swaps on this kind of CDO account for the lion's share of AIG's problems with default insurance. The market for the CDOs has evaporated, even for issues that don't have any known problems. Nobody wants to buy them, which means, for now, they essentially have a value of $0. Some prudent investors, and some cynical speculators, bought insurance called credit default swaps from companies like AIG if the CDOs failed to pay off as they were supposed to.

When these investments buckle, AIG either has to make a payment or buy the bond, depending on the terms of the specific deal. On the face of it, the company's approach to its problem is sensible. It wants to buy the CDOs it insured and cancel the swaps. The bonds are almost certainly worth more than nothing, and they might be worth something close to their face value. So far, so good, but this is where the complications set in.

Texas' teacher pension fund plummets in financial crisis
The Teacher Retirement System of Texas has seen about a $25 billion market value drop since Sept. 1 in the nation's widening financial meltdown, making additional benefits next year for retirees appear unlikely. Bill Harris, the system's chief investment officer, said however that 275,000 retired teachers and beneficiaries covered by the fund shouldn't fear a change in current benefits. "These are short-term conditions. We are a long-term fund," Harris said.

But the financial crisis does darken the prospects of cutting an additional check for retirees, which the Legislature sometimes authorizes whenever the system has investment gains. Last year, retirees in the system received an extra one-time check for $2,400. That was based on a 14 percent investment return for the fund, and a $664 million appropriation from the Legislature to cover payroll increases for active teachers. The system ended its 2008 fiscal year on Aug. 31 with a market value of $104.9 billion.

Harris said the fund likely will end October with a value of between $80 billion and $85 billion once audited returns are complete, the San Antonio Express-News reported. State law does not allow the TRS or the Employees Retirement System of Texas to give out a 13th check unless the pension is 100 percent funded. Ronnie Jung, the system's executive director, told fund governing board members that gains and losses were fluctuating by as much as $1 billion a day in the volatile market.

New Jersey Governor Jon Corzine should run . . . for the hills
I'm not a gambling man, but I make exceptions for politics. I mull things over for a while and at a certain point I come to a conclusion on which I am willing to bet a six-pack of beer. And I am now willing to bet a six-pack that Jon Corzine will not run for re-election as governor of New Jersey. Unlike me, our governor is a gambling man, a damn good one. He made a fortune in the gaming houses of Lower Manhattan. And he knows enough to quit when he's ahead.

The deck is stacked against the next governor. And Corzine helped stack it even before he got into politics. That was back in the go-go 1990s when he led the charge to have Goldman-Sachs go public. His firm was far from the first to do so, but that trend led directly to the current debacle on Wall Street, according to an article in the latest issue of Conde Nast Portfolio that has become required reading in financial circles. The article by Michael Lewis is headlined simply "The End." And at the end of it, after Lewis has spun a tale of greed and incompetence stretching back 20 years, he interviews the head of one of the first investment banks to go public.

"He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders," Lewis writes. "When things go wrong, it's their problem," he quotes the former exec as saying. "It's laissez-faire until you're in deep (S-word)." Which is what we're in now. Wall Street is shedding jobs like a golden retriever shakes off water. Those jobs were the engine of the New Jersey economy. Sales tax and income tax revenues are expected to drop by more than a billion dollars next year. That's bad enough. But the killer is what happened to the state pension fund. It lost 10 percent of its value in September, and indications are it may have lost even more in October, though that hasn't been reported yet.

To put that in perspective, consider that Corzine had to scrimp and save just to put a mere $1.1 billion into the fund this year. Next year he would have to put in perhaps $15 billion, almost half the budget, just to get us back to where we started this year. And the fund was on shaky ground even then. That's why Corzine wanted to "securitize" the toll roads back before "securitize" became another S-word. Things may have been bad then, but now the fund is like that lady in the "I've fallen and I can't get up" commercial. Its liabilities are growing so much faster than its assets that the two lines must converge.

There's one obvious solution, suggested to me by another Wall Street whiz. All we'd have to do is fire 25 percent of the employees covered by the fund. Simple. But the fund doesn't cover just state employees, a quarter of whom probably could be cut. It covers teachers, cops and firemen all over the state. Corzine couldn't cut them if he wanted to.

