Wednesday, November 19, 2008

Debt Rattle, November 19 2008: Full Metal Coffin

National Photo Co. What Gravity? 1915
Along C&O Canal, Washington, D.C .

Ilargi: Hmmmm. It’s starting to look like we're about to see a harbinger moment of sorts, isn't it? I see no indication that the Motown Big Three will get what they want. Flying in on private jets may well be the last nail in the full metal coffin.

A free hand-out now seems to be entirely off the table, and that would leave only the option of a loan. But what could the Three put up as collateral for that loan? For every million dollars a factory might be worth, and that is a big if once the stones start a-falling and a-rolling, there are many millions more in obligations.

The main argument pro a bail-out is the prevention of job losses, both inside and outside the companies. Still, with that 17 million car manufacturing capacity, and a market for less than 10 million, and with all the foreign competitors eyeing those same sales, it's obvious that at least half the production will be gone no matter what. Which, as we've seen, will cost 2.5 million jobs whatever else is done.

That kind of automatically leads to the Chapter 11 option. Which will shave a haircut, the down to the bare bone type, off of all pension plans and other benefits, both for present employees and retirees. So what will be the difference? The US government is in no position, certainly not after 'securing' Wall Street banks and bonuses, to guarantee more than a few pennies a head in Flint, Michigan. It's over.

Detroit will fail, that much is guaranteed, if and when less than 15 million vehicles are sold annually in America. And there is no way that will be achieved again before 2012, if ever. GM workers are out of luck, unless there's a Manhattan effort launched for armored personnel vehicles. And even then, their pensions will be toast.

Canada is waiting to see what the US will do, before launching its own save the seals program. In Canada, even more jobs, percentage wise, than in the US, depend on US car makers. But Canada has its own issues. In the run-up to the recent federal election, the sitting government, as well as all the other parties, never once mentioned words like deficit or recession.

A few weeks later, about face is here. The PM presents a deficit as something positive (?!), and the central banker says there'll be a recession, the same Bozo the Clown who 3 weeks ago said there’d be growth. Yeah, things change fast, don’t they? NO they do not, and have not, I have been saying this would happen for ages. But I do not have a cute message, now do I?

The problem with constantly lying to people is that they have no time to prepare for hard times. To wit: A recent survey says that one thrid of Canadians thinks homes will lose value in 2009, while one third also thinks that'll be a great time to buy. Yaaah.... Canadian banks, which are presented as conservative and oh-so stable, lost on average 40% of their value since January, while the one thing that has kept the country’s economy afloat until recently, commodities, are down some 50%.

If and when politicians and media constantly hide reality from people, they invite misery and, ultimately, violence.

The New York Stock Exchange threatens to de-list Fannie Mae because its stock trades below $1 ($0.410 right now). Well, there's plenty other candidates for that honor. Ambac today trades at $0.850, after losing 25%. Freddie Mac trades at $0.560. Then we have the challenged firms, the ones sinking so fat they'll get there soon. There's Ford, at $1.25, down 26%, GM, still at 2.61, but losing another 15%. National City at $1.91, down 10%. Wamu doesn't even get to a dime anymore, but is still listed.

A Detroit rally is in the works from those covering shorts, and then it’ll be a Dickens Christmas in much of America.

Financial Crisis Tab Already In The Trillions
Given the speed at which the federal government is throwing money at the financial crisis, the average taxpayer, never mind member of Congress, might not be faulted for losing track. CNBC, however, has been paying very close attention and keeping a running tally of actual spending as well as the commitments involved.

Try $4.28 trillion dollars. That's $4,284,500,000,000 and more than what was spent on WW II, if adjusted for inflation, based on our computations from a variety of estimates and sources*. Not only is it a astronomical amount of money, its' a complicated cocktail of budgeted dollars, actual spending, guarantees, loans, swaps and other market mechanisms by the Federal Reserve, the Treasury and other offices of government taken over roughly the last year, based on government data and news releases.

Strictly speaking, not every cent is a direct result of what's called the financial crisis, but it is arguably related to it. Some 68-percent of the sum falls under the Federal Reserve's umbrella, while another 16 percent is the under the Troubled Asset Relief Program, TARP, as defined under the Emergency Economic Stabilization Act, signed into law in early October. The TARP alone is bigger than virtually any other US government endeavor dating back to the Louisiana Purchase.

30 'leading edge' indicators of why we'll be in Great Depression 2 by 2011
Every day there is more breaking news, proof Wall Street's greed is already back to "business as usual" and in denial, grabbing more and more from the new "Bailouts-R-Us" bonanza of free taxpayer cash and credits, like two-year-olds in a toy store at Christmas -- anything to boost earnings, profits and stock prices, and keep those bonuses and salaries flowing, anything to blow a new bubble.

Scan these 30 "leading indicators." Each problem has one or more possible solutions, but lacks unified political support. Time's running out. We're already at the edge. Add up the trillions in debt: Any collective solution will only compound our problems, because the cumulative debt will overwhelm us, make matters worse:

  1. America's credit rating may soon be downgraded below AAA
  2. Fed refusal to disclose $2 trillion loans, now the new "shadow banking system"
  3. Congress has no oversight of $700 billion, and Paulson's Wall Street Trojan Horse
  4. King Henry Paulson flip-flops on plan to buy toxic bank assets, confusing markets
  5. Goldman, Morgan lost tens of billions, but planning over $13 billion in bonuses this year
  6. AIG bails big banks out of $150 billion in credit swaps, protects shareholders before taxpayers
  7. American Express joins Goldman, Morgan as bank holding firms, looking for Fed money
  8. Treasury sneaks corporate tax credits into bailout giveaway, shifts costs to states
  9. State revenues down, taxes and debt up; hiring, spending, borrowing add even more debt
  10. State, municipal, corporate pensions lost hundreds of billions on derivative swaps
  11. Hedge funds: 610 in 1990, almost 10,000 now. Returns down 15%, liquidations up
  12. Consumer debt way up, now at $2.5 trillion; next area for credit meltdowns
  13. Fed also plans to provide billions to $3.6 trillion money-market fund industry
  14. Freddie Mac and Fannie Mae are bleeding cash, want to tap taxpayer dollars
  15. Washington manipulating data: War not $600 billion but estimates actually $3 trillion
  16. Hidden costs of $700 billion bailout are likely $5 trillion; plus $1 trillion Street write-offs
  17. Commodities down, resource exporters and currencies dropping, triggering a global meltdown
  18. Big three automakers near bankruptcy; unions, workers, retirees will suffer
  19. Corporate bond market, both junk and top-rated, slumps more than 25%
  20. Retailers bankrupt: Circuit City, Sharper Image, Mervyns; mall sales in free fall
  21. Unemployment heading toward 8% plus; more 1930's photos of soup lines
  22. Government policy is dictated by 42,000 myopic, highly paid, greedy lobbyists
  23. China sees GDP growth drop, creates $586 billion stimulus; deflation is now global, hitting even Dubai
  24. Despite global recession, U.S. trade deficit continues, now at $650 billion
  25. The 800-pound gorillas: Social Security, Medicare with $60 trillion in unfunded liabilities
  26. Now 46 million uninsured as medical, drug costs explode
  27. New-New Deal: U.S. planning billions for infrastructure, adding to unsustainable debt
  28. Outgoing leaders handicapping new administration with huge liabilities
  29. The "antitaxes" message is a new bubble, a new version of the American dream offering a free lunch, no sacrifices, exposing us to more false promises

Will the next meltdown, the third of the 21st Century, trigger a second Great Depression? Or will the 2007-08 crisis simply morph into a painful extension of today's mess to 2011 and beyond, with no new bull market, no economic recovery as our new president hopes? Perhaps some of the first 29 problems may be solved separately, but collectively, after building on a failed ideology, they spell disaster.

So listen closely to "leading indicator" No. 30:
At a recent Reuters Global Finance Summit former Goldman Sachs chairman John Whitehead was interviewed. He was also Ronald Reagan's Deputy Secretary of State and a former chairman of the N.Y. Fed. He says America's problems will take years and will burn trillions. He sees "nothing but large increases in the deficit ... I think it would be worse than the depression. ... Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds." It'll get worse because "the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs, all very costly and all done by the government."

Reuters concludes: "Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes. 'I just want to get people thinking about this, and to realize this is a road to disaster,' said Whitehead. 'I've always been a positive person and optimistic, but I don't see a solution here.'" We see the Great Depression 2. Why? Wall Street's self-interested greed. They are their own worst enemy ... and America's too.

Fannie Mae in Danger Of Stock Delisting
Sub-$1 Price Violates NYSE Rules

How a giant has fallen. Fannie Mae, once the largest public company in the Washington area and a bedrock of the U.S. financial industry, disclosed yesterday it is at risk of being dropped from the New York Stock Exchange. The announcement came after the mortgage finance company's share price fell below $1, a violation of exchange rules. Battered by the decline in the mortgage market, District-based Fannie Mae's shares lost most of their value this year before the government seized them. Fannie Mae's shares closed yesterday at 47 cents.

McLean-based Freddie Mac is also at risk of violating exchange rules, as its shares have fallen below $1 as well, though the company hasn't made an official announcement. Fannie Mae said it is working with the Federal Housing Finance Agency, which is the regulator in charge of the company, "to explore options relating to this deficiency." The company has until Nov. 26 to let the NYSE know if it plans to take steps to boost its share price above $1. If it does, it will have six months to accomplish the task.

If Fannie fails to boost its stock price, it could be delisted, or removed from the stock exchange. The company would still be traded on one of several electronic markets. But for many companies, that could have devastating effects. Many mutual funds aren't allowed to own companies that aren't listed on an exchange. The impact for Fannie Mae, whose future is in the hands of Congress, is harder to know. The government suspended dividend payments on the company's shares and took control of nearly 80 percent of them. It left the remaining shares outstanding.

A few weeks after the takeover, NYSE officials visited FHFA headquarters for a meeting with James B. Lockhart III, the agency's director, and the new government-appointed chief executives of Fannie Mae and Freddie Mac. The exchange wanted to know whether the FHFA and the companies would be able to meet its rules for financial reporting and board structure in order to remain listed. They said they would. Fannie Mae and Freddie Mac filed timely financial reports last week and are building their boards. In other news, the FHFA has suspended a requirement that Fannie Mae allocate funds to a new congressional housing trust fund set up to support low-income housing.

Fannie Mae sells $2 billion bills at higher rates
Fannie Mae on Wednesday sold $2 billion in bills at higher interest rates compared with sales of the same maturities and size a week ago. Fannie Mae said it sold $1 billion of three-month benchmark bills due Feb. 18, 2009 at a stop-out rate, or lowest accepted rate, of 1.000 percent and $1 billion of six-month bills due May 20, 2009 at a 1.750 percent stop-out rate.

The three-month bills were priced at 99.747 and have a money market yield of 1.003 percent, and the six-month bills were priced at 99.115 and have a money market yield of 1.766 percent, according to Fannie Mae. On Nov. 12, Fannie Mae sold $1 billion of three-month bills at a 0.930 percent stop-out rate and $1 billion of six-month bills at a 1.490 percent stop-out rate.
Settlement for the new bills is Nov. 19-20.

US Fuel Demand in First 10 Months Fell Most Since 1981
U.S. fuel demand fell 5.2 percent in the first 10 months of this year, the biggest drop since 1981, the American Petroleum Institute said.
Deliveries of petroleum products, a measure of consumption, averaged 19.6 million barrels a day in the period, down from 20.7 million barrels a day a year earlier, according to a report from the industry-funded API.

“Not only have higher prices for much of 2008 been altering consumers’ behavior, but more recent economic uncertainties have increasingly been putting a damper on demand,” said Ron Planting, an analyst with the Washington-based institute, who helped prepare the report. Demand dropped 5.4 percent during the first 10 months of 1981, Planting said. The U.S. economy contracted that year. Gasoline demand averaged 9.06 million barrels a day from January through October, down 2.6 percent from a year earlier, the report showed.

Deliveries of distillate fuel, a category that includes heating oil and diesel, averaged 3.93 million barrels a day during the period, down 6.7 percent. Jet-fuel consumption averaged 1.55 million barrels a day, a 4.5 percent decline. Implied demand for residual fuel averaged 591,000 barrels a day during the 10-month period, down 19 percent from a year earlier, according to the report. Some manufacturers and utilities switch between residual fuel and natural gas, depending on cost. The U.S. produced 4.9 million barrels a day of crude oil through October, down 2.6 percent from a year earlier, according to the institute. Production for the period was down 49 percent from the peak of 9.6 million barrels a day in 1970.

Big Three CEOs Flew Private Jets to Plead for Public Funds
The CEOs of the big three automakers flew to the nation's capital yesterday in private luxurious jets to make their case to Washington that the auto industry is running out of cash and needs $25 billion in taxpayer money to avoid bankruptcy.The CEOs of GM, Ford and Chrysler may have told Congress that they will likely go out of business without a bailout yet that has not stopped them from traveling in style, not even First Class is good enough.

All three CEOs - Rick Wagoner of GM, Alan Mulally of Ford, and Robert Nardelli of Chrysler - exercised their perks Tuesday by flying in corporate jets to DC. Wagoner flew in GM's $36 million luxury aircraft to tell members of Congress that the company is burning through cash, asking for $10-12 billion for GM alone.

"We want to continue the vital role we've played for Americans for the past 100 years, but we can't do it alone," Wagoner told the Senate Banking Committee. While Wagoner testified, his G4 private jet was parked at Dulles airport. It is one of eight luxury jets in the GM fleet that continues to ferry executives around the world despite the company's dire financial straits. "This is a slap in the face of taxpayers," said Tom Schatz, President of Citizens Against Government Waste. "To come to Washington on a corporate jet, and asking for a hand out is outrageous."

Wagoner's private jet trip to Washington cost his ailing company an estimated $20,000 roundtrip. In comparison, seats on Northwest Airlines flight 2364 from Detroit to Washington were going online for $288 coach and $837 first class. After the hearing, Wagoner declined to answer questions about his travel. Ford CEO Mulally's corporate jet is a perk included for both he and his wife as part of his employment contract along with a $28 million salary last year. Mulally actually lives in Seattle, not Detroit. The company jet takes him home and back on weekends.

Mulally made his case Tuesday before the committee saying he's cut expenses, laid-off workers and closed 17 plants. "We have also reduced our work force by 51,000 employees in the past three years," Mulally said. Yet Ford continues to operate a fleet of eight private jets for its executives. Just Tuesday, one jet was taking Ford brass to Los Angeles, another on a trip to Nebraska, and of course Mulally needed to fly to Washington to testify. He did not address questions following the hearing.

"Now's not the time to do that sort of thing," said John McElroy of the television program "Autoline Detroit." "Now's the time to be humble and show that you're sharing equally in the sacrifice," McElroy said. GM and Ford say that it is a corporate decision to have their CEOs fly on private jets and that is non-negotiable, even as the companies say they are running out of cash. Private jet travel is perhaps the greatest perk of all for CEOs, who say it allows them to travel more efficiently and safely, even in a recession.

AIG, despite the $150 billion bailout, still operates a fleet of corporate jets. The company says it has put two out of its seven jets up for sale and is reviewing the use of others. Though there are no such plans by GM or Ford. "It appears that the senior management of the automakers simply don't get it," said Schatz.

Let Detroit Go Bankrupt
Mitt Romney

If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed. Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.

I love cars, American cars. I was born in Detroit, the son of an auto chief executive. In 1954, my dad, George Romney, was tapped to run American Motors when its president suddenly died. The company itself was on life support — banks were threatening to deal it a death blow. The stock collapsed. I watched Dad work to turn the company around — and years later at business school, they were still talking about it. From the lessons of that turnaround, and from my own experiences, I have several prescriptions for Detroit’s automakers.

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers. That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable.

Second, management as is must go. New faces should be recruited from unrelated industries — from companies widely respected for excellence in marketing, innovation, creativity and labor relations. The new management must work with labor leaders to see that the enmity between labor and management comes to an end. This division is a holdover from the early years of the last century, when unions brought workers job security and better wages and benefits. But as Walter Reuther, the former head of the United Automobile Workers, said to my father, “Getting more and more pay for less and less work is a dead-end street.”

You don’t have to look far for industries with unions that went down that road. Companies in the 21st century cannot perpetuate the destructive labor relations of the 20th. This will mean a new direction for the U.A.W., profit sharing or stock grants to all employees and a change in Big Three management culture. The need for collaboration will mean accepting sanity in salaries and perks. At American Motors, my dad cut his pay and that of his executive team, he bought stock in the company, and he went out to factories to talk to workers directly. Get rid of the planes, the executive dining rooms — all the symbols that breed resentment among the hundreds of thousands who will also be sacrificing to keep the companies afloat.

Investments must be made for the future. No more focus on quarterly earnings or the kind of short-term stock appreciation that means quick riches for executives with options. Manage with an eye on cash flow, balance sheets and long-term appreciation. Invest in truly competitive products and innovative technologies — especially fuel-saving designs — that may not arrive for years. Starving research and development is like eating the seed corn. Just as important to the future of American carmakers is the sales force. When sales are down, you don’t want to lose the only people who can get them to grow. So don’t fire the best dealers, and don’t crush them with new financial or performance demands they can’t meet.

