Sunday, November 23, 2008

Debt Rattle, November 23 2008: How can I convey to you?

National Photo Co. Happiness 1919
A child holding the Thanksgiving turkey.

Ilargi: It may seem sort of hard to decide which idea is sillier. But then again, that's not really fair. The nonsense oozing from Bush and Canadian PM Harper in Peru about how free trade will solve all our problems within the next 18 months goes way beyond silly. We can rest assured we'll see more protectionism than we hold possible, and the US will lead the pack. Bailing out Detroit is one thing the rest of the world will label protectionist, and we can just take it from there. Think Washington will bail out Toyota and Honda’s US factories as well? Not much choice. But I still have hope they'll let them all go in freefall.

Yet, the fact that the free trade mumbo trumps Obama's 2.5 million job rescue plan doesn’t mean the latter makes any sense. I took a look at the financial team, well, all of the team really, and none of my confidence is being boosted. Hillary Clinton is that woman who wanted to bomb all kinds of people, remember? The armored pant-suit? And how can you change anything by keeping your financial staff full of the same kind of folks who are there now? Geithner is an insider with direct responsibility for Bear and Lehman, Larry Summers is a power-hungry bigot, and Rob Rubin was for Citi was Paulson was at Goldman: the worst gambling addict in the house. These folks won’t make decisions in favor of the American people, they'll save their own status and investments. And by picking them Obama makes clear that’s what he'll do too.

Building highways for cars that nobody can afford any longer is nuts. Paying for it with borrowed money also is. Printing money is out of the question: the global bond markets will be relentless and out for blood. The US needs to produce things, not repair them. Most of all, it needs to produce its own basic needs, and after that is done, goods that can be exported. And no, I don't mean cars.


Funny thing with that Citigroup slogan, "Citi never sleeps", and they're still using it too, with huge ads in today’s US papers:

“That’s why now, more than ever, you can feel confident that Citi never sleeps.”

Here's what I wrote on June 19 (which accidentally is months before Citi chairman Bisschoff said he was confident there'd be no more big bank failures; he's still in place, go figure):

I know why Citi never sleeps
Yeah, that title was my immediate reaction when I saw Citi’s new slogan, "Citi never sleeps", earlier in the year. Not every slogan is as strong as it may at first appear. [..]
Today, Meredith Whitney comes closer than ever to predicting the end of Citi, let’s call it The Big Sleep: "It's an impossible feat. It's not a case of changing the chef. The whole restaurant has to be shut down.".

Does Washington have the guts and brains to let Citi go down? I doubt it, I think they'll come with something tonight. But really, that whole story about how much society needs the likes of Citi, Goldman or JPMorgan is utter crap. The people in power need for them to survive, but not the voters who put them in power.


Today’s best piece is a CNBC video which features Hugh Hendry, chief investment officer at hedge fund Eclectica. CNBC’s selected this quote to present it: "All US Financials Will be Nationalized in a Year". But Hendry has much more to say, and much more interesting. How about this:
How can I convey to you the seriousness, the bleakness of all of our futures? Cause I can't do it justice. I think my wife's going to divorce me, cause I’m the most miserable person to live with. I look around and I see dead people, and It's quite tough that. How can I convey to you how serious it is?

It may be that we'll just have this waterslide, where we have an 80% peak to trough movement [in the S&P]

Hendry says all big financials in the US will be owned by the US government within 12 months. When asked about a merger partner for Citigroup, he says: "Yes, the US government." Now remember that all these banks have artificially been propping up their balance sheets by valuing all sorts of toxic paper, worth BIG maybe pennies on the dollar, at face value. None of these institutions has any positive value whatsoever. They all are so deep in debt it's hard to imagine. And your government will buy them all, and with all of those trillions of dollars of debt, and do so with your money and that of your future generations. Do you really wish to wake up tomorrow and find 5 or 10 times annual US GDP in outright debt on your pillows?