So that's out. And Corzine KO'd the other possible solution back when he first took office. In 2006, Corzine was advised by many people, including some of his fellow Democrats, that the only way to save the pension system was to end it. All current public employees would get their pensions, but new hires would have to rely on defined-contribution plans similar to the 401(k) plans held by us people who pay their salaries. The unions went crazy. And since public employee unions are the prime motive force in Democratic Party politics, an upwardly mobile Democrat like Corzine had to assure them that he takes the side of labor against management - even though he is management. Thus we got the bizarre spectacle of Corzine taking the microphone at a union rally in Trenton to proclaim, "We will fight for a fair contract!"

He's still fighting, but he's not helping the public employees. Corzine could have been a hero if he'd straightened out the system when he had the chance. But now it's too late. The ship is sinking, and I think the captain's going to desert. There are rumors that he's being considered for the job of treasury secretary in an Obama administration. But if that falls through, "I think he'd take the job of ambassador to Zimbabwe," one Wall Street wag told me. I imagine he could work his way a bit further up the alphabet. But wherever he went, it would have to be better than spending another $50 million or so from his dwindling fortune to win re-election to what could be the most thankless job in American politics. That's what the smart money says anyway. Or the smart beer.


Dan W said...

Funny...not in a ha ha way...

As I'm reading your piece Ilargi I am watching the c-span Senate discussion of the automotive industry bailout. And some Senator from Maryland and some Senator from Missouri are proposing a bill that allows people to write off excise taxes and sales taxes on their next tax return if they buy a new car. and the Senator from Maryland is up there saying "wow! this means that a minivan will end up costing only $20,000!!"

What a joke. These Congresspeople are such clowns. Cut from the same cloth as the uber-wealthy criminals in banking, these folks have no clue what life is REALLY like out there.

Their likely response to a patient with Pancreatic Cancer is a few Advil and low and behold, I have once again saved the day!! Vote for Me!!!!

Travis said...

Two weeks ago I was watching the c-span hearings with the SEC's Cox stating that they didn't have the resources to follow these newfangled financial products.

You can imagine my surprise when they trot out an insider trading charge against Mark Cuban (Basketball owner) for a whopping $750.000. Apparently the SEC has known of this for five years, yet they finally decided to act now.

Surely it has nothing to do with Cuban denouncing the bailout on his blog four days ago.....

robert said...

Isn't sales tax already deductible?

Anonymous said...

and now some kind words
from our financial luminaries

"Capital must protect itself in every possible manner by combination and legislation.
Debts must be collected,
bonds and mortgages must be foreclosed as rapidly as possible.

When, through a process of law, the common people lose their homes
they will become more docile and more easily governed through the influence of the strong arm of government, applied by a central power of wealth under control of leading financiers.

This truth is well known among our principal men now engaged
in forming an imperialism of Capital to govern the world.

By dividing the voters
through the political party system,
we can get them to expend
their energies in fighting
over questions of no importance.

Thus by discreet action,
we can secure for ourselves
what has been so well planned and so successfully accomplished."

USA Banker's Magazine,
August 25 1924

Forrest said...

"ABCPMMMFLF" ?? Seriously?

Combine that with the recent about-face in TARP spending, and the revelation that they will now leave $350 Billion on the table for the next Administration...and it makes me wonder -

What would it look like if the Fed\Treasury\White House decided to throw in the towel during this lame duck session, enter full Shock territory, and "Let The Sucker Go Down."?

I can picture them putting together this acronym, ABCPMMMFLF, with the intent of - "Will you lose confidence already!"

Dan W said...

I am trying to make sense of the Bush/Paulson "decision" to 'pass' on the 2nd 350 Billion. ilargi? Stoneleigh? I have some thoughts, but I'd love to hear yours first.

rumor said...

Good roundup today, Ilargi. The decline is proceeding pretty much as expected, as are the puppet shows that make up the news and politics surrounding it.

It's a bit funny, the mental toll this is taking on me. I'm finding fiction less and less interesting as the years go on - the antics going on in the non-fiction world are more entertaining and, perhaps ironically enough, no more connected to reality.

FB said...


Schwarzenegger. "So it's not like we're asking for a bailout, because it's our money. We're just saying, 'Hey, give us some of our money back,' " he said.

I wonder if he realises how much he sounds like Thatcher in 1979 during the European budget debate.

That does not bode well for national unity.


Anonymous said...

dan w.
"I am trying to make sense of the Bush/Paulson "decision" to 'pass' on the 2nd 350 Billion."

Me too. I thought they'd spend it as quickly as possible, to get the best bang for their buck (our buck). Maybe now they can't agree on a target to bang with the remaining 350?