It is not wrong to ask for government help, but the automakers should come up with a win-win proposition. I believe the federal government should invest substantially more in basic research — on new energy sources, fuel-economy technology, materials science and the like — that will ultimately benefit the automotive industry, along with many others. I believe Washington should raise energy research spending to $20 billion a year, from the $4 billion that is spent today. The research could be done at universities, at research labs and even through public-private collaboration. The federal government should also rectify the imbedded tax penalties that favor foreign carmakers.

But don’t ask Washington to give shareholders and bondholders a free pass — they bet on management and they lost. The American auto industry is vital to our national interest as an employer and as a hub for manufacturing. A managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs. The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk. In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.

Shelby favors changing automaker management teams
The senior Republican on the Banking Committee, said Wednesday he doesn't believe there will be a turnaround in the troubled U.S. auto industry until its top management is ousted and its manufacturing operations are revamped. "I don't think they have immediate plans to change their model, which is a model of failure," Sen. Richard Shelby said, a day after the top executives of General Motors, Ford and Chrysler came to Congress to plead for a $25 billion "bridge loan" to avert layoffs and plant closings.

"I think a lot of it will be life support," Shelby, R-Ala., said. "I believe their best option would be some type of Chapter 11 bankruptcy ... These leaders have been failures and they need to go." Rep. Barney Frank, D-Mass., disagreed with that, saying choosing the bankruptcy option would like mean abrogation of labor contracts. "We already have too much union busting," said Frank, appearing on CBS's "The Early Show" with Shelby. Frank called bankruptcy "the favored spectator sport" for political leaders who wish to dodge a tougher decision. Whatever the various arguments, Detroit is running out of time.

The automakers' top executives will return to Congress on Wednesday, appearing before a House committee to make the same plea they made Tuesday to the Senate Banking Committee. Facing a less-than-receptive greeting there, General Motors Corp. CEO Rick Wagoner warned that the failure of the U.S. auto industry could lead to a loss of 3 million jobs within the first year and ripple throughout communities around the country. "This is all about a lot more than just Detroit. It's about saving the U.S. economy from a catastrophic collapse," Wagoner said.

Dire assessments aside, the rescue plan appeared stalled on Capitol Hill, opposed by the Bush administration and Republicans in Congress who are reluctant to use the Treasury Department's $700 billion financial bailout program to come up with the $25 billion in loans. "You're asking an awful lot," said Sen. Christopher Dodd, D-Conn. "I'd like to tell you that in the next couple of days this is going to happen. I don't think it is." A Senate vote on an automotive bailout plan, which would also extend jobless benefits, could come as early as Thursday, but it currently lacks the support to advance.

In an op-ed essay in Wednesday's editions of The New York Times, Mitt Romney, a candidate for this year's Republican presidential nomination, wrote: "If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won't go overnight, but its demise will be virtually guaranteed." Romney, who was born in Detroit and whose father was an auto industry executive, wrote: "Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check."

Rank and file Republicans and Democrats from states heavily affected by the auto industry worked behind the scenes trying to develop a compromise that could speed some aid to the automakers before year's end. But it was an uphill fight. Automakers were running into bailout fatigue on Capitol Hill. Lawmakers complained that many of the industry's problems were self-made, citing their past reliance upon gas-guzzling trucks and SUVs and opposition to tougher fuel efficiency regulations. Many wondered if the companies would be back for more money in a year. Chrysler LLC CEO Bob Nardelli rejected suggestions that the automakers should seek Chapter 11 bankruptcy protection similar to airlines that later emerged restructured and leaner. "We just cannot be confident that we will be able to successfully emerge from bankruptcy," Nardelli said. Ford Motor Co. CEO Alan Mulally said the three automakers are highly interdependent.

The financial situation for the automakers grows more precarious by the day. Cash-strapped GM said Tuesday it would delay reimbursing its dealers for rebates and other sales incentives and could run out of cash by year's end without government aid. Given the concerns, Democrats in the Senate discussed but rejected the option favored by the White House and GOP lawmakers to let the auto industry use a $25 billion loan program created by Congress in September — designed to help the companies develop more fuel-efficient vehicles — to tide them over until President-elect Barack Obama takes office. House Speaker Nancy Pelosi, D-Calif., and other senior Democrats, who count environmental groups among their strongest supporters, have vehemently opposed that approach because it would divert federal money intended to develop vehicles that use less gasoline.

Chrysler Considered, Abandoned, Bankruptcy Before Seeking Aid
Chrysler LLC Chief Executive Officer Robert Nardelli said his company studied a prearranged bankruptcy before dismissing the idea as unworkable and approaching the U.S. government for money to survive. Nardelli and General Motors Corp. CEO Rick Wagoner, who has repeatedly ruled out bankruptcy, told senators yesterday that a failure will lead to an economic "catastrophe" much costlier than the $25 billion in aid being proposed by Democrats. GM has said it may run out of operating cash this year. "We did look at prepackaged," Nardelli testified in Washington. "We looked at pre-negotiated. We've looked at almost every alternative within Chrysler as a privately held company before we came here and ask for support to -- to provide a bridge, if you will, through this economic trough."

His comments highlighted U.S. automakers' objections to so- called prepackaged bankruptcies, as advocated by some Republican lawmakers. While proponents say a filing with financing in hand would let GM, Chrysler and Ford Motor Co. survive, the automakers say going to court would end in their liquidation. Wagoner, Nardelli and Ford CEO Alan Mulally returned to Capitol Hill today for a House committee hearing as they seek an industry bailout before Congress's lame-duck session ends this week. Opposition from President George W. Bush and Republicans threatens to scuttle Democrats' bid to tap the $700 billion bank-rescue plan for automaker loans. A defeat may push consideration of any new aid into 2009, because House Speaker Nancy Pelosi said yesterday she doesn't intend to reconvene in December.

"Without fresh capital, we project that GM may not have sufficient liquidity to make it to year end," Deutsche Bank AG analysts including Rod Lache in New York wrote in a note to investors today. A GM bankruptcy is the "only way" for the biggest U.S. automaker to end union costs that make it uncompetitive, Republican Senator James DeMint of South Carolina said in an interview on Bloomberg Radio. Nardelli, who said Chrysler is down to $6.1 billion in cash and burning about $1 billion more each month, told senators yesterday that bankruptcy would take too much time. "To a certain degree, all of these take an extensive amount of time," he said of the options for arranging a filing for court protection. Auburn Hills, Michigan-based Chrysler would need support from "all the players, all of the suppliers, all of the vendors, all of the labor," he said.

"In fact, we are in a very fragile position," he said of Chrysler, whose 26 percent U.S. sales decline this year through October is the most among major automakers. The median time for a prepackaged bankruptcy is 45 days, according to Lynn LoPucki, who teaches bankruptcy law at Harvard University and the University of California at Los Angeles. The median time for an ordinary bankruptcy is about 1 1/2 years, or more than 10 times as long, he said. For GM, a prepackaged bankruptcy plan with federal assistance would involve fewer taxpayer dollars than a bailout done outside of court, said Mark Bane, a bankruptcy lawyer at Ropes & Gray in New York. He isn't involved in GM's case. The Detroit-based automaker could use court protection to reduce debt, reject unfavorable contracts and minimize the risk that it would need a future bailout, Bane said in an interview.

"It creates the environment to deal with GM's problems, but limits government financial commitment," he said. "I don't understand the stigma that would come with prepackaged bankruptcy," with the benefit of government funds to the industry, Tennessee Republican Senator Bob Corker said yesterday. "I don't know how that could possibly be detrimental." Mulally, who said Dearborn, Michigan-based Ford isn't yet running out of money, said he expects that the bankruptcy of one automaker may lead to the failure of the others. The failure of GM would cost the government as much as $200 billion should the biggest U.S. automaker be forced to liquidate, Nariman Behravesh, chief economist at IHS Global Insight Inc. in Lexington, Massachusetts, estimates.

A GM collapse would mean "more aid to specific states like Michigan, Ohio, and Indiana, and more money into unemployment and extended benefits," he said Nov. 15. Aid will likely be delayed until Congress attaches more conditions, JPMorgan Chase & Co. analyst Himanshu Patel in New York wrote in a report today. "The tone of the hearing conducted on behalf of the Senate Banking, Housing and Urban Affairs Committee and the direction of questioning did not change our view that federal aid is more likely than not," Patel wrote. "However, we feel it is clearer now that the timing of any such aid is not imminent as key differences remain amongst influential power-brokers."

Congress Blames Treasury as Foreclosures Mount
A congressional banking leader Tuesday blew hot air and blame at the U.S. treasury secretary about the ongoing home foreclosure crisis, but neither made a commitment to help stressed homeowners. Congress is officially out of session, except for this week, and has no plan to address the looming problem of foreclosures until it returns in January, when Pres.-elect Barack Obama takes office.

Congress would have full authority to do so. Instead, Rep. Barney Frank, chair of the House Financial Services Committee, told Treasury Secretary Henry Paulson that he should address the foreclosure problem and direct money from a special 700-billion-dollar fund to homeowners in trouble. "It is essential that we do something, that we use some of the [funds] toward foreclosure reduction," Frank said. Paulson, a lame-duck secretary who will leave in January when Pres.-elect Obama appoints a new secretary, said he knows how he is going to spend the remaining funds, and foreclosure assistance and an auto industry bailout is not part of his plan.

Congress has been apprised of Paulson's spending, has vast authority over it, and could have directed him to intervene on behalf of homeowners. Congress handed the 700 billion dollars to Paulson on Oct. 3, after Paulson said the emergency money was urgently needed to prevent a wholesale collapse of the U.S. banking system and economy. The U.S. public was highly critical of the plan, and called Congress by the thousands, but legislators, led by Frank and other Democrat leaders, authorised the money. Without help, five million U.S. homes will be lost to foreclosure in the next two years, according to the Federal Deposit Insurance Corporation.

Two million have already been foreclosed on. Committee member Maxine Waters expressed anger that she helped win votes for the 700 billion dollars, which she said she thought would be spent on foreclosure assistance. "I worked very hard to pass this [bailout] legislation. I was looked at with suspicion when I sold this to the Congressional Black Caucus. I am disappointed you have just divorced yourself from dealing with foreclosures," Waters told Paulson. Paulson, formerly of Goldman Sachs, has spent the funds directly on financial firms, and spent hundreds of millions to hire financial firms to disperse the money, and track it.

"We are turning the corner. We have stabilised the system and prevented a collapse. We have a lot of work ahead. It's a lot of work to get the markets going again," Paulson said. Paulson has given 125 billion dollars in cash to nine of Wall Street's largest firms, in exchange for limited stock, and 148 billion dollars so far to other smaller banks.

"You, Secretary Paulson, took it upon yourself to ignore the authority and direction that Congress gave you. I couldn't believe it when I heard that you abandoned the foreclosure effort," Waters said. Paulson expects to spend up to 350 billion dollars before he leaves office, and said the remainder will be directed to credit card companies, and businesses that make auto and education loans. None will go toward foreclosure assistance or the auto industry, he said. "I feel a great responsibility to stick with the purpose of the [fund], to stabilise and strengthen the financial system. Auto companies fall outside that purpose," Paulson said.

"Why are foreclosures still increasing, in light of the 700 billion dollars spent at taxpayers' expense?" Rep. Nydia Velazquez asked Paulson. "It's hard to imagine we're not going to have a large number of foreclosures when you look at what we've gone through, and the shoddy lending practices," Paulson said. Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation, has a plan in hand to help homeowners, and told Frank and Paulson she needs 24 billion dollars to get it started. It appears homeowners may have to wait until January for Congress or the Treasury to consider funding it.

None of the powerful congressional leaders nor Paulson has stepped forward to propose funding for it. Frank told Paulson that he should address the foreclosure problem. "The fundamental policy issue is our disappointment that funds are not being used out of the 700 billion dollars to supplement mortgage foreclosure reduction," Frank said. Waters expressed frustration that Paulson has refused so far to fund Bair's plan, and said it is badly needed. Mortgage holders are not voluntarily trying to re-negotiate their unfair loans, she said.

Waters' office is trying to help 26 homeowners to re-negotiate lower interest rates on unfair loans. "It is absolutely ridiculous. One of the banks is Wells Fargo. I've had to go all the way to the chairman. I stay on the line for one hour just trying to get to a servicer. Then when you talk to the servicer, they don't even know enough to evaluate the incomes of the owners," she said. The foreclosures are at the centre of the financial meltdown, and unless stemmed, will continue to drag down the U.S. and global economy, economists told the panel.

"Stopping the financial crisis and getting credit flowing again requires ending the spiral of mortgage foreclosures and the expectation of very deep further house price declines," said Martin Feldstein, of Harvard University. Alan Blinder, an economist at Princeton University, painted a bleak picture of the next year. "The hope that we might avoid a serious recession is now gone," he said. Blinder said that if the U.S. takes aggressive action by spending billions on infrastructure and other projects, the country may be able to hold unemployment at 8 percent. It currently stands at 6.5 percent.

Big Three Plead for Aid
The chief executives of Detroit's Big Three auto makers appealed in dire language for U.S. taxpayers to help their industry, but couldn't dispel doubts in Congress that have clouded prospects for a government-led rescue. In appearances Tuesday before the Senate Banking Committee, the leaders of General Motors Corp., Ford Motor Co. and Chrysler LLC, together with the head of the United Auto Workers union, argued the shaky U.S. economy couldn't withstand a collapse of any of the companies.

The chief executives of GM and Chrysler said they could run out of funds without the government's support. GM CEO Rick Wagoner said the package is needed to "save the U.S. economy from a catastrophic collapse." That the companies were convening -- "hat in hand," as Sen. Christopher Dodd (D., Conn.) said -- before a congressional panel reinforced the depth of their difficulties and the possible diminishment of their political clout. Extending a helping hand to Detroit auto makers, long a central part of the nation's manufacturing base, doesn't appear to be a given.

One question is whether the auto makers can muddle through to January when a new Congress convenes with strengthened Democratic majorities and a Democrat in the White House. The complexity of a possible intervention -- and the political divisiveness it has wrought -- could be too great to overcome this week. On Monday, Senate Democrats introduced legislation that would set aside $25 billion to help the industry, drawing from the $700 billion fund created to stabilize financial markets. The legislation would allow the auto companies and parts suppliers to receive "bridge loans" of at least ten years with favorable interest rates. But there is resistance among many senior Republicans and the White House. If no decision is made this week, the issue will be kicked over to the new 111th Congress.

In the late afternoon session, Republicans largely condemned the industry's request. Even some Democrats committed to helping the auto makers showed little enthusiasm for the task at hand. While noting he backs aid, Senate Banking Chairman Mr. Dodd denounced the companies for failing to move more aggressively to reverse their sharp declines in market share. "They're seeking treatment for wounds that, I believe, are largely self-inflicted," Mr. Dodd said, adding the industry has failed to adapt and "we're all paying the price for it." As the hearing stretched past its third hour, the top executives disclosed how much they might each apply for if Congress approved the $25 billion loan package: $10 billion to $12 billion for GM; $7 billion to $8 billion for Ford; and $7 billion for Chrysler. The companies said they would use the money to pay employees, cover current operating costs and develop new products.

Both GM and Ford are on a pace to use up $2 billion each a month, based on their third-quarter earnings. Not getting funding immediately threatens GM most directly because the firm is operating close to its minimal funding requirements. The supply chain is shared among the Big Three, so a bankruptcy filing of one could spell problems for the other two. Some analysts suggest GM, Ford and Chrysler can cut costs enough to survive until January. But if the U.S. auto market continues to sink, the companies' cash drain could outpace their ability to cut costs. GM has said that without government aid, the company would run out of operating funds as early as early 2009.

Chrysler joined GM for the first time in linking its survival to a federal bailout. "Without immediate bridge financing support, Chrysler's liquidity could fall below the level necessary to sustain operations in the ordinary course," Robert Nardelli, the company's chairman and CEO, said. He added that the company was currently spending about a $1 billion a month more than they were taking in, leaving the auto maker with slightly more than $6 billion cash on hand. Only Ford says that while the loan package is necessary for the betterment of the U.S.-based auto companies, it could withstand the downturn without government assistance. The auto makers and the union sketched their companies' far-reaching impact. They also argued that Chrysler, Ford and GM are on the right track to compete with foreign-based auto makers, but that turmoil in the broader economy foiled their good planning. The companies together employ 239,000 people in the U.S.