Hendry also says the remarkable thing is not Citi, or JP Morgan, it’s the CDS spread on WarrenBuffett and his Berkshire Hathaway fund. "Warren got a bit sleazy. I have to say, I love the guy, but when you're over 80, and you're uber-uber-uber rich [..] the uber rich want to be socialists. You want to build a moat around your wealth. And socialism is a great mote; it means people like me can't get you."

A must see video, see below.


I will be gone for a while after today, more looking from the outside in than doing day-to-day work. I hope the team I have assembled in the interim will please you. My friend OC will be the editor, Stoneleigh will keep a close eye on what goes on, 5-6 people will contribute, and I will not be entirely absent either.

You might want to think about participating in and donating to our upcoming Automatic Earth Christmas fundraiser. This site costs a lot of money to make, and it doesn't come back (though I am very gratefull for all donations received so far, don't get me wrong). I don't want to make it a pay-site, but at the same time something's got to give. We have saved a lot of people a lot of money and trouble, but have no way to get any -what i would consider- fair payment for it. And that is fine, as I’ve said before, it's my free choice, but it can't last.

So allow me to suggest something, and please think it over. There are a lot of regular, returning, daily, readers here. Most of them, if you'd suggest it to them, would agree that what The Automatic Earth provides is worth $1 per day, or even $0.50.

Why not, since ‘tis the season to be jolly, add up what you feel that daily value is to you, and donate it once per month or per week, or in a lump sum for the next few months, or even add it up retroactively? It would make my work, and, believe me, that is a lot, much easier. I now often have to be a contortionist just to keep the wagons on the track.

It would make this site, and all the labor that goes into it, a lot more pleasurable, while the cost to you would be more or less negligible.

Please think about it. And thank you.

All US Financials Will be Nationalized in a Year
”It's not preferable, but all major U.S. financial companies will eventually be under government control because the alternative is so much worse, Hugh Hendry, chief investment officer at hedge fund Eclectica Asset Management, said Friday. "All financials will be owned by the U.S. government in a year," Hendry said. "I bet you."

Nationalizations take dramatic losses from the private sector and places them on the larger balance sheet of the public sector, he said. "It's not good," but society is vulnerable and society is going to have to intervene, Hendry said. Because the taxpayers are forced to foot the bill for bailout out the banks, shareholders shouldn't be compensated, Hendry added.

"Actually the shareholders of Citigroup have looked the other way for more than a decade" while management took excessive risk, he said. Shareholders should take nothing away if it is nationalized, because the taxpayer will be "paying this for a long, long time," he added.

Canned beer is the new champagne
From office beverages that are no longer free to Ferraris that go unpurchased, financial services firms and their staff are being forced to a new era of austerity imposed by the global financial crisis. "Canned beer is the new champagne," Oppenheimer & Co. banking analyst Meredith Whitney told a recent finance summit in New York.

Financial firms worldwide have slashed more than 130,000 jobs in the current crisis, with thousands more losses expected as banks totter and hedge funds hemorrhage assets. Some of the new austerity is fuelled by hype, said Anton Schutz, portfolio manager at Mendon Capital in Rochester, N.Y. "Everybody's cutting back. I mean you don't need the new Ferrari this year," he said.

Wall Street bonuses could fall by 41 per cent in 2009, and in London, the cash-bonus pool is forecast to fall by nearly 60 per cent this year. Employers are also cutting back on perks such as business-class travel, while once high-flying dealmakers are reining in gaudy spending. Hugh Young, managing director at Aberdeen Investment Management, says Coca-Colas in the office fridge are gone, he said. "The last thing of course, which we don't want to do, is cut people, if it ever comes to that," he said in Singapore.

Sachs and the Citi
With Citigroup apparently up for sale either in part or whole, rumors were swirling Friday morning regarding which entity (s) would be likely suitors. The one which might make the most sense is Goldman Sachs, not the least reason being that the new bank could be named “Sachs And The Citi.” Rumors regarding a merger/ takeover/ sale of Citigroup are helping European shares rebound and providing a boost to U.S. futures as well, which as of 05:30 EST were up about 4.5%.