"the antics going on in the non-fiction world are more entertaining and, perhaps ironically enough, no more connected to reality."

Certainly more astonishing. Ya can't write this stuff. :-/

Reluctant Poseidon Hamster

Penn said...

Citi isn't lying when it says it's too big to fail. For instance, one of the tallest skyscrapers in Sydney is the Citibank building. The man appointed to 'help' Pakistan out of its spiral was a Citibank exec.

When we talk about Citibank, we're talking about the largest bank in the world.

It's too big to fail - it's also to big to bail.

Citibank will fall, and this will usher us into an unprecedented Depression. Bank panics everywhere. Implosion of Goldman Sachs, JP Morgan, Merrill Lynch. Bank of America will follow. Parts of the world will look apocalyptic.

And none of this factors in Pakistan, which will presently fall to the Taliban.

Penn said...

The Big Three ain't lying when they say they're too big to fail.

Admittedly, this industry is Soviet in its cumbersomeness. But by now it's well known that GM, Ford and Chrysler are tied to many jobs - a tenth in the U.S., I've heard.

I shudder to think about the impact on Detroit and the Great Lakes region. Detroit is already the poorest city in America; there are neighborhoods where the police don't dare go.

If the carmakers go bankrupt, Detroit will be America's New Orleans.

Diasporas will float out of the Great Lakes Region. The fallout will rain on Pittsburgh and Chicago.

I don't have a solution for the problem: the carmakers will go bankrupt no matter what. But rest ill-assured: the United States is becoming an economic desert.

rumor said...

"Rest ill-assured". I like that. Very apt for the present.

Penn said...

Rest ill-assured indeed. Things look really worrying when you consider that Ohio, Michigan and Indiana have unemployment insurance funds that are insolvent.

Millions will be discharged from factories in the Great Lakes region. Will they get any help whatever? I doubt it.

The Great Lakes region is liable to become as legendary as the Dust Bowl.

el pollo said...

dan w said...
I am trying to make sense of the Bush/Paulson "decision" to 'pass' on the 2nd 350 Billion. ilargi? Stoneleigh? I have some thoughts, but I'd love to hear yours first.

My take is that they need congressional approval to release it, and Congress now has a wild bee up its collective ass. They don't want to go before the committees and be grilled about where the money is going. The release probably wouldn't pass the lame duck session anyway. All pain - no gain for the bankstas.

Ilargi said...

” I am trying to make sense of the Bush/Paulson "decision" to 'pass' on the 2nd 350 Billion..“

$350 billion doesn't begin to cover what's steaming down below:

”...JPMorgan has $407.8 billion of what it calls "wholesale" loan commitments, according to regulatory filings. Citigroup has $400.7 billion of "commercial and other consumer" loan commitments. Bank of America has $385.2 billion of "loan commitments" and Wachovia Corp. in Charlotte has $236.2 billion. San Francisco-based Wells Fargo, which is buying Wachovia, has $89.5 billion of "commercial" loan commitments...”

TARP has become a burden, Paulson has to go ask permission, and the banks have all sorts of forms to fill out. Before you know it, someone starts demanding interest payments. It’s been taken care of, it's not needed anymore:

”A Fed program to buy as much as $1.8 trillion of short-term debt from U.S. companies means they don't have to tap backup credit lines provided by banks, which would have forced JPMorgan Chase & Co., Citigroup Inc. and other financial institutions to record the loans on their balance sheets and raise more capital. Another Fed program, with the acronym ABCPMMMFLF, aims to shore up the $1 trillion market for asset-backed commercial paper issued by off-the-books financing vehicles guaranteed by banks.
If companies eligible for the Fed's commercial paper program had tapped their credit lines for the full $1.8 trillion, the banks would have had to set aside tens of billions of dollars against the loans. They also would have had to draw down their cash reserves, sell highly rated investments such as Treasury bills or crawl back to the Fed for additional financing

Meet fractional banking on roids: anything that once required collateral is now backed by the Fed.

Slate said...


"Isn't sales tax already deductible?"

It is an itemized deduction only if you do not choose to itemize your state income taxes or live in a state without an income tax like Tennessee (my home state). My guess is that they're thinking of making it a tax credit or perhaps some other type of above the line deduction that everyone can take advantage of. Either way it's a twisted subsidy to move outdated and fuel inefficient inventory, which isn't exactly what we need on the brink of peak oil. Show me a facet of policy where Congress isn't clueless.