Under pressure from senators over the issue of executive compensation, Chrysler's Mr. Nardelli said he would be willing to accept a salary of $1 a year as part of a federal bailout. Lee Iacocca made the same commitment when he ran Chrysler and secured federal loan guarantees in 1979. The chief executives of GM and Ford declined to make the same commitment. The Banking Committee testimony is part of a broader lobbying campaign that includes parts suppliers and dealers. The executives will appear before the House Financial Services Committee Wednesday. All told, the companies are seeking $25 billion to weather the weakening economy, which has dampened demand for autos and restricted consumer access to loans. In another indication of the industry's problems, the world's three dominant credit insurers now consider the U.S. auto industry among the riskiest sectors for default.

Few lawmakers in either party doubt the economic challenges facing the Big Three. At issue is how -- and whether -- Congress should get involved. Sen. Jim Bunning (R., Ky.) said a rescue proposal by Senate Democrats would give the industry "virtually a blank check," and doesn't require the companies to improve productivity and lower labor costs. "Major changes are needed, if federal dollars are to be made available," he said. Sen. Richard Shelby (R., Ala.) said he has doubts about whether the money will be enough to meet the industry's needs: "Is this the end, or just the beginning?" Industry supporters, such as Sen. Carl Levin (D., Mich.) want action this week. "The stakes are great and time is short," said Sen. Levin, who is scrambling to find the 60 votes needed to overcome objections in the Senate. Sen. Levin drafted the legislation that would set aside $25 billion to help the industry using bridge loans.

To qualify, companies would have to accept limits on executive compensation, allow the government to take stock in the firms, and submit a detailed plan showing how they intend to return to sound financial footing and improve their capacity to produce fuel-efficient vehicles. It wasn't clear whether Congress would demand management changes as a condition to any bailout, although the topic was on the minds of some lawmakers. Sen. Bob Bennett (R., Utah) predicted the jobs of hourly workers and executives are on the line as the industry restructures itself. "Everybody's going to get hurt in the process," he said, adding that the idea "that we in the Congress can prevent that from happening is wishful thinking."

The proposed assistance would be on top of $25 billion in already-approved loans intended to help the industry retool to meet higher fuel-efficiency standards. The White House is pushing a rival plan to speed release of the previously approved loans, by removing certain restrictions. In testimony before the House Financial Services Committee, Treasury Secretary Henry Paulson said Tuesday the collapse of one of the auto companies "would be something to be avoided." But he said giving the industry access to the $700 billion fund isn't the answer. "I don't see this as the purpose" of the bailout program, he said.

Some Democrats aren't showing enthusiasm. Sen. Dianne Feinstein (D., Calif.) said she has problems with helping the industry without first receiving "a new business plan" that shows how the companies will return to competitiveness. Sen. Jon Tester (D., Mont.) said the idea of additional government intervention isn't popular with voters: "People in Montana are experiencing bailout fatigue."

A British Lesson on Auto Bailouts
A faltering auto giant whose brands are synonymous with the open road. Hundreds of thousands of unionized workers with powerful political backers. An urgent plea for the government to write a virtual blank check. This is not the story of Ford and General Motors, but British Leyland, a car company that went through £11 billion of inflation-adjusted British taxpayer money, or $16.5 billion, in the ’70s and ’80s before going out of business. All that is left of the company now are memories of cars like the Triumph, and a painful lesson in the limited effectiveness of bailouts.

“It’s all too evocative,” said Leon Brittan, a top official in the government of Margaret Thatcher, the free-market-minded prime minister who nevertheless backed the rescue. “I’m not telling the U.S. what to do, but the lessons of the British experience is don’t throw good money after bad. British Leyland carried on for a few more years, but they’re not there now, are they?” Other experts are sounding the same alarm. “The British Leyland experience is a relevant and cautionary one,” said John Casesa, a principal in the automotive consulting firm Casesa Shapiro Group in New York. “The government got in the business of trying to make a winner out of a structurally flawed company. That’s the risk in the U.S. as well.”

Though Continental automakers have fared better than British ones, Mr. Casesa argues that the long history of government support in Europe made companies like Renault and Fiat strong players in their home markets, but not worldwide. “With the exception of BMW and Mercedes, European automakers haven’t been globally successful,” he said. “Nor have they been hugely profitable.” That comparative history is receiving new attention as Congress turns its attention this week to the fate of Detroit. The British Leyland bailout remains the classic example of a futile government intervention. The tight cooperation between governments and automakers on the Continent has produced happier results.

For half a century after World War II, the French government was the majority stakeholder in Renault, and Paris still holds a 15 percent stake in the company. In the 1980s, the company received a bailout equal to nearly 4 billion euros, or $5.1 billion in today’s money. Now it is highly profitable — at least compared with its American counterparts. Today, G.M.’s German subsidiary, Opel, is appealing to Berlin for help, seeking more than 1 billion euros in credit guarantees, according to Carl-Peter Forster, G.M.’s European chief. Monday, Chancellor Angela Merkel of Germany said her government would make a decision before Christmas. “It’s not decided yet whether these loan guarantees will become necessary,” Mrs. Merkel told reporters in Berlin after meeting with Mr. Forster and other management and labor officials. “If these guarantees become necessary, those funds should remain within Opel” in Germany, she added, echoing a concern some Americans have expressed that any United States bailout money go only to American automakers.

So far, Asian companies have not complained that such a bailout would amount to an anticompetitive subsidy. But José Manuel Barroso, president of the European Commission, said last week that he thought an aid package for Detroit could be “illegal” under World Trade Organization rules. That has not stopped European automakers from seeking 40 billion euros in loans from the European Investment Bank, ostensibly to help develop cleaner cars. For Garel Rhys, head of the Center for Automotive Industry Research at Cardiff University in Wales, the trajectory of General Motors is reminiscent of British Leyland not only because of the former’s decision to seek aid to avert bankruptcy, but also for its slow, seemingly inexorable loss of market share. “Both had a history of being the biggest in their market but couldn’t adapt as they lost sales,” he said. “They couldn’t get customers back.”

Historically, British Leyland’s roots stretched back further than Henry Ford’s Model T. The company controlled 36 percent of the British market well into the 1970s, with mass-market brands like Austin and Morris and premium lines like MG and Jaguar. But rising competition from Japanese and German automakers, shoddy workmanship and a breakdown in labor relations brought the company to near bankruptcy by 1975, Mr. Rhys said. Michael Edwardes, who took over as British Leyland’s chief executive in November 1977, recalled that when he joined, no one even knew whether individual brands were profitable. “It was a farce — no one knew what the costs were,” he said. As it turned out, every MG the company sold in the United States resulted in a loss of $2,000 for British Leyland. Wildcat strikes consumed more than 32 million worker-hours in 1977, and the company became a symbol of labor strife, with some employees walking out the door with spark plugs in their coat pockets and engines in the trunks of their cars, Mr. Edwardes said.

Mr. Edwardes immediately began reducing the company’s work force of roughly 200,000 — to 104,000 within five years — and closing 19 factories. He appealed to the Thatcher government for aid, arguing the money was needed if British Leyland was going to be able to afford to lay off workers while investing in new models. Eventually, the government put up £3.6 billion, equal to £11 billion in today’s money. But the rescue did not do much to preserve British Leyland’s labor force or market share in the long term. By the time it received its last government infusion of cash in 1988, Mr. Rhys said, British Leyland’s market share had slumped to 15 percent. British Leyland evolved into MG Rover, which was eventually acquired by BMW, then spun off, finally going bankrupt in 2005.

According to Mr. Rhys, just 22,000 workers remain at British Leyland’s successor companies, about 10 percent of its work force in the mid-1970s. “It was a very poor return,” he said. “We felt collectively and nationally that we got our fingers burnt, and this was always used as a reason to avoid bailouts, both by Labor and Conservative governments in Britain.” Mr. Edwardes still defends the government aid, arguing it preserved parts of the company that remain in business now — like Jaguar and Land Rover, which were bought by Ford. Jaguar never made a profit for Ford, however, and was sold with Land Rover to Tata Motors of India earlier this year. Ford recouped only about half of what it paid to acquire the two brands, and is estimated to have poured $10 billion into Jaguar.

Despite the British experience, the case of Renault, which combined fresh money and new management in the 1980s, showed that government bailouts can be beneficial. The French government help for Renault also came amid increasing losses for the company. But Mr. Rhys said that unlike British Leyland, Renault was able to use the financing to create new car models that were ultimately successful. That, along with tough cost-cutting by a newly installed chairman, cleared the road to profitability by the time the government began privatizing Renault in the 1990s. If Washington does go ahead and help Detroit, Mr. Edwardes said, it is crucial that the government overhaul the management of the Big Three. “Throwing money at them isn’t enough,” he said. “They need money and they need new management. They need both, not one or the other.”

Facing a Slowdown, China’s Auto Industry Presses for a Bailout From Beijing
Do Chinese automakers need a bailout? China’s car industry is quietly pressing Beijing for government help as it copes with a jarring slowdown, top Chinese auto executives said in interviews here on Tuesday. This autumn, after six years of 20 percent or more annual growth, vehicle sales were flat or slightly negative, a shock to an industry that has borrowed heavily to build ever more factories for a market that had once seemed insatiable.

Citing the $25 billion in loans that Congress has already approved to help American automakers increase green research, and the additional $25 billion in loans the American industry is seeking this week to cope with a hobbled economy, Chinese executives are now telling the government here that they also need emergency measures. They are seeking lower taxes on new cars, lower fuel prices and increased grants for research into hybrid cars and new technology.

“The Chinese government will undoubtedly support us,” said She Cairong, the general manager of JAC Motors, adding that state-owned Chinese banks had already become more willing to lend money to Chinese automakers in recent weeks as bank regulators have eased restrictions on loans to heavy industry. Still, Mr. She and other industry leaders said that while government officials have voiced concern to them about the industry’s deteriorating condition, Beijing has not committed to any specific help. “They’re asking the questions but they haven’t said anything yet” on how aid might be structured, said Frank Zhao, vice president and chief technology officer of Geely Automobile Holdings. “We really hope the Chinese government will come and help us.”

Michael Dunne, the managing director for China at J. D. Power, said in a telephone interview from Shanghai that the executives’ remarks here represented a shift in the position of the Chinese auto industry. “This is the first I’ve heard of it,” he said, adding that “as the market slows down, Chinese automakers are going to face competition as they never have before.” Lots across China became increasingly crowded with unsold cars as sales were slightly lower in August and September than a year earlier. Yet manufacturers unexpectedly increased their shipments of new vehicles to dealerships last month by 10 percent compared with a year earlier, seeking to keep new factories busy and avoid layoffs.

Retail sales figures for October are due this week, and are likely to show a further decline that could set off another round of price cuts in a market where discounting is already becoming increasingly common. Detroit has repeatedly found that raising production in the face of weak retail sales is a recipe for financial trouble, and there is little reason to think that will be different in China. The Chinese auto industry faces several threats simultaneously. Weakening economic growth, falling real estate prices and a yearlong plunge in the stock market have made consumers leery of spending money. Fuel prices in China are still high despite the recent decline in world oil prices. And Chinese auto exports, mostly to developing countries in Eastern Europe, Southeast Asia, Africa and Latin America, are starting to crumble.

China’s car industry is already bigger than Japan’s, and is approaching in sales the industries of the United States and all of Europe. China is on track to sell 10 million vehicles this year, while demand in the United States is dropping toward 14 million vehicles. Automobiles have played a central role in Beijing’s recent plans to move up the manufacturing chain, from making cheap goods that require unskilled or low-skilled workers to more advanced products. To that end, the Chinese government has provided considerable help to China’s nascent auto industry with research and development spending, as well as loans from state-owned banks.

But there is some disagreement within the Chinese auto industry now about how the government can be most helpful. Some companies, like Geely, are looking for more government grants to help them develop hybrid gasoline-electric cars and other cutting-edge technologies for which research spending may be cut if sales do not recover. But Zheng Qinghong, the general manager of Guangzhou Auto, one of China’s largest and fastest-growing automakers, said that the Chinese industry needs the government to help consumers become enthusiastic again about buying cars. Retail sales have dipped a couple percentage points to 750,000 a month; sales were still rising at an annual pace of 24 percent a year ago. “The best way is to boost growth in demand” for cars, through steps like lower car taxes and lower fuel prices, he said in an interview.

Western multinationals would probably benefit at least indirectly from any government initiative to help China’s auto industry, because Western companies are required to do business through joint ventures with Chinese automakers, most of which are partly or entirely government owned. Jeffrey Shen, the chief executive and president of one of these joint ventures, the Changan Ford Mazda Automobile Company, said that he did not know how the government would help, but that some steps were inevitable. “I’m sure it will come,” he said, with both extra assistance for research and greater availability of loans. The renewed willingness of state-owned banks to lend money to the auto industry this autumn is in contrast with the United States, where General Motors, Ford and Chrysler have found banks and other investors leery of lending to them.

Government-mandated lending quotas, not interest rates, tend to be the most important limit on bank lending in China. Regulators have begun easing the quotas this fall after four years of fairly tight quotas imposed in an effort to control the growth of the money supply and limit inflation. Direct loans from the government of the sort under discussion in Washington are not needed in China, Mr. Zheng said. “For now, the Chinese auto industry doesn’t need saving” in the same way as the American industry, he said. Chinese automakers began facing real difficulties only in the third quarter, and have not yet released results for that period; many release their results only twice a year.

Gas prices have not fallen in China because the government pushed up regulated retail gasoline and diesel prices at service stations to more than $3 a gallon over the last year, but has not lowered retail prices as oil prices have plunged. The government is trying to encourage energy conservation and allow oil refiners to recover financially from sometimes being forced to sell gasoline and diesel below cost earlier this year during the spike in oil prices. China’s top three export markets for fully assembled vehicles are Russia, Ukraine and Vietnam, all of which are struggling with the global financial crisis.

Great Wall Motor has had a 40 percent plunge in its monthly exports to Russia in the last three months, said Steven Wang, the deputy manager of the company’s international trade division. But Great Wall Motor has still managed to avoid any layoffs because domestic sales remain strong enough to maintain employment, Mr. Wang said. With China’s largest automakers involved in joint ventures with American automakers, and with the entire Chinese auto industry now seeking its own forms of government help as well, criticism of any bailout for Detroit has been muted. Producers elsewhere in Asia, facing declining markets at home as well, have also been hesitant to criticize.

“We support vigorous competition in the automotive market place and recognize there may be extraordinary situations when such a vital sector of the American economy may require unprecedented actions to assure its long-term viability and a healthy American economy which benefits everyone,” said Jake Jang, a spokesman for Hyundai Motor in South Korea. But managers at some of the smaller Chinese manufacturers, especially those with hopes of entering the American market some day, are unhappy about the prospect of assistance for Detroit from Washington. “If G.M., Ford and Chrysler get a lot of support from their government, it’s not fair,” said Gordon Chen, the international business manager of Changfeng Motor, which has displayed cars at the last two Detroit auto shows in preparation for entering the American market in 2011 or 2012.

Toyota Cuts North America Production Further as Demand Drops
Toyota Motor Corp., confronted with its first U.S. sales slump in 13 years, will further cut North American production and may offer fewer model versions to lower costs. Assembly work at the Toyota City, Japan-based company's U.S. and Canadian plants will be suspended on Dec. 22, extending a scheduled Christmas-New Year closure by two days, spokesman Mike Goss said in an interview yesterday. Sienna minivan output in Indiana will be cut in half in January and production at one of two Georgetown, Kentucky, factory lines will be slowed, he said.

Sagging U.S. demand for large pickups and sport-utility vehicles led Toyota in August to halt production of Tundra pickups in Texas and Indiana for three months. U.S. sales for Asia's largest carmaker have fallen 12 percent this year through October as the economy weakened, gasoline prices rose to a record and the credit crunch reduced consumer access to loans. "Toyota is not profitable in North America this year," said Sean McAlinden, chief economist for the Ann Arbor, Michigan- based Center for Automotive Research said yesterday.

Toyota is adjusting to a U.S. market that may fall to as few as 13 million new vehicles this year and even lower in 2009, Irv Miller, group vice president of corporate affairs for the company's U.S. sales unit, said at a conference in Los Angeles yesterday. The company hasn't had an annual U.S. sales decline since 1995. While no full-time employees will be laid off, the company will eliminate "half or more" of 500 temporary workers at the Georgetown plant during the first three months of 2009, Goss said.

Toyota is "studying" past worker furloughs by U.S.-based automakers and may eventually announce similar layoffs, McAlinden said. Last week, the company said it would indefinitely cut one of two Tacoma pickup production shifts at New United Motor Manufacturing Inc., a joint venture factory in Fremont, California, Toyota shares with General Motors Corp. Assembly of Tacomas will continue normally at a factory near Tijuana, Mexico, as Toyota is required by that country to meet an annual production goal of 50,000 vehicles, Goss said.

Toyota built 1.29 million cars and light trucks at North American plants this year through October, down 7.2 percent from 1.39 million a year ago. To reduce costs and complexity, the company is considering options such as making fewer versions of some models. "We are looking at everything right now," Miller said. "Perhaps instead of 17 Camry variations, we go to three," he said, adding that there are no specific plans to alter the Camry line. Miller said "simplifying" Toyota's lineup might be patterned after its Scion brand, with standard base models and several custom option packages. "We are looking to make it easier for our dealers and easier for customers to buy a vehicle," he said.