Ilargi said...

Mike Shedlock sort of joins me today. He bungles some items, and gets others right. In general, I don't think petitioners understand the political system very well.

Still: How long have I been saying this for? For many months. This has to be resolved before Jan 20, or the damage to the country and Obama's career will be much much greater. I can only hope that Obama knows this, whether from me or by himself. He is a smart man, after all, but may be beholden too much to corporate interests.

The present stalemate gives me some hope that he's playing the right pieces on the board.

Question for you all: who do you think will be blamed for GM's very timely death if it happens prior to Jan 20? I see plenty of angles in place for both parties to blame the other. And that's what's needed.


Message For Congress

Fax Title: Say No To Auto Bailout

Dear senator/congressional rep

The Auto industry is attempting to employ the same scare tactics used by Paulson to get Congress to approve a $700 billion bailout for banks. Please remember that we were told huge measures were needed to prevent a stock market collapse.

Congress passed the $700 billion bailout on Friday October 3.

Since $700 Billion Bailout Passed
• The S&P collapsed from 1114 on October 3rd to 848 on November 17th. This is a drop of 24%.
• Paulson did not use the funds as requested.
• Bernanke promised to disclose how taxpayer money would be used but has refused to do so.
• Bloomberg has filed a lawsuit against the Fed under the Freedom of Information Act to find out just how Paulson has used the money.
• Not a single job was created with the money.
• Fannie Mae has announced it may need another $100 billion.
• Freddie Mac proclaimed it had negative net worth.
• AIG received another $37 billion.
• Cities and Auto companies now want a share of the $700 Billion.
• There was not a single positive result out of the money that was spent.

The Paulson plan was poorly thought out and poorly executed which is exactly what one would expect when Congress rushes to pass bills without considering alternatives.

Paulson Humiliated
On November 14 Paulson stated "We have in many ways humiliated ourselves as a nation with some of the problems that have taken place here."

Humiliated Again
We were humiliated again by wasting half of the appropriated $700 billion and getting virtually nothing out of it. Worse yet, Congress violated free market principles to waste that money.

Now Congress is complaining banks do not want to lend.

Of course banks do not want to lend.
Unemployment is rising, credit card defaults are rising, foreclosures are rising, and commercial real estate losses are rising. Banks need reserves to offset increasing loan loss provisions.

Forcing Banks To Lend Is A Huge Mistake
Forcing banks to lend would be a huge mistake. All it will do is increase bank losses. We are in this mess in the first place because banks lent recklessly. Now the ultimate irony is right in the midst of a recession, certain members of Congress are attempting to force banks to lend.

Stop The Madness!
Consumers are tapped out. They are not going to buy autos no matter how much money Congress throws at the sector.

World Will Not End If GM Goes Bankrupt
The very best thing that can happen to GM and Ford is they go bankrupt. The sooner the better. Congress will then see that the world will not end. Both companies will reorganize. Both companies will keep making cars.

The airline industry did not stop flying when it went bankrupt and the auto companies will not stop producing cars if they go bankrupt. In fact, bankruptcies will eliminate the debt on the books decrease interest payments and make the companies more competitive, if and when they ever get around to producing autos that consumers want instead of what the manufactures want to produce.

The combined market cap of GM and Ford is $1.84 Billion + $4.30 Billion or a grand total of $6.14 Billion. Spending $50 billion on companies worth $6.14 billion makes no sense.

Furthermore, GM alone has a negative net worth (Stockholder's Deficit) of $60 Billion according to GM's 10Q for the period ended September 30, 2008.

If Congress gave GM $50 billion, GM would be worth -$10 billion!

The Downside In Trying
Barney Frank says "There is no downside in trying." Of course there is a downside in trying. The downside is however much money Congress is willing to throw at the problem because every bit of it will be wasted.

Paulson gave Citigroup $25 billion. Today Citigroup announced it will shed 50,000 jobs. Exactly what taxpayer benefit did we get for that $25 billion?

It is high time Congress stop wasting taxpayer money. Let GM and Ford go bankrupt. The world will not end and no jobs will be lost that are not going to be lost anyway. The more money Congress wastes attempting to bail out organizations that deserve to fail, the less money there will be for legitimate uses down the road. It's high time that Congress understand that simple economic fact.