US Housing Starts, Permits Drop to Record Low Pace
U.S. housing starts and permits for future construction both dropped to record lows in October, signs the housing downturn may extend into a fourth year. Construction starts on housing fell 4.5 percent in October, less than economists forecast, to an annual rate of 791,000 that was the lowest since records began in 1959, the Commerce Department said in Washington. Building permits, a sign of future residential projects, dropped 12 percent to a 708,000 pace, the lowest since at least 1960.

Builders mired in a three-year housing slump are finding it hard to attract buyers as property values drop and banks tighten lending standards. Declines in construction spending remain a drag on economic growth, increasing chances of a prolonged recession. "The problems in housing were exacerbated by the credit problems we had in September and October," said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, who forecast housing starts would drop to a 790,000 annual pace. "Housing will be slow to rebound from that period." Starts were projected to fall to a 780,000 annual pace from a previously estimated 817,000 in September, according to the median forecast of 75 economists polled by Bloomberg News. Estimates ranged from 700,000 to 870,000.

Compared with October 2007, work began on 38 percent fewer homes. Permits decreased more than forecast, compared with a 805,000 annual pace in the prior month. Construction of single-family homes dropped 3.3 percent to a 531,000 rate, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, fell 6.8 percent from the prior month to an annual rate of 260,000. The decrease in starts was led by a 31 percent decline in the Northeast. Construction dropped 13.7 percent in the Midwest, while starts in the West rose 7.5 percent and were up 1.5 percent South. The National Association of Home Builders/Wells Fargo index of builder confidence dropped lower than forecast in October to 9, its lowest since record-keeping began in 1985, the Washington-based association said yesterday. The gauge averaged 27 last year.

"We are in a crisis situation," NAHB chairman Sandy Dunn, a builder from Point Pleasant, West Virginia, said in a statement. "Tremendous economic uncertainties have driven consumers from the housing market, and it's going to take some major incentives to bring them back." U.S. foreclosure filings in October jumped 25 percent from a year earlier, compared with average monthly gains of about 50 percent so far in 2008, according to RealtyTrac, a seller of foreclosure data. Filings increased 5 percent from September after California passed a law delaying foreclosures for some borrowers. Home prices dropped in four out of every five U.S. cities in the third quarter, a record spurred by distressed foreclosure sales across the country, the Chicago-based National Association of Realtors said yesterday. The median price of a U.S. home fell 9 percent from a year earlier as sales of properties with mortgages in default accounted for at least a third of all transactions.

The housing slump is cutting into builders' profits. Toll Brothers Inc., the largest U.S. luxury homebuilder, reported its 10th straight quarterly revenue decline on Nov. 11. The five largest U.S. homebuilders reported a combined $1.09 billion in losses in their most recent quarters as prospective buyers had difficulty obtaining mortgages. About 70 percent of U.S. banks surveyed indicated they tightened standards on prime mortgage loans, down from 75 percent in the previous survey, the Federal Reserve said on Nov. 3 in its quarterly Senior Loan Officer Survey.

US Mortgage Applications Index Decreased 6.2% Last Week
Mortgage applications in the U.S. dropped last week as demand for home-purchase financing slumped to an almost eight-year low. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan fell 6.2 percent to 398.6 for the week ended Nov. 14, from 425 the prior week. The group’s purchase index decreased 13 percent to the lowest level since December 2000.

The prospect of even bigger decreases in property values and stricter lending rules by banks may be scaring away home buyers, indicating the housing slump is likely to enter a fourth year in 2009. The economy may be heading for the worst recession in decades as consumers and business retrench. “The intensification of economic and financial problems since September has been having a negative effect on home sales,” Abiel Reinhart, an economist at JPMorgan Chase & Co. in New York, said in a note to clients before the report.

The mortgage bankers’ purchase index decreased to 248.5, today’s report showed. The refinancing gauge climbed 2.6 percent to 1,281.2. Applications declined even as most mortgage rates fell. The average rate on a 30-year fixed loan dropped to 6.16 percent, the lowest level in over a month, from 6.24 percent the prior week. At the current 30-year rate, monthly borrowing costs for each $100,000 of a loan would be about $610, up $42 from mid- January, when the rate reached a three-year low of 5.5 percent.

The share of applicants seeking to refinance loans increased to 49.9 percent from 45.1 percent of total applications. Confidence among U.S. homebuilders in November dropped to the lowest level since record-keeping began in 1985, according to a report yesterday from the National Association of Home Builders/Wells Fargo. The index of builder confidence decreased to 9, lower than forecast, from 14 in October. A reading less than 50 means most respondents view conditions as poor.

A Commerce Department report today is projected to show that builders in October began work on 780,000 homes at an annual rate, the fewest since record-keeping began in 1959, according to the median estimate in a Bloomberg survey. Building permits probably fell to the lowest level since 1981. Today’s report also showed the average rate on a 15-year fixed mortgage decreased to 5.87 percent from 5.90 percent. The rate on a one-year adjustable mortgage rose to 6.80 percent from 6.77 percent the prior week. The Washington-based Mortgage Bankers Association’s loan survey, compiled every week since 1990, covers about half of all U.S. retail residential mortgage originations.

Consumer Prices in U.S. Dropped 1% in October, Most on Record
The cost of living in the U.S. dropped in October by the most on record as fuel costs plummeted and retailers discounted automobiles and clothing to entice shell- shocked consumers. Consumer prices plunged 1 percent last month, more than forecast and the most since records began in 1947, after being unchanged the prior month, the Labor Department said in Washington. Excluding food and energy, so-called core prices unexpectedly fell for the first time since 1982. A recession that may become the worst in decades raises the risk that deflation, or a prolonged decline in prices, will be another hazard facing Federal Reserve Chairman Ben S. Bernanke and President-elect Barack Obama.

Target Corp. is among retailers cutting prices in an effort to lure away cash-strapped holiday shoppers from Wal-Mart Stores Inc. "Disinflation is now moving through the system," Joseph Brusuelas, chief economist at Merk Investments LLC in Palo Alto, said before the report. "We expect to see prices coming down more broadly in coming months. There's an enhanced risk of deflation." Consumer prices were forecast to fall 0.8 percent, according to the median forecast of 77 economists in a Bloomberg News survey. Estimates ranged from a decline of 1.2 percent to a gain of 0.4 percent. Costs excluding food and energy were forecast to rise 0.1 percent, the survey showed. Prices increased 3.7 percent in the 12 months to October, the smallest year-over-year gain since October 2007. They were forecast to climb 4 percent from a year earlier, according to the survey median.

The core rate increased 2.2 percent from October 2007, after a 2.5 percent year-over-year increase the prior month. Energy expenses dropped 8.6 percent, the most since 1957. Gasoline prices fell 14 percent, the biggest decline in four decades. Gasoline has kept falling this month. A gallon of regular gasoline at the pump averaged $2.07 on Nov. 17, down from an October average of $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." The consumer-price index is the last of three monthly price gauges from the Labor Department. The CPI is the broadest gauge because it includes goods and services.

A Labor report yesterday showed wholesale prices fell 2.8 percent last month, the most on record. Last week, the government also said the cost of imported goods declined by the most ever. Food prices, which account for about a fifth of the CPI, increased 0.3 percent after a 0.6 percent increase in September. The drop in core prices reflected declines in the cost of clothing, automobiles, air fares and hotel rates. New-vehicle prices fell 0.5 percent and clothing costs dropped 1 percent. The price of airfares plunged 4.8 percent, the most since June 1999. The cost of all services, excluding fuel, was unchanged, the first time it hadn't increased since 1982. The benefit of the drop in prices can be seen in its effect on incomes.

Today's figures also showed wages increased 1.4 percent after adjusting for inflation, following no change in September. They were still down 0.9 percent over the last 12 months. The decline in purchasing power is contributing to the slowdown in consumer spending. Retail sales fell 2.8 percent last month, the most on record, Commerce Department figures showed last week. Mounting job losses and record foreclosures are causing American consumers, who account for more than two-thirds of the economy, to retrench. Wal-Mart, the world's largest retailer, said yesterday it planned to reduce U.S. prices on Thanksgiving food and Christmas merchandise to lure customers during the holidays.

"You'll see a lot of rollbacks," Eduardo Castro-Wright, Wal-Mart's U.S. stores chief, told analysts at a Morgan Stanley conference in New York. Rollbacks refer to price reductions the retailer scatters throughout grocery, pharmacy and other departments to spur sales. Target, the second-largest U.S. discounter, said this week it plans to add more grocery items and offer ôsharperö discounts to draw shoppers who are shunning jewelry, clothing and home goods, which account for more than 40 percent of its revenue. "Right now, the consumer is very hesitant," Chief Executive Officer Gregg Steinhafel said during the company's Nov. 17 earnings call. "They're very stressed."

Sales of clothing and home goods have been "sharply lower," partly because of banks decreasing consumer credit limits, Chief Financial Officer Douglas Scovanner said during the call. Leaders in the U.S., Europe and Asia are calling for increased government spending to make up for the loss of consumer purchasing power and lessen the global recession. Obama and House Democrats are planning to spend as much as half a trillion dollars to stimulate the world's biggest economy and U.K. Prime Minister Gordon Brown pressed other leaders of the Group of 20 nations to follow that effort last weekend.

The Professor’s Pop Quiz: Who Controls A.I.G.?
The terms of the government’s investment in the American International Group were released last week. After reading these terms, I have a multiple-choice question.
Who controls A.I.G.? Is it:
  1. The Federal Reserve
  2. The Department of the Treasury
  3. The current shareholders of A.I.G. (but not the government)
  4. All of the above collectively
  5. No one knows

The best answer I can discern right now is number 5. The deal has become much more complicated than it was before, but the control rights over A.I.G. appear to be as follows:

1. In exchange for its $40 billion preferred share injection under the Emergency Economic Stabilization Act, the government is getting a 10 percent dividend on these shares (plus A.I.G.’s agreement to restrictions on lobbying), the same limitations on executive compensation as in other preferred equity injections, a further limitation on annual bonus pools for senior partners not to exceed 2007 and 2006 levels, and compliance with an expense policy. As for control rights — the $40 billion preferred is nonvoting except on certain major issues affecting the preferred. If A.I.G. misses dividend payments for four consecutive quarters, the Treasury has the right under the terms of this preferred stock to elect two directors and a number of directors (rounded upward) equal to 20 percent of the total number of directors after giving effect to such election.

2. In exchange for the new $60 billion Federal Credit Facility (down from $85 billion), the Federal Reserve obtains the general rights of a creditor including senior security over A.I.G.’s unregulated subsidiaries, but no real governance rights except for some negative covenants limiting A.I.G.’s operations and expenditures.

3. Finally, the government is receiving 100,000 Series C preferred shares convertible into 77.9 percent of A.I.G.’s outstanding common stock. This second preferred stock has a vote equal to 77.9 percent of A.I.G.’s share capital and is entitled to 77.9 percent of any dividends paid by A.I.G. on its common stock.

Thus, whoever controls these Series C preferred shares controls A.I.G. These Series C shares, the stock that will vote and control A.I.G., will be owned by is a trust for the benefit of the Treasury Department. The trust is called the A.I.G. Credit Facility Trust. And who are the trustees of this trust and the controllers of A.I.G.? I have no idea nor have I seen any public disclosure on the issue except for news reports in October that these trustees would be appointed by the Fed and that there would be three of them. Moreover, under Section 5.11 of the original credit agreement, a provision that appears to be unamended in the new deal, A.I.G. “shall use all reasonable efforts to cause the composition of the board of directors of [A.I.G.] to be … satisfactory to the Trust in its sole discretion.”

So, why this oddity? I must admit, I am puzzled. Perhaps it is related to accounting or some other legal requirement? But I also suspect it may be political — the government does not want to control A.I.G. directly. Rather, it is preserving some separation of ownership and control to bar future administrations from political meddling (read the Obama administration). This is probably a worthy goal — allowing A.I.G. to operate on an economic basis protected from political meddling.

However, there should be adequate oversight of the trust and some mechanisms to prevent the trustees from obtaining their own private benefits from controlling A.I.G. and its $1 trillion in assets. In addition, the trustees themselves should be chosen for their acumen and ability to right the sinking A.I.G. ship. Here, the government could begin by disclosing the terms of this trust once they are drafted.

Modified mortgages often re-default
Sheila Bair, chairman of the Federal Deposit Insurance Corp., has proposed modifying millions of mortgages to prevent foreclosure. However, changing home loans like this doesn't always prevent problems, according to Lender Processing Services, which processes mortgage payments and tracks roughly 39 million of the 50 million outstanding home loans in the market. Bair said the FDIC's modification plan would cost $24.4 billion and proposed that some of the Treasury's $700 billion Troubled Asset Relief Program be used to pay for it.

The FDIC has already modified more than 5,000 delinquent mortgages owned or serviced by failed lender IndyMac and Bair's broader proposal is modeled on those efforts. Under the IndyMac program, eligible homeowners have been offered more affordable monthly payments through reduced interest rates on the loans, extended amortization and deferred principal payments. Lender Processing Services told analysts at Keefe, Bruyette & Woods that the results of such modification are often uninspiring.

"Industry evidence indicates that in a majority of instances loan modifications simply delay the timeline from default to foreclosure but don't prevent them from taking place," Nathaniel Otis and William Clark, analysts at KBW, wrote in a note to investors on Tuesday. For the industry in general, after mortgages are modified roughly 25% go delinquent again after just one post-modification payment and more than half end up delinquent after several post-modification payments, Lender Processing Services told the analysts.

The FDIC's broader modification proposal assumes a re-default rate of roughly 33% -- about 2.22 million mortgages would be altered to avoid 1.5 million foreclosures, according to the plan. The government would share up to half of the losses from re-defaults with lenders and investors. To qualify for the plan, borrowers would need to make six consecutive payments. This eliminates early-payment defaults - a trend that has inflated industry-wide default data, FDIC spokesman Andrew Gray noted. Bair said on Tuesday that the FDIC's IndyMac efforts have already prevented "many foreclosures that would have been costly to the FDIC and to investors."

Under the FDIC, IndyMac has mailed more than 23,000 loan modification proposals to borrowers, and will mail over 7,000 more soon, Bair added. That's in addition to more than 5,000 mortgages that have already been modified. On average, the modifications have cut each borrower's monthly payment by more than $380, or 23% of the monthly payment on principal and interest, she reported. "Over the next two years, an estimated 4 [million] to 5 million mortgage loans will enter foreclosure if nothing is done," she said. "The stakes are too high to rely exclusively on industry commitments to apply more streamlined loan modification protocols."

The internal models of Lender Processing Services suggest that the number of foreclosures will continue to rise through 2010 before peaking in 2011, the KBW analysts reported. Foreclosures six months ago were mostly associated with bad loans, but now job losses are increasingly the cause in newer foreclosure notifications, Lender Processing Services also noted.

Canada's Carney says Canada at risk of recession
Canada is at risk of entering a recession in 2009, with recovery coming in the second half of that year, the country's bank governor Mark Carney said on Wednesday.'We expect a negative quarter at the end of 2008. We will have very marginal growth at the start of 2009,' he said.

'Starting from flat growth in the first quarter of 2009 and the second quarter of 2009 ... recession is a possibility for Canada. We do see growth picking up for the second half of 2009,' he added at a news conference in London. 'We are going to see a global recession. We are in a consumer recession in the United States,' he said.

B.C.'s got the real estate blues
British Columbians have largely resigned themselves to the reality of declining real estate prices, according to two new polls. And while they have come to grips with the idea that they are on the downslope of provincial real estate markets, that appears to be the pressure release many prospective buyers have been looking for. Ipsos Reid, in a report to be released today, found that 57 per cent of British Columbians expect home prices to decline in 2009 by varying amounts depending on the region.

In Vancouver, the survey found an anticipated drop of 6.7 per cent. In the Fraser Valley, respondents' expectations were for an 8.1-per-cent decline. And on Tuesday, the Canadian Association of Accredited Mortgage Professionals (CAAMP) released the results of a survey showing 48 per cent of British Columbians expected further declines in prices. But the dropping prices look like relief to some buyers, according to the Ipsos Reid survey, which found six out of 10 respondents thought now is a good time to buy. "A lot of people have been expecting the bubble to burst," Hanson Lok, Ipsos Reid's senior research manager in B.C.

Now, with prices falling, projections for them to continue coming down and a glut of homes on the market, buyers who are in the market feel better about the strength of their negotiating position. However, while more people feel they are in a better position to buy now than they were a year ago, Lok said the current world financial roller coaster needs to sort itself out before many of them do buy. "So a lot of people, while they feel prices are more advantageous for buyers, are going to hold out before they consider buying," Lok said. He added that they will also wait to find the bottom of the market, because "prices are much more advantageous, and if they wait a little bit longer, they're going to get better."

Ipsos Reid surveyed more than 1,600 British Columbians for its poll, with a margin of error of 2.4 percentage points, 19 times out of 20. CAAMP commissioned Maritz Research to canvas 2,000 responses from across the country. Lok said the difference in sample sizes from B.C. likely explains some of the differences in responses around expectations for price declines, and that the results are likely not that far apart. The CAAMP survey also found that some 35 per cent of B.C. respondents said they believed it is a good time to buy a home, compared with 33 per cent who believed it wasn't a good time (the balance of respondents were neutral).

Nationally, 38 per cent of respondents said now is a good time to buy versus 32 per cent who did not. And on balance, the CAAMP survey found people weren't stressed about their mortgages, despite the declining prices, with 84 per cent of respondents reporting they are satisfied with their mortgages. Murphy said he believes that relates to mortgage rates and the state of the general economy. While both unemployment and interest rates are higher than they were a year ago, Murphy said they both remain at relatively low levels on a historical basis.

"In a broad sense, it really comes down to where people's personal situations are," he added. "If they feel their job is pretty solid and things are good on that front, and their [mortgage] rates are low, then they're in a fairly good position." The CAAMP survey also found that Canadians borrowed more against the equity in their homes this year -- 22 per cent compared with 17 per cent in 2007. They also borrowed more, $41,000 in 2008, up 20 per cent from the previous year.

Oil falls below $54 as economic gloom deepens
Oil's decline deepened to below $54 a barrel on Wednesday, pressured by economic weakness that will further erode the world's demand for fuel. U.S. crude fell to $53.30 a barrel, its lowest since January 2007, and by 8:11 a.m. EST was trading 61 cents lower at $53.78. Oil has dropped by nearly two-thirds from a record above $147 a barrel in July. London's Brent crude was off 54 cents at $51.30.

"With no end in sight for the global economic turmoil, traders continue to focus on the lack of demand heading into 2009," said Jonathan Kornafel, Asia director of U.S.-based options trader Hudson Capital Energy. "It is becoming quite evident that demand may actually drop from 2008 to 2009." The oil market was also closely watching U.S. weekly oil data due out at 10:35 a.m. EST on Wednesday as well as any moves from the Organization of the Petroleum Exporting Countries (OPEC) at their meeting next week.

Analysts in a Reuters poll expected the U.S. oil data would show an increase of 800,000 barrels of crude stocks, and a 400,000 barrel rise in gasoline inventories. Distillate stocks, which include heating oil and diesel, were forecast to have risen 600,000 barrels.. The American Automobile Association (AAA) motor group said on Tuesday that U.S. travel for the upcoming Thanksgiving holiday next week would decline for the first time since 2002. OPEC is very concerned about the worsening world economic slowdown, the group's president Chakib Khelil said in remarks published in El Khabar newspaper on Wednesday. Nigerian Oil Minister Odein Ajumogobia said his country was not pushing for further cuts in oil output.

Pressure Builds for US Infrastructure Outlays
Business and labor groups are ramping up a lobbying campaign to persuade President-elect Barack Obama and the next Congress to back a huge boost in infrastructure spending in an effort to create jobs and kick-start economic growth. These interest groups have increased their investments in Washington. The general-contracting sector, for example, gave $22.6 million of political donations during the 2007-08 election cycle, a 22% increase from the 2006 election.

The construction lobby is asking Congress to quickly approve $18 billion for highways and bridges and an additional $10 billion for water-infrastructure projects. Railroads want new tax incentives to add track to ease congestion at choke points. The aviation industry wants to boost a federal program for runway construction. And telecommunications firms want tax breaks to expand broadband service, while electric utilities want incentives to modernize the transmission grid.

The lobbying push comes as a broad economic-stimulus bill with $13 billion of transportation spending appears headed for a defeat in Congress this week. Advocates of infrastructure spending are seizing on everything from rising unemployment to last year's bridge collapse in Minneapolis to argue for outlays for various projects. "We are driving infrastructure to the top of the agenda," said Janet Kavinoky of the U.S. Chamber of Commerce, who appeared with an ally from the United Steelworkers union Tuesday at a forum sponsored by the Campaign for America's Future, a left-leaning think tank.

Industry lobbyists say economic turmoil and the government's bailout of other market sectors has given them hope for success. Many feel there will be more emphasis on public-works funding next year, once Democrats are in charge of the White House and Congress. "As a general rule, Democrats are inclined to be more favorably disposed to infrastructure investment as an economic stimulus than Republicans," said Todd Hauptli, a lobbyist for the American Association of Airport Executives.

Infrastructure proponents aren't counting on any quick fix next year. Among the obstacles they face: a federal deficit that could hit $1 trillion next year alone and a raft of competing policy proposals. Congress is also due to take up a six-year highway bill that could carry a $500 billion price tag. Debate on that legislation could pit lobbyists for other modes of transportation, such as railroads, against supporters of more spending on roads.

Looming over it all is the question of how to pay for a big wave of public works. Gasoline-tax receipts, the main source of federal transportation dollars, have been falling this year as Americans cut back on driving. A commission created by Congress this year recommended more than doubling gas taxes from the current 18.4 cents a gallon. But Mr. Obama and his aides steered well clear of advocating any increase during the campaign.

Meanwhile, some of those pushing to increase infrastructure spending fear the next White House might choose other priorities -- such as narrowing the budget deficit or opting for other forms of stimulus spending. "The election of Obama offers opportunity. It doesn't guarantee anything," Rep. Keith Ellison (D., Minn.) said Tuesday, cautioning transportation lobbyists against overconfidence.

If lobbyists succeed in getting something approaching what Democratic Rep. Lynn Woolsey of California on Tuesday called "a new New Deal," it will be a significant shift. Over the past couple of years, construction lobbies have repeatedly failed to get lawmakers to approve big increases in infrastructure spending. Their only recent success was getting Congress in September to put $8 billion into the rapidly depleting Highway Trust Fund, the main source of federal transportation dollars. "There is a lot of pent up demand," Mr. Hauptli said.

Wall Street looks to interest rates of 0.5%
A record fall in American producer prices last month has led Wall Street to price-in a half-percentage-point cut in interest rates, to 0.5 per cent, when the US Federal Reserve meets on December 16. The 2.8 per cent drop in producer prices in October, triggered by the collapse of global energy prices, was bigger than Wall Street had expected. It also validates the measures by the Fed, which recently dramatically cut the cost of borrowing. Before the banking crisis erupted three months ago, Ben Bernanke, the Fed Chairman, had been reluctant to reduce interest rates much amid concerns that cheaper borrowing would stoke inflation.

At the time, he was worried that inflation posed a real threat to the US economy amid high oil and food prices. New data from the US Labour Department yesterday showed that the collapse of commodity values caused by the global recession has affected manufacturing costs. In October, the price of petrol in the United States fell by almost a third. US producer prices are a measure of how much money manufacturers in America receive for their goods. A fall in producer prices puts pressure on consumer prices - the main measure of inflation. As energy prices fall, the operating costs of manufacturers fall both for paying utility bills and for the price of the basic materials and chemicals they use to make their goods. Energy costs fell 12.8 per cent in October, the biggest decline for 22 years.

While core producer prices, which exclude food and energy, shot up four times faster than expectations, to 0.4 per cent over the month, many economists believe the rise to be a hangover from the period of a high oil price and that it will fall soon. The figure includes items such as lorries, farm equipment, detergents and tyres. Ian Shepherdson, chief US economist at High Frequency Economics, said: “We view these as legacy rises after the surge in commodity prices that is now reversing.” Separately, Mr Bernanke told the Financial Services Committee on Capitol Hill that credit markets, while stabilising, remained under serious strain and government capital injections into banks are needed to help to restore normal lending.

Bank of England considered two-point interest rate cut
Bank of England policymakers considered an even bigger reduction in interest rates - of more than two percentage points - when they voted to lower them by 1.5 points earlier this month, but worried this could be too much of a shock for financial markets. The news raised expectations in the City of a further one-point move next month, which would take rates down to 2%. Minutes of the meeting, released this morning, showed all nine members of the monetary policy committee voted in favour of the cut, which took the Bank's base rate to 3% from 4.5%. The committee's deliberations suggest it stands ready to move again aggressively to bring borrowing costs down in a bid to stimulate the economy.

Last week the Bank published its latest forecasts for the economy, which show it sinking into a deeper recession than previously thought, while inflation could fall to 1%, far below the Bank's 2% target. The CBI warned today that the outlook for manufacturing production is the worst for nearly 30 years. "Monetary policy boring? Clearly not any more," said Marc Ostwald of Monument Securities. "The fact that they considered 200 basis points at this month's meeting will surely trigger a shift in market expectations for December to a 100 basis points cut. Bad news for an already beleaguered pound, particularly if Alistair Darling goes on a borrow-and-spend spree as is largely expected for next Monday's pre-budget report."

The MPC said its latest forecasts showed that a "very significant reduction in the Bank rate – possibly in excess of 200 basis points – might be required in order to meet the inflation target in the medium term". However, it opted against such a big move this month for a number of reasons. A "key concern" was the degree of surprise to financial markets. "Too large a surprise could pose upside risks to the inflation target if the resulting depreciation of sterling was excessive," the committee said. Some members thought there was a case for leaving some of the "required policy loosening to the months ahead to support confidence as the economy weakened". The pound fell to $1.4964 after the minutes were released, from $1.4987 just before. It also weakened against the euro, now worth 84.18p.

Policymakers also argued that it made sense to wait until after the government's pre-budget report. It is expected to include tax cuts and other measures to help families and businesses, which could reduce the need for future rate cuts. While the banking measures that have been introduced around the world have restored some stability to the banking system, it was unclear how the supply of money and credit to the wider economy would respond and the committee wanted to wait and see how these measures were working, it said. Ross Walker at RBS said: "The fact that there was such a radical cut suggested to us that there had been a fundamental rethink within the committee. And quite possibly a new consensus forming, certainly a significant narrowing between the hawks and the doves."

Citi Agrees to Acquire SIV Assets for $17.4 Billion
Citigroup Inc., the fourth-biggest U.S. bank by market value, agreed to acquire $17.4 billion of assets held by structured investment vehicles advised by the company. Citigroup said today in a statement that the value fell from $21.5 billion as of Sept. 30, reflecting market declines of $1.1 billion and $3 billion in debt that matured or was sold. SIVs, which Citigroup invented in 1988, emerged 15 months ago as one of the first major strains in credit markets rocked by record high foreclosures on subprime mortgages. Citigroup, the biggest manager of the funds, has reduced the assets of its SIVs from $87 billion in August 2007.

Citigroup was forced to bail out seven troubled SIVs in December, assuming $58 billion of debt, as a slump in credit markets eroded the value of their assets. SIVs were set up to make money by selling short-term debt and buying longer-dated and higher-yielding assets including bank bonds, mortgage-backed securities and collateralized debt obligations. The short-term debt was bought by money-market funds as well as government investment pools that manage cash for schools and towns.

Many of those buyers refused to roll over their investments after becoming concerned that the SIVs' assets lost value as credit markets began melting down last year. Citigroup, which has lost 73 percent on the New York Stock Exchange this year, fell 29 cents, or 3.5 percent, to $8.07 at 9:41 a.m., the lowest value since Nov. 1, 1995.

Five potential surprises into year's end
Groucho Marx once said that he didn't care to belong to a club that accepted people like him as members. As the recession's ranks swell and desperation sets in, truer words have never been spoken. The year 2008 will forever be remembered as the year the perfect storm finally arrived. The toxic combination of financial engineering, debt dependency and immediate gratification commingled like a clap of thunder on an otherwise sunny day. The script played out precisely as written, although that hardly made it easier to digest.

We've long offered that time and price were the only true medicine for the cumulative imbalances that steadily built through the years. Much like a forest fire, the painful process of price discovery is a necessary precursor for fertile rebirthing and greener pastures. With a conscious nod that the ultimate market bottom is likely a few years away as debt is destroyed and social moods shift, we wanted to share five vibes that could manifest into the year's end as conventional wisdom catches up with reality.

Reversal of fortune
As the world worried about inflation entering 2008, deflation was a central theme in Minyanville. We were early as the dollar dripped lower and commodities drifted higher into the summer. Since July, the greenback has appreciated 21% vs. a basket of foreign currencies, and commodities are down an eye-popping 48%. All roads lead to deflation, we know, but the path of maximum frustration is often paved with detours. Keep close tabs on the dollar, which recently registered several technical exhaustion signals. If it reverses lower, it'll pave the way for commodities to enjoy a spirited counter-trend sprint.

Retail therapy
We suggested in August that retail therapy -- or, the need for retailers to visit their therapists -- would be necessary as we edged toward the holiday season. Since that time, Sears Holdings Corp. has lost 70%, Target Corp. is off 45%, Inc. is 60% lower and Home Depot Inc. has taken a 30% haircut. There's no denying that the consumer is on the ropes and spending is on sabbatical. That's front-page news, however, and the market rarely rewards the obvious, if only for a trade.

Seismic readjustment
Equilibrium between asset classes is askew as evidenced by insane volatility in equities, credit, commodities and currencies. Some analysts believe that given the current state of credit, fair value on the S&P 500 Index is close to 600. In a finance-based global economy, further dislocation could conceivably lead to social unrest and geopolitical conflict. Remember, world wars are historically bred from economic hardship.

We may witness a grand scale asset-class readjustment. Potential scenarios include wiping the speculative CDS slate clean (contracts not backed by underlying collateral), massive revaluation (yuan), the introduction of a "convertible currency" or crude being denominated in something other than dollars.

Performance anxiety
There is widespread acceptance that we'll continue to see forced selling by the hedge-fund community as money migrates from that once-golden goose. That may prove true, but there's another side to the trade. In the mutual-fund universe, the conditioned mind-set is that the only thing worse than losing money is underperforming the benchmark. Given the horrid performance in the mainstay averages, that currently isn't competing for mind share.

Should the tape catch a sustainable bid, the potential for a "long squeeze" will manifest in kind. If that happens, look for the "master beta" plays such as Research In Motion Ltd. , Google Inc., Apple Inc. , and Inc. to spring back to life and lead the speed.

Sell hope, buy despair
Entering September, we shared that one of two things would happen as corporate credit came due. Either the market would suffer from cancer that chewed through the system or we would see a car crash as the wheels fell off the wagon. We've since experienced both. The S&P 500 is down 35% in a matter of months, credit continues to clog our systemic arteries and lame-duck politicians have thrown in the towel and passed the buck to the new administration.

The biggest potential land mine in the marketplace is widespread speculation that General Motors Corp. or Ford Motor Co. will file for bankruptcy before year's end. That could set the stage for our final surprise of 2008 -- for when the auto industry is finally fitted for a toe tag, it may finally be time to close your eyes and buy the market for a trade.

S&P cuts Ambac on mortgage loss exposure
Standard & Poor's on Wednesday downgraded ratings on bond insurer Ambac Assurance Corp and its holding company Ambac Financial Group Inc and said they remain exposed to heavy losses on U.S. mortgage-related securities. The agency cut its financial strength rating on Ambac Assurance three notches to 'A,' or the sixth-highest investment grade. It cut its senior debt rating on Ambac Financial by three notches to 'BBB,' or two notches above speculative grade. S&P cut its hybrid security rating on Ambac Financial to 'BB-plus,' which is the first level of speculative, or 'junk' status.

All ratings have a negative outlook, meaning S&P could cut them again within two years. 'The rating action on Ambac reflects our view that the company's exposures in the U.S. residential mortgage sector and particularly the related collateralized debt obligation structures have been a source of significant and comparatively greater-than-competitor losses and will continue to expose the company to the potential for further adverse loss development,' analyst Dick Smith said in a statement. Ambac and rival MBIA reported large third-quarter losses, hit by write-downs and limited new business. The companies have been hit hard by the credit crunch and the loss of their Triple-A ratings earlier this year, which disrupted their entire business model.

Their ratings were cut after they took billions of dollars of losses on exposure to mortgages and complex debt instruments. Ambac is trying to revive its business by reactivating its Connie Lee Insurance Co as a new municipal bond insurer. Ambac Assurance also has been forced to support the funding needs of its financial services unit to help it meet collateral calls and termination agreements, said S&P. The unit is comprised of Ambac's swap agreements and Guaranteed Investment Contracts.

'Ambac has purchased assets from and made loans to the affiliate that have lowered slightly the credit quality of Ambac's investment portfolio and increased the gap between the book value and fair market value of the assets in the portfolio,' said Smith. Still, Ambac Assurance has sufficient claims-paying ability and enough liquidity at its current rating, he said. Moody's Investor Service cut its ratings on Ambac Assurance and the holding company in early November, triggering a $3.2 billion collateral call.

American Express Delinquencies Rise to 4.4 Percent
American Express Co. had its highest monthly increase in credit-card delinquencies on record in October as jobless claims rose, according to FBR Capital Markets. Late payments rose 35 basis points to 4.4 percent last month, according to a report yesterday from FBR analysts led by Scott Valentin in Arlington, Virginia. The default rate increased 33 basis points to 6.96 percent, the highest since November 2005, the report said. The report didn't say what the previous record for delinquencies was. A basis point is 0.01 percentage point.