I urge you to vote against any bailout for the Auto companies. To do so would be a further waste of taxpayer money.

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jal said...

Ilargi or anyone who know a bit more than me about "money"

If they big 3 take the bail out then that will destroy them.

If the bail out money is the first to get paid back then there will be nothing for, bank loans, suppliers, bonds, prefered share,pension funds, common shares, etc.
There are not enough assets to guarrantee the bail out package.

If the bail out money is the last to get paid back. It will never get paid back and the money is going to go to the most persistent bank loan, pension fund, and supplier.

Please explain the "food chain" with or without a bail out.

acrumb said...

Paul craig Roberts on the need for auto bailout:
The Crisis Has Hardly Begun

Ilargi said...

In response to Paul Craig Roberts:

"Paulson should rethink the automakers’ and FDIC’s proposals. A bank produces nothing but paper. Automakers produce real things that can be sold. Occupied homes are worth more then empty ones."

Totally agree on 1. Banks in the present system are nothing but leeches and vultures, that add zero value to the real economy. And not a penny should ever have been handed out to cover their gambling losses.

But when you switch your focus from Wall Street to Detroit, what exactly is the difference? Real things, sure, but they obviously cannot be sold, or GM wouldn't be on the precipice. Whether that is because they are lousy at business or lousy at making cars, makes no difference anymore at this point.

US car manufacturing capacity is 17 million. Sales are 10 million and falling. Detroit, for various reasons, is so deep in a hole that the car industry in Japan and Europe stand a much better chance to reorganize, recuperate and continue in a slimmed down version than GM or Ford.

The Big Three are doomed, cannot turn a profit, as long as sales remain below 15 million vehicles. Sales will stay below that for at least the next 5 years, and much more likely for 15. Or 25.

If you want to save the production capacity, and the workers plus their craftsmanship, you have to find another product line, and before Christmas. That's how urgent this is. GM is worth less (market cap) than the cash it burns through in one single month. But Detroit is done making automobiles, that much is certain.

Both FDR and Hitler figured out the solution 70 years ago.

idle acts said...


You confuse two different issues in your comment. I don't intend a blanket defense of the SEC, but Cox was saying that the SEC lacked jurisdiction (and possibly resources) to oversee certain products. The Cuban case was insider trading, a subject the SEC has had undisputed jurisdiction over for decases.

As for the timing of the Cuban suit, the SEC enforcement division could have been investigating the matter for 5 years, but lawsuits can only be filed upon Commission approval, and the process for obtaining that approval is lengthy. My guess is that the suit was filed as soon as enforcement completed the investigation and got authority from the Commission to file. There is no way that a lawsuit was filed in response to comments Cuban made on his blog four days before the suit was filed. Things just don't happen that quickly there. The organization moves at glacial speed at the best of times, and these are not the best of times.

In any case, SEC procedures don't allow suits to be filed before giving potential defendants notice and an opportunity to be heard. Cuban himself would have known he was about to be charged for months, if not longer.

acrumb said...

About james Grant's book...
Henry Waxman, Hedge Fund Managers and 'Mr. Market Miscalculates'

Starcade said...

The original article first:

NONE of the Big Three are making January -- and neither is anyone reliant on the Big Three to stay in business. That's about 12 million jobs out the door in the next six weeks.

But the car industry is far finished. Has been for years. We make refurbished tanks for the limp-dicks who seem to be so prevalent in SoCal where I live... Well, that day is over.

Citibank?? Only, really, the next to go. The government has basically chosen the three large banks who will survive the longest, and Citi ain't one of 'em. Bye bye to one-seventh of the jobs now -- and the rest go soon. Real soon.

There are no jobs left. You want me to pay off my student loans, credit cards, mortgages, etc.? Debtors' prison, or you get nothing. That's the new truth. Most people, really, should just walk away from the debts at this point, unless there is some actual benefit in continuing to pay them off. For many, there isn't. And, given the crooked nature of many of the banks, there never was!

Put bluntly, the only way to basically stop the bleeding is to declare a Jubilee, junk all the currency, and start the Hell over. We're done otherwise, in a river of our blood.

Starcade said...

rumor: There are people I know closely who are one more bad story away from being the next lead story on the evening news. Somebody's going on a mass-murder rage, and it will not be long. I can understand your stress.

About the Great Lakes: They might as well start getting whatever they can, as far as people, out of Detroit and turn that into the "Escape from New York" model, because there's going to be a mess when TSHTF.