American Express has been battered by rising delinquencies and higher funding costs. The New York-based company became eligible for government funds when it won Federal Reserve approval to become a commercial bank on Nov. 11 as frozen credit markets choked off affordable financing. Becoming a bank won't relieve American Express from having to borrow money in the bond market, the analysts said. "We do not believe that American Express will be able to grow deposits to a significant enough level that meaningfully reduces its dependence on capital markets-related funding," the analysts wrote.

There were no sales of bonds backed by credit-card payments in October, the first time since 1993, when the asset-backed securities market was in its infancy. Yields on top-rated credit card bonds relative to benchmark interest rates reached a record high of 525 basis points more than the London interbank offered rate, or Libor, last week, according to Bank of America Corp. data. U.S. Treasury Secretary Henry Paulson's plan to shift the focus of the Troubled Asset Relief Program to boosting investment in consumer debt did little to revive investor demand for debt tied to credit card and auto loan payments, the Bank of America data show.

The economic slowdown will cause losses on soured loans to be higher than expected as households struggle to pay bills, the FBR analysts said. Jobless claims in the U.S. are at the highest level since 2001, the Labor Department said on Nov. 13. The total number of people on benefit rolls jumped to the highest level since 1983. American Express has lost 61 percent of its market value this year amid concern that customer defaults would rise.

New York Budget Gaps Threaten Broader Economy
The holes blown in New York budgets by Wall Street's meltdown could reverberate through the Northeast region and beyond, after several years in which the financial capital's strong performance helped drive national growth. The Empire State's economy, the third-largest in the U.S. behind California and Texas, grew second-fastest among states last year. Its gross domestic product advanced 4.4%, much stronger than the 2% national average and higher than California's growth of 1.5%.

Now, though, New York state and New York City are preparing to address big budget deficits. And that is bad news for the wider U.S. economy, especially as other powerhouse states reel from job losses and sizable deficits. Next door in New Jersey, tax revenue fell short of projections by $258 million for the first four months of the fiscal year, and state officials there last week said Trenton's budget deficit could reach $1.2 billion, triple the previous prediction. Neighboring Connecticut's budget deficit, meanwhile, could hit $6 billion over the next two years.

The New York City Council Monday begins hearings on a series of proposed spending cuts and tax increases, while in Albany, the state capital, Gov. David Paterson reconvenes the legislature Tuesday to consider rolling back already approved spending increases on health and education to close a $2 billion funding gap for the current year. New York state also faces a $12.5 billion deficit in 2009, and the Democratic governor has said he would ask labor unions to forgo 3% raises called for by contracts that would have to be renegotiated. But Gov. Paterson has rejected calls for higher taxes on the wealthy -- unlike New York City Mayor Michael Bloomberg, who has proposed tax increases. "[T]he higher we tax even the wealthy, the more we lose population and the less job creation there is," Gov. Paterson said in an interview Friday. "We're pretty resigned to the fact that we're going to have to do this with spending cuts."

The housing downturn and a slumping manufacturing sector have already forced states to tighten their belts. Some 41 states face budget deficits in coming years, according to a report by the Center for Budget Policy and Priorities. But New York finds itself in a particularly perilous spot because of its increasingly heavy reliance on the financial sector as its tax base. This summer, Gov. Paterson offered a stark example of the challenges: The top 16 banks paid $173 million of state taxes in June 2007, but that number fell to just $5 million this past June. And the financial sector generates one in five state tax dollars today, up from just 3% of state tax revenue in 1980.

The state's budget division now projects a 35% drop in capital-gains revenue and a 43% decrease in bonuses. That alone would translate into a year-over-year decline of $20.7 billion in income, much of it taxed at the top rate. In New York City, meanwhile, Wall Street accounts for 5% of all jobs but could account for one in five job losses. "We'll feel the major effects come January and February, when people would normally be getting bonuses," says David I. Weprin, the city council's finance-committee chairman. While the 2001 recession was considered relatively mild nationally, it had a sharp impact on New York, which was also reeling from the Sept. 11 attacks that year. Some economists say the current downturn could be more painful because wages on Wall Street have outpaced those in other sectors.

The financial sector has accounted for 41% of wage growth in the state from 2003 to 2007, according to Donald Boyd, a senior fellow at the Rockefeller Institute of Government in Albany. "There are so many things that are going to be very bad for New York," Mr. Boyd says. Mr. Bloomberg -- who recently secured a term-limits exception so he can run for mayor again in 2009 -- has said it will be a "number of years" before the city's banking sector starts paying taxes again, and he has budgeted zero tax liability for the industry for the next two years. To close a two-year, $4 billion gap, he has floated increasing New York City's sales tax by 3% and the income tax by 15%. That would raise the top marginal rate for city and state taxes, already the highest in the nation, to more than 11%.

New York's governor blames the state's current shortfall, in part, on its failure to better manage revenue during the years of soaring Wall Street profits. "What's actually more embarrassing than the fact that we have such a huge deficit now, when bonuses are down and capital gains are down, is the fact that when there was...wealth, we overspent," says Gov. Paterson. In 2001, New York state was able to close a budget gap with a temporary income-tax increase, but some say that may not work this time because Wall Street is undergoing a structural realignment, not a cyclical downturn. If the financial industry re-emerges as one that is more tightly regulated and more risk-averse, that could mean fewer years of record profits.

"It suggests that the city and the state will have to tighten their belts permanently," says Kathryn Wylde, president of the Partnership for New York City, a group of chief executives. "The financial-services industry will never be the bonanza [for the city] that it once was." One silver lining: Lower office rents and real-estate values could draw new businesses. Already, city officials have worked to cultivate the biotechnology, hospitality and tourism sectors.

Britain’s manufacturing confidence hits 30-year low
The scale of the economic slowdown became clearer today as British factory orders continued to fall and confidence among manufucturers plunged to a near 30-year low. The CBI's monthly Industrial Trends survey showed the gauge of factory orders was -38 in November, slightly higher than the -39 recorded in October, but any figure under 50 indicates contraction, signalling that orders are still falling sharply. Today's dire figures suggest that the fall in economic output in the final three months of the year could be more severe than the 0.5 per cent drop recorded in the third quarter.

There were hopes that the manufacturing sector would ride out the slowdown better than the financial and housing sectors, which have been badly hit by the credit crunch, but Paul Dales, of Capital Economics, said the figures suggested this was now unlikely to be the case. "It was hoped that industry would soften the recession. These figures suggest that it will only deepen it," he said. The CBI said earlier this week that it expected a 0.8 per cent fall in output.

Ian McCafferty, economic adviser to the CBI, said: “With a sharper and more prolonged UK recession in prospect, conditions are going to remain tough for some time,” said. The rapid falls in inflation, coupled with dwindling demand, were reflected in the figures as no manufacturers said they expected to raise their prices over the next three months, compared with a reading of 10 per cent in October and 23 per cent in September.

Barclays left thoroughly shaken
If you think big City investors were upset about Marks & Spencer’s boardroom reshuffle, you should hear them on the subject of Barclays. I can’t repeat some of the comments in a family column. But take it from me, they are mad as hell. They are angry that they were not consulted before Barclays raised expensive new capital from the Gulf.

They are angry that Barclays has ridden roughshod over the cherished principle that existing shareholders should get first dibs in any such fundraising. And they are angry that Barclays appeared to dismiss out of hand the idea of raising cheaper capital from the Government. Some are angry enough to vote against the fundraising on Monday. Others believe that they could not risk Barclays losing the vote and being left up the creek without a paddle. But some say they will be thinking very seriously about voting against the reelection of some of the directors at April’s annual meeting.

Barclays said yesterday that all directors would offer themselves up for reelection next year in an attempt to appease shareholders (in another concession, it said that executive directors had waived their bonuses, which came as no great surprise after Goldman Sachs announced the same move at the weekend). Barclays emphasised that the decision to offer up all the directors for election (as opposed to only one third of them) reflected the extraordinary circumstances of the capital-raising. But the Association of British Insurers, which represents many of the biggest institutional shareholders, is floating the idea that this should become standard practice.

Supporters of the plan argue that it would force directors to consider shareholders’ views more carefully before making big decisions. And it would allow shareholders to express their retrospective displeasure at decisions it would be impractical for them to vote against. Some suggest that if M&S had had such a regime in place, it would have helped to defuse the row over the controversial elevation of Sir Stuart Rose to executive chairman.

Back at Barclays, executives are trying to soothe shareholders’ anger by saying that it is quite justified. It is terrible their rights have been trampled on, but there was no alternative, given the need to raise so much, so quickly. And taking the Government’s money was certainly no alternative if shareholders wanted their management to remain in control. But the institutions are having none of it and, unless they calm down by April, John Varley and Bob Diamond could have a very rough ride. As for any other cash-strapped companies that think they can bypass City shareholders in favour of a friendly sheikh – you have been warned.

Ilargi: I’m sure we all remember that ”Buffett has at times decried derivatives as 'financial weapons of mass destruction' " Well, second time in a week that we see how deep he's into them. Don't trust that man. He's not your friend.

Buffett's Credit Risk Soars on $37 Billion Bet
The cost of protecting against default by Warren Buffett's AAA rated Berkshire Hathaway Inc. has almost tripled in two months, a sign of just how skittish investors have become amid the global financial crisis. The cost to protect against Berkshire being unable to meet its debt payments, based on credit-default swaps, is more than four times that of rival insurer Travelers Cos. At those levels, the swaps are typical of companies rated Baa3 by Moody's Investors Service, one level above junk. The price may have risen on concern that the billionaire's firm could lose a $37 billion bet on world stock market values more than a decade from now.

"That's just so stupid," said Mohnish Pabrai, head of Pabrai Investment Funds and a Berkshire shareholder. The swap buyers are projecting "present circumstances into infinity" and concluding Buffett's bet will cost the company $40 billion, Pabrai said. "It will never happen," he said. For the swaps to pay off, Berkshire would have to exhaust its $33.4 billion cash hoard, and Buffett's decades-long record as the world's most successful investor would have to come to a cataclysmic end. President-elect Barack Obama seeks him out for advice and the world's biggest firms, including Goldman Sachs Group Inc. and General Electric Co., turned to Berkshire for capital and the prestige that comes with Buffett's backing.

Buyers of default protection are being charged 1.45 percentage points more for Berkshire swaps than for insurance against Allstate Corp. Allstate last month had its credit grade cut by Fitch Ratings after hurricane claims and declines in its investments caused a $923 million third-quarter loss. Berkshire has remained profitable amid the worst financial crisis since the Great Depression, and wouldn't pay out on its stock market bets, if it lost them, until at least 2019. "If you were going to start picking companies that are going to default, you probably wouldn't put Berkshire at the top of the list, so it's totally unexpected to see them there," said Jeff Matthews, author of "Pilgrimage to Warren Buffett's Omaha" and founder of Greenwich, Connecticut-based hedge fund Ram Partners LP. Of the swaps, he said: "I wouldn't buy them, and yet it's there."

Standard & Poor's said Buffett's bet on the stock indexes wouldn't cause a liquidity crisis. Berkshire spokeswoman Jackie Wilson said she had passed along requests for comment to Buffett. The stock fell below $100,000 a share for the first time in two years last week and has dropped about 33 percent this year. Buffett's Bets The cost of protection on Berkshire debt has jumped to 415 basis points from 140 basis points two months ago, according to CMA Datavision. That translates to $415,000 a year to protect $10 million for five years. The median for companies rated Baa3 was 348 basis points yesterday, according to data from Moody's capital markets research group. Credit-default swaps, used to hedge against losses or to speculate on the ability of companies to repay their debt, rise as investor confidence deteriorates.

The increase may be tied to a series of bets that Buffett has taken on four stock indexes across the globe, including the Standard & Poor's 500 Index, according to Berkshire shareholders. Buffett sold contracts to undisclosed buyers for $4.85 billion that protect the buyers against declines in those markets. Under the agreements, Berkshire will pay as much as $37 billion if, on specific dates beginning in 2019, the market indexes are below the point where they were when he made the agreements. By Sept. 30, Omaha, Nebraska-based Berkshire had written down the contracts by $6.73 billion as the S&P declined for a fourth straight quarter.

"I believe these contracts, in aggregate, will be profitable," Buffett said in a statement in May, reiterating comments from his letter to shareholders in February. "We are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the long run. That is our philosophy in derivatives as well." A total of 2,450 credit-default swaps had been sold on Berkshire as of Nov. 14, protecting a net amount of $4.7 billion, according to data from the Depository Trust & Clearing Corp., which runs a central registry for the derivatives. Buyers of derivatives typically aren't disclosed, and representatives at 20 potential buyers including insurers and pension funds either didn't know who was involved or declined to respond. Buyers of the credit-default swap protection on Berkshire may include the companies that stand to gain if Buffett loses on the stock bets, said Matthews. They may be hedging their gains against Berkshire by entering into separate agreements to ensure they recover some funds if Berkshire is unable to pay, he said.

The increase in perceived credit risk contradicts Buffett's record of building Berkshire over 40 years from a failing textile maker into a $145 billion company with businesses ranging from carpet making to utilities. Buffett has at times decried derivatives as "financial weapons of mass destruction" and criticized their complexity and popularity. Berkshire hasn't disclosed which stock indexes besides the S&P are covered under the contracts or how they're structured. Berkshire, which typically gets about half its profit from insurance, on Nov. 7 posted its fourth straight quarterly profit drop, the longest streak of declines in more than a decade, on hurricane costs and investment losses. Further declines in debt and equity markets reduced shareholders' equity, a measure of assets minus liabilities, by $9 billion in October, after the third quarter ended, the company said. Berkshire's stock decline this year compares with a slide of 41 percent in the S&P 500. Berkshire shares rose in 17 of the past 20 years.

Buffett may use the $4.85 billion paid to Berkshire in the derivative deals to buy stock or make acquisitions. "Shareholders should rejoice that he was able to obtain that capital to invest on such attractive terms for years before the chance comes that he'll have to pay," said Tom Russo, a partner at Gardner Russo & Gardner, whose largest holding is Berkshire stock, in an interview this month. Still, he said, the increasing cost of Berkshire credit protection in the swaps market "isn't crazy in light of the way the markets performed." American International Group Inc., the insurer that needed $150 billion from the U.S. government to stay afloat, nearly was forced into bankruptcy by derivatives. As credit rating firms lowered their grades on AIG, the New York-based firm was required to post collateral to show it could meet its obligations to the counterparties who took the opposite side on their bets.

Berkshire may have to post collateral on some derivatives "under certain circumstances, including a downgrade of its credit rating below specified levels," the firm said in a regulatory filing this month. Damien Magarelli, a credit analyst for Standard & Poor's in New York, said the losses are merely an "accounting loss." "They've had no collateral requirements to date and the losses are not viewed by us as a cash loss," Magarelli said. "It is not something that would be creating any type of liquidity issues or near term cash payments." Berkshire's AAA rating is the highest available. "If Berkshire isn't triple A, I'm not sure which company would be," Buffett said in May.

Deflation: why it is dangerous
Economists warned today that the UK economy is likely to suffer from deflation next year, after the latest official data showed inflation was slowing sharply. Deflation is when prices fall year-on-year – a phenomenon that has affected the electrical goods market for a long time. Each year, televisions get bigger, thinner and cheaper. So why is this a problem?

Cheaper products, be they gadgets, cashmere jumpers or utility bills, are excellent news for consumers, especially when they have suffered from a relentless squeeze on their standard of living over the last two years. A short burst of deflation is, indeed, a good thing. It makes everyone feel a little bit richer. But this is only true if prices fall for a short time. A prolonged period of deflation can have a pernicious affect on an economy and was one of the main causes of the Great Depression of the early 1930s and of the damage wreaked on Japan's economy in the early 1990s.

There are two main reasons why deep-rooted deflation is so dangerous, especially when it is combined with job losses, as is expected to happen next year. It encourages people to defer spending, as they wait for prices to fall further. This in turn forces down the price – as retailers slash prices in a vain attempt to attract shoppers. As retailers cut prices, so too do manufacturers, who then have less money to invest in new technology, equipment and, crucially, staff. Wages then start to fall – psychologically very damaging for consumers, even those that keep their jobs. As they fret about less money in their pockets and their job prospects, they further postpone spending, starting the deflationary spiral once again.

The other main reason why deflation can cause so many problems is that it serves to make debt more expensive. Here's why. If you borrow £1,000 at the start of the year to pay for a new sofa, the cost of the loan does not change throughout the year. It remains at £1,000. But the sofa is falling in price. So at the end of the year – when you are still paying back the loan – you have ended up taking out £1,000 to pay for a sofa now worth just £900 or £800. Think of it as negative equity on a grand scale, spreading itself into every corner of consumer credit.

Of course, in theory there are some winners: savers. Deflation should encourage people to save, because a £1,000 saved at the beginning of the year, should be able to buy more than £1,000-worth of goods at the end of the year. That is if they can find a savings account that pays out a decent level of interest, which can be very tricky when the Bank of England has slashed interest rates to just 2 per cent or even 1 per cent.

China moves to stem mass layoffs
Companies in two Chinese provinces, Shandong and Hubei, have been told they must seek official consent if they want to lay off more than 40 people. The order highlights the Chinese authorities' concern over mounting job losses. As China's main external markets plunge into recession and export orders shrink, layoffs have multiplied in the country's big manufacturing regions.

In Shandong alone, nearly 700,000 people have lost their jobs this year. In southern Guangdong, tens of thousands of firms have closed, sparking off reverse migration to the countryside by redundant workers. China's economic growth has slowed sharply this year to around 8 percent - high by world standards, but much less than the double-digit figures seen for years. If the one-off boost from the Olympics is factored in, even that number may be further reduced.

China's manufacturing index contracted dramatically in October, indicating an abrupt slowdown. It is kicking in at a time when the country's factories normally rev up production to serve western markets in the run-up to Christmas. The Chinese authorities are keen to avoid social instability, seen as a source of labour and political unrest. The human resources controls imposed in Shandong and Hubei are an attempt to put bureaucratic obstacles in the way of mass layoffs.

But it is unclear how effective they will be. "The factories are not getting enough orders, so some workers have nothing to do," Chinese media quote a Shandong factory manager as saying. "I have been thinking of getting rid of some of them to cut costs. But if the government doesn't agree to my layoff plans, what can I do? I can't afford to pay them all."

The alternative may be drastic wage cuts. In one factory in Guangdong, salaries have been reduced by up to 75%. Although that is hardly a sustainable pay level for most workers, they may have to wait until the economic climate improves in China's foreign markets. The crisis has helped expose the extent to which the country has become dependent on the outside world - a far cry from the Mao-era slogan of self-reliance.

China’s workers head home jobless
Not since he left home to find work in China's booming south five years ago has He Huan been back for more than two weeks at a stretch. And even when he does return to Chengdu, capital of southwest Sichuan province, it is during the Chinese New Year break — the only time when China's masses of migrant workers can leave their factory jobs to rejoin their families. But this year, the 23-year-old journeyed back from Shenzhen city in July and stayed put.

The Taiwanese-owned garment manufacturer he joined last May was showing signs of being in trouble. Until this January, there were more than enough orders from abroad to keep all 4,000 workers and their sewing machines busy, churning out casual wear, he said. Then things began to change. “There was less and less work, and they started to cut workers. Before I left, there were only half left,” said He, who was paid a monthly wage of 2,000 yuan (RM1,060). Unnerved by stories of bankrupt factory bosses who fled without paying their workers, he picked up his last pay cheque in mid-July and caught a train home.

Under the weight of the global financial crisis, thousands of labour-intensive factories in China's southern manufacturing and export hub that hire millions of migrant workers, have collapsed. Others are slashing pay, relocating, or shedding workers. Hosts of migrant workers — who have long flocked to the Pearl River Delta region for employment that pays better than farm work — are being forced home to ride out the storm. In Guangdong, with 30 million migrant workers, 50,000 of the province's one million companies have closed down in the first nine months of this year. China last year had 226 million migrant workers toiling far from home in its manufacturing, coal and construction sectors.

There are no official figures of those who have returned home. But local newspapers in provinces that are traditional sources of migrant labour — including Sichuan, Anhui, Jiangxi, Hubei and Chongqing municipality — have in recent weeks reported on the rising numbers coming back, especially from the Pearl River Delta region. Guangzhou city, Guangdong's capital, reported that from Oct 11 to 27, departures from its main train station hit 1.17 million people, an increase of 129,000 passengers over the same period last year. Most were migrant workers heading home.

Chinese media reports are not unanimous over whether the trend amounts to a tide, as some analysts note that the number heading home has not yet overtaken that still leaving in search of jobs or those currently outside. But many warn that the homeward-bound movement could grow into an exodus if the economic crisis deepens. Most migrant workers are not legally registered as living in the cities they work in, and have little social protection to fall back on when they lose their jobs.

“A slowdown in the West might not lead to disturbance because the basic lives of the people are more or less guaranteed. But in China, high unemployment, a drop in incomes, will mean many like these migrant farmers will lose their basic livelihoods,” said economics and China issues expert Hu Xingdou. “Without that basic level of living, this could lead to prominent problems in social order and stability — we could see more protests, riots.” The loss of income for migrant farmers, who remit the bulk of earnings home, could also cast a damper on the economies of their home provinces.

Beijing's newly unveiled four trillion yuan economic stimulus package, with its focus on national infrastructure projects and social welfare, is crucial to maintaining stability by preventing growth from falling below 8 per cent, said Hu. That is the level at which economists say China needs to grow in order to keep generating enough factory jobs to maintain stability in the labour market. Already, labour protests have hit struggling businesses in the south in recent weeks, with reports of unpaid factory workers protesting after their companies folded.

Jiangxi native Ye Qingfang, 30, was one of the unlucky ones. His former employer, an automotive parts maker in Zhejiang province, has not paid workers since September. With hardly any savings and no suitable job openings, he too, is heading home. “If the company is bankrupt, no matter what you do, they have no way to pay you,” he told The Straits Times. The situation looks likely to get worse before getting better. Some 2.5 million jobs in the Pearl River Delta region may be lost by year-end, according to government and industry estimates.

Migrant workers who have returned home say the weakening job market is grounding them for longer than they would like. Former farmer Tang Ximing, 38, has been back in Lanzhou city since September, when he left his job as a cook, earning 1,200 yuan a month in a Shenzhen factory canteen, to start a small business back home. When that fell through due to lack of capital, he thought of heading out and contacted friends in Guangdong. “They told me, ‘Don't bother. There is nothing’,” he said

Greece braces for shipping storm
Heir to one of Greece's oldest shipowning families, Leonidas Polemis overlooks the heart of the Greek shipping industry from his plush office in the port of Piraeus and sees a severe economic storm coming. Global shipping is facing its worst crisis in decades. In just a few months, dry cargo rates have fallen by more than 90 percent as a five-year boom has turned to bust. For Greece, which owns a fifth of the world's fleet, that spells trouble.

"Panic is one word to describe what is going on," said Polemis, sat beneath an oil painting of one of his family's first vessels, bought some 200 years ago. "People are selling some ships in a panic mode ... Some companies will go bust." Greece has a lot to lose. At 170 million tonnes, its merchant fleet is the largest in the world, ahead of Japan. It is the second biggest contributor to Greece's 240 billion euro economy after tourism, accounting for 7 percent of output.

Its tendrils stretch into many sectors, with shipping magnates investing in everything from banks to building and tourism. The slick cars and quayside restaurants of Piraeus testify to fortunes earned in the boom, but executives say they face a perfect storm of plunging demand and oversupply of ships. "This is the worst it has ever been," said George Xiradakis, head of shipping consultants XRTC in Piraeus. "Everybody will be affected. This is a globalized market, probably the first globalized market in the world."

The global economic crash has slashed demand for transport of commodities to fast-growing nations like China and India. On top of that, the credit crunch has made banks reluctant to lend money to shipowners and to provide financial guarantees to allow their ships to sail, leaving some stuck in harbor. Dry cargo vessels that commanded $150,000 a day in May are now earning $7,000 or less. The tanker market, where Polemis' Remi Maritime Corp. owns 22 vessels, has been less badly hit but is still sharply down. Prices could fall further next year, when a record number of ships are set to flood the market: more than 10,000 new ships are currently on order, according to the UN.

Greeks have been seafarers for thousands of years. Shipowners made fortunes running the British naval blockade in the Napoleonic wars and in the 20th century the riches and rivalry of Aristotle Onassis and Stavros Niarchos was legendary. For many in Greece, the latest crisis has revived painful memories of the collapse of the early 1980s, when hundreds of huge cargo vessels floated chained together in the Saronic Gulf off Athens, unable to find charterers as the market dried up.

Brokers say some vessels are already being ordered to slow to half speed on the high seas because there are no cargoes when they arrive. The number of ships asking to idle off Piraeus has risen and officials say traffic at the port is down sharply. "We estimate (the fall) at around 25 percent for the time being but we think in the near future ... we face a bigger reduction," said Nikos Arvanitis, head of the International Maritime Union at Piraeus. "If this situation will continue ... working positions will be affected. We have to reduce costs."

While shipping accounts for just over 1 percent of Greece's 4.5 million workforce, its economic influence is far higher. Foreign earnings from shipping were 17 billion euros last year, according to the central bank. "We estimate the slowdown in shipping will take around 0.5 percent off GDP," said Nicholas Magginas of National Bank. "There is a significant risk that there will be some problems with the bank debt ... a need for some restructuring."

For the first time, Greece faces a shipping crisis in which some of its biggest shipowners on the stock market rather than private businesses. Since billionaire George Economou floated his firm DryShips on the Nadsdaq in 2005, 12 other mostly Greek dry-bulk shipping firms have listed in New York, raising some $4 billion. But public listings mean public scrutiny. DryShips said in an exchange filing it might not be able to meet its covenants to banks if things worsened. Economou, who defaulted on bonds in the 1990s, said it has no trouble paying its debts.

"The longer this crisis goes on, the worse it will be, even for big firms," said Xiradakis, noting some debt renegotiations and ship sales were likely. "Banks have to stand by their clients and wait for the smoothness of the cycle or we are going to have a lot of losses." Local lenders, such as Piraeus Bank, have some 10 billion euros in loans to Greek shipowners, but their relationship is built on years of understanding. Piraeus says its 1.4 billion euro portfolio is spread among 60 traditional shipowners and has a 0 percent loss rate in the last 10 years.

Many analysts question whether foreign banks, which hold over three-quarters of Greek shipping debt, might be more jittery. Royal Bank of Scotland, which has needed 20 billion pounds of emergency capital from the British government, is one of the biggest lenders to the Greek shipping market. Some firms are already protectively cancelling orders. Genco, founded by Peter Georgiopoulos, annulled a $530 million deal for six vessels, forfeiting a 10 percent deposit. Shipping analysts estimate a third of worldwide orders may be canceled.

For those forced to sell, prices have tumbled: Xiridakis cited a 1980s cargo vessel, which would have sold for $18 million last year, going for just over 3 million this year. Smaller companies with older vessels will be worse hit, he said. But some Greek shipowners, used to downturns, are thinking long-term. Commodities carrier Diana Shipping canceled its dividend this month but said it was saving the cash to acquire ships at low prices during the downturn. "We are not worried. In Greece we know any crisis bring opportunities and shipping is in our blood," said Xiradakis.

Deflation is a "great liberating force"
 There is now world-wide worrying about price deflation again. After all, real estate prices have sunk, stock prices have hit the ditch, the price of oil has the sheiks concerned, and even Las Vegas hotel room rates have plunged. Sounds like all good news for those of us who buy things, at the same time being a bit of a bummer for heavily indebted sellers.

But Ex-Federal Reserve governor Rick Mishkin told an early morning CNBC audience that "inflation could be too low." On the same program, James K. Galbraith, who teaches economics at the Lyndon Baines Johnson School at the University of Texas at Austin, chimed in that there has been "a huge deflationary shock" to the economy, and of course the government needs to step in and stabilize the markets and bail out businesses. "The Fed did not allow the money base to expand, and we had a panic in the liquid markets," supply-side guru Arthur Laffer told a Las Vegas audience last week, "which caused this financial panic, pure and simple."

Across the pond, Ambrose Evans-Pritchard, writing for the Telegraph, warns "Abandon all hope once you enter deflation." Fine wines and white truffles have dropped in price and these price drops could "spread through the broader economy, lodging like a virus in the British and global monetary systems." "The curse of deflation is that it increases the burden of debts," frets Evans-Pritchard, who goes on to contend: "Deflation has other insidious traits. It causes shoppers to hold back. They wait for lower prices. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop."

Yes, the current economics brain trust is worried that consumers will collectively show the good sense to delay purchases, pay down debt and increase their savings. After all, this liquidation of malinvestments will likely take awhile. The prudent thing to do in times of uncertainty is not to ramp up debt and spend money you don’t have. But now all of a sudden saving is a dirty word. According to Evans-Pritchard, "It [savings] also redistributes wealth – the wrong way. Savings appreciate, which is nice for the ‘rentiers’ with capital. The effect is a large transfer of income from working people with mortgages to bondholders."

Of course sounder thinking economists don’t see deflation as evil, as Jörg Guido Hülsmann points out in his just published Deflation & Liberty, "it fulfills the very important social function of cleansing the economy and the body politic from all sorts of parasites that have thrived on the previous inflation." And although Hülsmann’s definition of deflation is the proper one: a reduction in the quantity of base money, while what the main-stream blathers on about is a drop in prices, the point remains: "There is absolutely no reason to be concerned about the economic effects of deflation – unless one equates the welfare of the nation with the welfare of its false elites," explains Hülsmann.

But to say governments and their friends are concerned about deflation is an understatement. Professor Peter Spencer from York University says the Bank of England has learned many hard lessons since its founding in 1694. And with no gold standard to get in the way, that central bank is "cutting rates very fast, and if necessary they too will to turn to the helicopters," referring to Milton Friedman’s (or Ben Bernanke’s) idea that governments are capable of dropping bundles of banknotes from helicopters to stop deflation.

This printing of money "will keep the [deflation] wolf from the door," according to Professor Spencer. But creating more money doesn’t create more goods and services. There is no wolf at society’s door. "From the standpoint of the commonly shared interests of all members of society, the quantity of money is irrelevant," Hülsmann makes clear. And if the over indebted and the over lent go bankrupt, that’s fine. The fact is, these liquidations have no effect on the real wealth of a nation, and as Hülsmann stresses, "they do not prevent the successful continuation of production."

Meanwhile the Bernanke Fed has gone on an unprecedented growth spurt, more than doubling its balance sheet – out of thin air – in an attempt to bail out the financial community. Formerly the asset side of the American central bank’s balance sheet was Treasury securities with a dash of gold. Now the Fed, despite being double the size, has fewer Treasury securities, with the rest being the toxic securities that has buckled the big Wall Street banks.

It’s as if Bernanke is channeling John Law, the architect of France’s Mississippi Bubble back in 1720. Law couldn’t keep his bubble inflated and neither will Bernanke and his fellow central bankers. While central bankers furiously try to re-inflate, cheered on by the mainstream financial media, monetary authorities should deflate the money supply, pulling in their horns like consumers are doing. Deflation is a "great liberating force," writes Hülsmann, "because it destroys the economic basis of the social engineers, spin doctors, and brain washers."

50% of US primary care doctors plan to quit or cut back
Primary care doctors in the United States feel overworked and nearly half plan to either cut back on how many patients they see or quit medicine entirely, according to a survey released on Tuesday. And 60 percent of 12,000 general practice physicians found they would not recommend medicine as a career.

"The whole thing has spun out of control. I plan to retire early even though I still love seeing patients. The process has just become too burdensome," the Physicians' Foundation, which conducted the survey, quoted one of the doctors as saying. The survey adds to building evidence that not enough internal medicine or family practice doctors are trained or practicing in the United States, although there are plenty of specialist physicians.

Health care reform is near the top of the list of priorities for both Congress and president-elect Barack Obama, and doctor's groups are lobbying for action to reduce their workload and hold the line on payments for treating Medicare, Medicaid and other patients with federal or state health insurance. The Physicians' Foundation, founded in 2003 as part of a settlement in an anti-racketeering lawsuit among physicians, medical societies, and insurer Aetna, Inc., mailed surveys to 270,000 primary care doctors and 50,000 practicing specialists.

The 12,000 answers are considered representative of doctors as a whole, the group said, with a margin of error of about 1 percent. It found that 78 percent of those who answered believe there is a shortage of primary care doctors. More than 90 percent said the time they devote to non-clinical paperwork has increased in the last three years and 63 percent said this has caused them to spend less time with each patient.

Eleven percent said they plan to retire and 13 percent said they plan to seek a job that removes them from active patient care. Twenty percent said they will cut back on patients seen and 10 percent plan to move to part-time work. Seventy six percent of physicians said they are working at "full capacity" or "overextended and overworked". Many of the health plans proposed by members of Congress, insurers and employers's groups, as well as Obama's, suggest that electronic medical records would go a long way to saving time and reducing costs.

Texas grand jury indicts Cheney, Gonzales of crime
A grand jury in South Texas indicted U.S. Vice President Dick Cheney and former attorney General Alberto Gonzales on Tuesday for "organized criminal activity" related to alleged abuse of inmates in private prisons. The indictment has not been seen by a judge, who could dismiss it. The grand jury in Willacy County, in the Rio Grande Valley near the U.S.-Mexico border, said Cheney is "profiteering from depriving human beings of their liberty," according to a copy of the indictment obtained by Reuters.