Mike Shedlock, through ilargi: No -- cars will not continue to be made here, for it's impractical to continue to do so, especially as the population will have to undergo a massive contraction to deal with all of what's been going on the last 40 years. Face it: All of this is central to one thing -- we cannot hold 305,000,000 people. Can't be economically done. The only way it's been physically done is to basically credit-up the entire economy to 25+ times the entire net worth of the planet.

These companies can't reorganize. Reorganize into what, and where do they get the materials to make their cars? EVERY COMPANY is a dead company walking now. Every last damnated one of them. It's just a matter now of when they _ALL_ die.

It's going to become a matter of time before someone finally admits the truth: There are people in this world who cannot afford to live. Period. Can't afford to continue to breathe. What's going to be done with them?

travis: Mark Cuban is perceived as a real threat. So, they're going to take him out. If they can convict him of this, he's out of sports.

Ilargi: Detroit is done, period. Cars are no longer going to be made here, really. There's no real capacity to continue making them, except as houses for the new homeless.

This country will not survive this. That was the plan all along. The question is: Will we be lucky to lose only a third of our US population???

Anonymous said...

Memo to Congress from American drivers:

Apparently we've bought our last car, we just don't know it yet. So GM & Ford are in their death throws. You are like a pet owner paying exhorbitant amounts of cash on unnecessary surgery at the end of your dog's life. Let him go peacefully. Save your cash for something more permanent:

Build mass transit instead of cars we can't afford to buy anymore. Name it the G.M.Ford Memorial Rail System. Hire every former auto worker in Michigan to build it. You won't regret it.

Bigelow said...

Ilargi wrote:
"Both FDR and Hitler figured out the solution 70 years ago."

You mean ramping up war production and predatory expansionism? If so, that is the same old same old.

/thehangedman/ said...

Starcade: "Face it: All of this is central to one thing -- we cannot hold 305,000,000 people. Can't be economically done. The only way it's been physically done is to basically credit-up the entire economy to 25+ times the entire net worth of the planet."

And similarly for the 6.5 billion on the planet as a whole.
Does that mean the sustainable human population is around a quarter billion or so? I wonder what becomes of the excess when they cannot be housed, fed, nor even supplied with water.

Anon of Florida said...

Bigelow: With what energy? Are we going to wage war with Flintstones APCs and tanks? The manpower is readily available, but where do we employ human wave attacks if the only two places we have to do so are Mexico(although with the internal wars going on in Mexico offer excellent opportunities for expending massive manpower) and Canada?

I wonder how readily the tooling in Detroit can be changed to manufacture other things, like Railroad cars.

Richard T. Haard, Ph.D. said...

GM shoving these huge cars and trucks at us and on a recent trip to Brazil I came across this sweet chevy pickup truck on the dealer lot. Flex fuel and so on. similar models by Fiat and VW.

Even Toyota and Nissan trucks have been getting bigger each year.

Penn said...

I've pondered the economic crisis long and hard for a while. To some extent, it's pure simulation. The money lost on the stock market is not like real money; it exists on the outskirts of reality.

Much of this economic crisis is taking place in space, where the satellites shuttle orders for shares and options and derivatives and what not.

Information and money darting at the speed of light.

However, the shape of this crisis changes if Citibank, for whatever reason, fails. It could be that speculators drive down its share price. It could be that Citibank took a lethal amount of leverage. It could be that too few are paying their credit card loans.

If Citi fails, there's going to be a sudden shudder across the nation.

I mean, how would that go down? Selling off Citibank will cause chaos. Is anybody big enough to buy the sucker? Maybe a foreign bank, but those aren't faring any better than America's. In America, we've got Bank of America absorbing Countrywide Home Loans and Merrill Lynch. Could Bank of America afford Citi? I can't think of any bank that could.

The ol' Friday night merger can't work with Citi. Maybe the FDIC takes it over, but that little Depression-era life-raft has got so little air in it. The FDIC has under $100 billion. And with its new guarantees, it would have to cover not only Citi's deposits, but its interbank loans too.

An FDIC takeover looks infeasible.

Anyway it goes down, the disappearance of Citi from skylines and streetcorners would really get the nation worried about its cash in the bank.

Tyr said...


"You mean ramping up war production and predatory expansionism? If so, that is the same old same old."

I think he meant state funded programs to put people to work creating infrastructure. Like the WPA. Hitler had something similar with the RAD or Reichsarbeitsdienst. Basically keeping the unemployed fed and out of trouble by putting them to work.