The indictment cites a "money trail" of Cheney's ownership in prison-related enterprises including the Vanguard Group, which owns an interest in private prisons in south Texas. Former attorney general Gonzales used his position to "stop the investigations as to the wrong doings" into assaults in county prisons, the indictment said. Cheney's office declined comment. "We have not received any indictments. I can't comment on something we have not received," said Cheney's spokeswoman Megan Mitchell. The indictment, overseen by county District Attorney Juan Guerra, cites the case of Gregorio De La Rosa, who died on April 26, 2001, inside a private prison in Willacy County.

The grand jury wrote it made its decision "with great sadness," but said they had no other choice but to indict Cheney and Gonzales "because we love our country." Texas is the home state of U.S. President George W. Bush. Bush and his Republican administration, which first took office in January 2001, leave the White House on January 20 after the November presidential elections won by Democrat Barack Obama. Gonzales was attorney general from 2005 to 2007.


Ilargi said...

"OuttaControl said...
el pollo

Why has the PPT "allowed" the market to fall 40% from its highs?"

To fleece da sheep. Gravity dictates that there's more money to be made in markets going down than in those going up.

TampaSteve said...

Good afternoon all,

I&S – I just wanted to express my gratitude for what an awesome job you guys do with this site; my understanding of finance is so much richer (forgive the pun) than it was this time last year.

I had a thought this afternoon about GM’s stock being at 60+ year lows… I was wondering if someone has put together an inflation-adjusted picture of GM’s historical share prices… $2.61 buys a heck of a lot less now than it did in 1948… I’m willing to bet the inflation adjusted stock price is just about as low right now as it’s ever been.

Perhaps a better way to illustrate would be a graph of GM’s CPI-adjusted market cap… The idea is to have something that the public can look at and say, “These guys are dead already, there’s no point in bailing them out”. Of course, a quick glance at their balance sheet would confirm that.

This is what’s going to make the economic unwinding really fun; the capacity to do real-time analysis of just how bad things are getting. We’ll know PRECISELY how much we’re suffering, as it happens!

OuttaControl said...

To fleece da sheep.

But then why not let it fall more, faster? Lots of marginal sheep have gotten out. Letting the market plummet would fleece more sheep closer to the skin.

I don't buy the whole PPT idea. Yeah, I know it exists, I just don't think it can do very much. Whenever the market drops 500 points in the last hour, nobody mentions the PPT.

Greenpa said...

Tampasteve- you comment is very closely related to one that's been bugging me since this morning. BIG news today is that "housing starts are at a record low- lowest since 1959, to an annual rate of 790,000."

Sounds awful, except for one thing. Houses are for- people to live in, yes? So I think the number of people available is significant. Current US population is around 302M. Population in 1959 was 178M. Veridam close to half of present. So, to me; if housing starts are the same, then current housing starts are actually at almost half of 1959 level; per capita.

Kinda a lot worse. Big. Lots. Awful worse.

Haven't seen any of the analysts point this out yet. What are they, sissies?

Anonymous said...

S&P is now lower than in 2002. All aboard!

Anonymous said...

The situation here in Europe is quite bad too.

I have the relative, who works in Skoda Auto (VW group). At the end of this summer, there were plans to build a new assembly line to increase the production. The whole factory worked on 3 workshifts, 5 days a week.

Today, the factory is closed one or two work days every week and the production is reduced slightly.

Greetings from Czechia

Rototillerman said...

Yesterday Insider claimed that trust was not an issue in the current credit crunch, that it was really about unwillingness to lend relative to perceived return (paraphrased). I don't think that's true, and for evidence I offer up this: just listen to one of the Planet Money podcasts where Adam Davidson and Laura Conaway check in daily with their bond traders at Tradition Asia Securities (or whatever it is, I've never been able to quite hear it correctly). They don't talk about having money available for lending, but no takers at the rates lenders are asking. No, they talk about having no money available at all. Nada, zip, zilch. To me, that says that someone sitting in a desk is making a decision: I can either put my money to work out in the marketplace... or I can take the easy way out and either hold onto it or deposit into the Fed. Tell me that isn't lack of trust...

TampaSteve said...

Greenpa - Good point... Although it might be more accurate to contrast a ratio of housing starts over the total residential housing stock for 2008 & 1959 to adjust for changes in housing per capita over the past few decades...

Either way, you're correct... The real decline is about twice as awful as the media is reporting... In my more cynical moments I’m convinced journalists do this on purpose to gloss over the truth, but it’s more likely that your average business reporter just doesn’t think analytically. Or both. :-)

el pollo said...

Dan W

Good call. 427 is a good bit of 1000.


Beside what Ilargi said, which of course is true, I don't think the PPT has the resources to control the market over any duration. I do think that they can make serious changes on a minute to minute basis by sharpshooting futures options. Why they let it plunge today without a serious attempt to reverse the plunge? I imagine that they had all their shorts lined up just like Greenpa's ducks, but only they know for sure.

I just hope the suckers rally that Stoneleigh "would bet her life on" doesn't start until Jan 1. Hate to cash out my SDS in this tax year. Don't expect to make much next year.

RobG said...

Somewhere I read that a Detroit bailout will violate international trade agreements. It would be like subsidizing an industry giving it an unfair trade advantage. So this one would be hard to pull off.

Greenpa said...

Tampasteve- I did think about that; technically I think the comparison with existing stocks is better- but it's also just a little more complex, ergo a little more difficult for Joe the Plumber to grasp. I'm devious, that way. :-)

Anonymous said...

"Dear Friend of GATA and Gold:

Wachovia Securities this month alerted its brokers and clients that it no longer would purchase precious metals for brokerage accounts, only shares in precious metals exchange-traded funds. In an explanation given to its brokers, Wachovia said the precious metals markets "are illiquid with wide bid/ask spreads and minimal transparency......"

This implies that real metal is awfully hard to get these days, and maybe that some brokerages would prefer that their clients not get it.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc."

Greenpa said...

Question for I&S: in the world of Global Warming, and overwhelming observation is that 95% of new careful measurements tend to be reported in this fashion: "Scientists surprised to find warming happening much faster than projected...".

My own impression at the moment is that, now that we are indeed over the cliff edge- things seem to be disintegrating quite a bit faster than I'd even guessed/feared.

Is that true from your perspectives also? Is this happening faster than you foresaw, or about on schedule?

Greenpa said...

sorry- economically, I mean, of course-

Thomas said...


"$2.61 buys a heck of a lot less now than it did in 1948… I’m willing to bet the inflation adjusted stock price is just about as low right now as it’s ever been."

According to the CPI Inflation Calculator it would take $23.35 to buy today what you could have bought in 1948 for $2.61.

In Dec. 1969, GM was selling for around $69.00 which would be the equivalent of $407.00 today.

Ilargi said...

""Scientists surprised to find warming happening much faster than projected..."."[..] "Is that true from your perspectives also? Is this happening faster than you foresaw, or about on schedule?"
"Scientists" and "economists" (never confuse the two) seem to have the same problem, don't they? After following people like James Hansen for years, how could you be surprised? People won't listen till you hit them over the head.

In both cases, "experts" always catch up way late, but also in both, reality is worse then they have gotten so far.

More Receding Horizons.

rumor said...

I ask myself today, how does Mark Carney see growth picking up in Canada in third quarter of 2009? And I think about all the things Carney has said over the past few months, and I finally understand the Mark Carney Method of Economic Prediction:

1. There will be growth 6 months from now.

2. Done!

This, I conclude, is the formula he uses to predict the direction of the Canadian economy in the future.

Ilargi said...

"Dan W. Good call. 427 is a good bit of 1000.

Not a bad call per se, but too greedy. Still first time since 2003 below 8000, that's something.

OC, Beside what Ilargi said, which of course is true, I don't think the PPT has the resources to control the market over any duration."

They don't have to. All it takes is very temporary manipulated ups and downs. That's enough to shuffle position and cash in on longs or shorts. Quite easy. No duration needed. That's perhaps the main issue people get wrong.

Tom Sawyer said...


Presidential Prayer Team?

Plunge Protection Team??

Professional Poker Tour???

Pulsed Plasma Thruster????

Planning & Placement Team?????

Pre-Production Test??????

sorry, but I´m not so sure what everybody is talking about here today. I must have missed the creation of this acronym in the last few days. Or is it really the Presidential Prayer Team?

Oh, all definitions are from

Tom Sawyer said...

the new book "Deflation and Liberty" from Guido Hülsmann is available for free as a PDF file from the Mises Institute

the Authors website is

el pollo said...

Tom Sawyer

jal said...

Recycling crisis
Ilargi has mention that shipping is coming to a grinding halt.

Here is how it is affecting you.
Blue box material was being sent to Asia for sorting and now it isn't.
B.C.'s recycling industry hit by global slowdown

Starcade said...

Who's going to buy, at this point? Seriously... Only those forced??

Ilargi: Frankly, the only reason the PPT can't keep this market up is that it would cause immediate hyperinflation of the likes Zimbabwe would be jealous of. This entire market should be at ZERO. No value at all.

TampaSteve: GM is long dead, as you state. The problem is, so are Ford and Chrysler. The real question, from there, is: Who's going to survive all this? Are we even going to make next summer before TSRHTF... My guess: We don't even make _Christmas_. The nationalization of Fannie and Freddie ended everything, because it blew the entire world up, by a factor of about 25.

OuttaControl: They have to get something back for their investment -- that's why they are basically pulling The World's Biggest Short Squeeze. The problem with that is what I said above: Who's going to keep playing this as the market, now (right now) has no support level until about 6400-7200 -- and they said this a month ago. The next fall will be a rather steep one.

Greenpa: What have I been telling you for weeks? Truth = Riot. If they ever tell the truth, it's getting ugly, fast.

scandia said...

I just had a thought that I wish I hadn't. Paulson says, ahem, I actually gave the money to the banks,not to support housing.
I say, ahem, but the banks aren't lending any money maybe because you didn't give the money to them either. If you did it would be easy to verify and nip the Bloomberg suit in the bud."
So, folks, were are those 350 billion dollars? On what island have the pirates buried the treasure? We were all following the money and now the trail has gone cold- unfollowable.

el pollo said...


The Bloomberg suit, to the best of my knowledge, is a Freedom of Information complaint against the Fed, not the Paulson. In my opinion, TARP is just a tactical diversion from the real action of the Grand Theft Wall Street game - which is the Fed by many multiples.

Ilargi said...


"Ilargi: Frankly, the only reason the PPT can't keep this market up is that it would cause immediate hyperinflation of the likes Zimbabwe would be jealous of. This entire market should be at ZERO. No value at all."

You have not a clue.

Starcade said...

Ilargi: All due respect, but where would they get the money to make these kinds of moves and NOT be hyperinflationary?

Ilargi said...

"All due respect, but where would they get the money to make these kinds of moves and NOT be hyperinflationary?"

We're not talking trillions, but a few billion here and there in the right place at the right time. Inflation is nowhere near an issue.

On a broader and largely unrelated scale, we will not have inflation for a long time to come.

EBrown said...

So it's been seasonably cold out the last few days, some snow has fallen. I live and work in upstate NY. Today toward the end of my shift a guy came into the registration area (I work in an Emergency Dept.) and asked if he could warm up for a while. He had, "come from Warsaw", which is a town between 40 and 50 miles away. I don't know anything about the poor guy's story except that he obviously had traveled at least a good part of that 45 miles on foot. He had a nice crust of frost over his entire beard. And was obviously chilled a bit.

Of course we let him stay, and he sat quietly in the corner and tried to disappear while watching the TV. I felt terrible for him. Then I walked out and went home and didn't think of him until now. I could have given him five bucks as five dollars isn't a make or break for my budget, but I didn't. I was busy up until I left and then I walked out, didn't see him because the waiting area is L shaped, and didn't think of him until later.

I know I can't solve everyone's problems in the coming nastiness, but I will, hopefully, be able to brighten a few days now and then. Next time I see someone down on their luck I will make more of an effort to reach out than I did tonight. Unfortunately I anticipate plenty of opportunities ahead. And I hope that should I be in the position of powerlessness that others will reach out to me.

Anonymous said...

A snapshot from the other side of the pond..
We store goods in a warehouse in the UK. It's three vast hangers, used to be an airfield. I was there yesterday.
"See that wall?" said the manager.
"I've not seen it for over twenty years"
Business is down 70%.
"I don't understand it - nobody can get anything out of China".
They also store polythene beads, manufactured in Israel. They reckon they'll have 6000 MT in store by xmas.
"No one's buying it, but they keep the factory running, and store it here, hoping it will get bought."


scandia said...

ebrown, I can relate to your thoughts on helping others as I walk about where the unemployed,homeless hang out. I like the phrase, " ...random acts of kindness..."

Greenpa said...

Ilargi: "Scientists" and "economists" (never confuse the two)"

No worries! No chance of my confusing them.

"In both cases, "experts" always catch up way late, but also in both, reality is worse then they have gotten so far. "

Very true. As I've stated on this blog before, my own opinion of the common university professor of science is pretty low- grade and degree inflation have been at work for many decades, generating a great many PhD's who do not, in my estimation, actually qualify as scientists.

But that's another story. I seem to have failed to communicate my actual question (happens to me all the time): what I was asking was "Is all the economic crashing actually happening faster than YOU - Ilargi and Stoneleigh - foresaw/expected. I certainly don't put you in the same category as the slow to learn "experts".

Thing is, this is a topic that interests me; I've written one analysis of a systemic reason why climate scientists, even good one, consistently generate models that underestimate problems.

And; even though I'm a smarty pants, and have understood for years that climate models were underestimating- even with my vastly superior comprehension of everything - (humor) - I'm STILL surprised at how fast global climate is disintegrating. I think the internal positive feedback loops are more pervasive, and more powerful, than the biggest pessimists guessed.

I'm interested if that is true for you, in the economic sphere, also.

FB said...


"The Fed did not allow the money base to expand, and we had a panic in the liquid markets," supply-side guru Arthur Laffer told a Las Vegas audience last week, "which caused this financial panic, pure and simple."

Am I missing something here? Or is Laffer as off the wall as he sounds?
I assume the guy is not dumb, so what is he trying to say?

On the surface, that quote runs counter to everything I have read.

Any reactions?


FB said...

Hello again,

Yikes. That "Americanfreepress" article (third to last) about deflation being a liberating force is a bruiser. I have rarely seen such a colletion of wild ideas.

First Laffer, then the Hülsmann fellow.

Ilargi, did you throw that in just to see if we were napping?


el pollo said...


Laffer is a founding father of supply side economics, and is usually spelled Laugher, as in,"Just listening to him is a Laugher."

Today may be a bigger market route than yesterday the PPT and Allah be willing. I think the sheep are truly getting frightened and ready to rebel against their "financial advisors."

Anonymous said...

Ilargi --

This article may be of interest to readers

My questions relates to the following in the article:

"A fall in the level of prices... Assuming,...that this fall of prices is not interfered with by reflation..."

How many years do you think it will take for the Fed to reflate the economy?

TampaSteve said...

Anybody see this:

Has the fed ever cut interest rates to zero before?

Talk about a hail mary pass... Isn't this pretty much the nuclear option? And what happens *when* it doesn't work?

perry said...

When it "doesn't work", they will go to negative interest rates.


Ilargi said...


"I think the internal positive feedback loops are more pervasive, and more powerful, than the biggest pessimists guessed. I'm interested if that is true for you, in the economic sphere, also."

I'd say I'm more often surprised that in both spheres the collapse is not faster than thats is is so fast. I look at both mainly from a systems theory view, which spells very clearly that slow collapse is so exceptional that it might as well be ignored in the cases we are discussing.

It also means, of course, that predictability is a difficult issue: whereas a specific point or time would seem to be subject to a sort of uncertainty that you find in quantum dynamics, you can look at trendlines. And it''s quite clear where those are pointing.

Both in climate science and in finance, I have no doubt we will see huge sudden shifts, rather than many small ones. What I see in both fields today is perhaps best compared to blowing up a balloon, even while knowing you are close to the end of the rubber's strength. Where exactly the -first- hole will appear is impossible to say, but you know it will rip somewhere soon.

perry said...

"What this crisis reveals is a broken financial system like no other in my lifetime," said former Fed chief Paul Volcker on Nov 17th. "Normal monetary policy is not able to get money flowing."

But some think that lowering rates to below zero will; that is, placing a hoarding-tax on Greenbacks will drive them out of hiding and cause a resurgence in spending. (or so some Fed governors think)


Greenpa said...

Ilargi: "I'd say I'm more often surprised that in both spheres the collapse is not faster than thats is is so fast. I look at both mainly from a systems theory view, which spells very clearly that slow collapse is so exceptional that it might as well be ignored in the cases we are discussing. "

Ahha. Now that is VERY damn interesting. I had not looked at it from that perspective- and I should have- and you are correct.


Anonymous said...

Ilargi and Greenpa,

We're poached!


mrmoto said...

25 b$ for auto industry (bridge loans)

Hot off the press

MrMoto said...

opps - jumped the gun - only a bi-partison plan - wheels turning trying to get something going though

Anonymous said...

Whewwwwwwwwwwww!!!!!!!!!!!!!...I'm exausted.........or is it deflated????