Penn said...

On the other hand, I can imagine Citibank being sold... to U.S. Bancorp, perhaps?

Tyr said...

All reforms will be for nothing if we don't take care of the underlying insanity in the system : producing so we can consume and consuming so we can produce. There's too much stuff, too much resources already tied up in useless trash.

I've been rewatching this documentary which I've always thought touches on a lot of the problems in a poignant way. ("Surplus - Terrorized into Being Consumers")

scandia said...

A few weeks ago I read something about GM building plants in China and Russia. Where is the money coming from for that expansion if they are so broke? Maybe they want the bailout to finance overseas expansion? So far bailout money hasn't been used for stated purpose so why should we expect a revelation of truthful intent from GM?
I want to shout, " Liar, liar, your pants are on fire"...I appreciate that is a childish impotent response...I live on the Cdn side of the Great Lakes and I am worried about a possible " dust bowl" future. Ontario is nervous. I called into to CBC radio and left my comment about GM which was give it to the workers.

bluebird said...

Where I live, in SW Ohio, all the hospitals have either just completed a major expansion, or building a major expansion or are in the planning for a major expansion. Spouse and I wonder who will be able to afford that healthcare when so many in our area are losing their jobs.

Dan W said...

@ Ilargi RE: $350 Billion pass:

I think I get it. There's no reason to go after the rest of the TARP because the FED has already set up ways for banks to write off trillions that is not subject to Congressional or public scrutiny.

Wow! So what you were saying earlier IS true: that the TARP was a total red herring, a way to divert attention from the FED's actions vis-a-vis TRILLIONS in off-sheet stuff.

bluebird said...

That Fed program "ABCPMMMFLF"? Which Fed graph would show the skyrocketing trillions increase that the Fed is backing for the banks' off-sheet stuff?

bluebird said...

Is it one of these Fed graphs?

bluebird said...

3rd question - how are these trillions paid for? Are they added onto our national debt, already at $10T?

FB said...


In response to Bluebird, TAE has published regular updates of the graph you listed, with the data of the BORROW series shown on the same graph for comparison purposes.

If you are interested in directly consulting the source data or working with the graphs, go to:

For BOGNONBR, go to:

For BORROW, go to:

It is possible to combine up to four or five data series on a single graph, modify the dates, etc. All in all, it is a very useful source of information.


Oarwell said...

GM & China: (remove spaces from URL)



(GM's China success)



Sept. 16 (Bloomberg) -- General Motors Corp., the biggest overseas carmaker in China, forecast its sales in the country will grow up to 15 percent a year as economic growth spurs demand for new cars.

The company expects sales to grow between 10 percent and 15 percent a year over the next five years, Nick Reilly, the carmaker's Asia-Pacific president said at a ground-breaking ceremony for the company's new $250 million research and development facility in Shanghai.

The automaker plans to spend $1 billion a year in China to expand operations after sales growth fell behind rival Volkswagen AG in the first six months of the year. Competition in China is increasing after industrywide sales fell for the first time in more than three years last month.


SHANGHAI - July 27, 2007: is reporting that SGM (Shanghai General Motors) will develop 3 new engine series, the AlloyTecV6 engine, ECOTECR four cylinder engine and Twin-Tec four cylinder engine.

"SGM will configure these three kinds of engines on Park Avenue, Lacrosse and Spark." Said SGM marketing director Liu Yuehai. He added that SGM will focus on the development of the new engines and to meet the increasing market demand.

Anonymous said...

There is one thing I still cannot understand:

They want to to take the taxpayers' money and throw them to the mouth of dying beast, am I right?

But why is the beast - auto industry - dying? It is because taxpayers pockets are empty, they (most of them) have no money to buy a car. Not because their managers are stupid and/or they misused their money.

If Bush will take the taxpayers' money to save the automakers, they will continue to make the car but what will happen? Will they make the cars others cannot buy? The cars will remain somewhere in the store and nothing will happens.

And after the money given by Bush will be spent, they will be in the same or deeper poo-poo than they're today. Because people will be much poor than they're today, 'cause Bush used thrir money to cover all the poo-poos his administration made for a long years.

The only way how to save the beast is to make people solvent.

Greetings from Czechia

Bigelow said...

In The Know: Should The Government Stop Dumping Money Into A Giant Hole? ONN