The rumors have also helped cause a shift in the currency market back to risk-acceptance mode, as the euro, pound and Australian dollar move higher against the dollar as the yen is sold. According the WSJ, Citi’s record 26% one-day plunge has officials of the firm believing “they need to reckon with a range of scenarios that were unthinkable only weeks ago.” “The situation should not be taken Citigroup's board and management are backing down from their insistence that the New York company has ample capital,” according to the article. A board meeting was scheduled for Friday to discuss Citi’s options.

A Citigroup spokeswoman said in a statement Thursday evening: Citi has a very strong capital and liquidity position" and is "focused on executing our strategy," which includes cutting expenses and selling assets. "We believe the benefits will be seen over time. Conspiracy theorists will no doubt be making a connection here with former Goldman head and present Treasury Secretary Hank Paulson’s decision last week to not use TARP funds to buy troubled assets from banks as originally intended. Citi has billions of dollars worth of these battered securities on its books.

However, Citigroup has been far from the only bank which has seen its shares plunge since the change in Treasury’s tactics. J.P. Morgan Chase shares slid 18% on Thursday, while Bank of America fell 14%. Another option for Citi, according the WSJ,  could be a sale of one or more of its parts, such as its Smith Barney retail brokerage, the global credit-card division or the transaction-services unit, which is one of Citigroup's most lucrative and fast-growing businesses. Early Thursday, Saudi Arabian investor Prince Alwaleed bin Talal bin Abdulaziz Al Saud that he would be increasing his holdings in Citigroup to 5%, adding that he remained a strong supporter of its management. "Prince Alwaleed began buying Citi shares as he strongly believes that they are dramatically undervalued," according to an emailed statement from his office. His holdings are currently less than 4%, according to the statement.

Credit markets turn ugly as TARP turns its back on toxic assets
US mortgages and credit markets on both sides of the Atlantic have been severely jolted since the US Treasury turned its back on plans to use some of its $700bn in financial bail-out funds to buy troubled assets from banks. More than a week has passed since Hank Paulson, the Treasury secretary, changed the parameters of the Troubled Asset Relief Programme (Tarp). Yet despite Mr Paulson's insistence to Congress this week that policy actions were starting to bear fruit, the picture on the ground in the credit markets has turned uglier.

The realisation there are no other buyers for some of the toxic assets the government has decided not to buy has led to a sharp fall in the value of mortgage-related assets and a wave of renewed selling. Some large investment funds had bought mortgages expecting the Tarp would help to shine a light on the market and establish a clearing price. "Now those markets will go back to being completely illiquid as there will be no price discovery process started by the TARP," says Jay Mueller, portfolio manager at Wells Capital Management. "It is tremendously difficult to trade when the rules of the game change."

Bankers and analysts in Europe say the renewed gloom in US asset-backed bonds has knocked both European markets and general inter-bank liquidity. Institutions are being forced to face up to the prospect of further pain from some assets they hold. "The Fed has realised that the Tarp cannot support unrealistic non-market prices," says one London-based banker. "Now banks themselves are going to have to discount for that, too."

Uncertainty and further losses have also rippled into the broader credit sphere, as valuations in Europe and the US for corporate bonds have fallen to fresh lows in recent days. The combination of weak economic data and illiquid, risk averse markets has been compounded by the fact that banks may need to raise more capital in order to cover losses from the further fall in mortgage prices. "The Treasury's announcement of a 180-degree shift in direction for the allocation of Tarp monies sent the credit markets into a tailspin," says Meredith Whitney, analyst at Oppenheimer. "As Tarp monies will no longer be allocated to buy illiquid assets off bank balance sheets, the market for such assets got even more illiquid."

That comes when banks and investors have been pulling back from trading as they have already endured a brutal year, plagued by big losses and redemption requests from rattled investors. Trading volumes across markets, including the safe haven of Treasury debt, are approaching levels normally seen in the last week of the year, as investors pare their activity. The lack of capital and prospect of more writedowns from impaired assets means that cash and derivatives are becoming increasingly dislocated. Cash bonds yield well-above levels implied by credit default swaps, while the 30-year Treasury bond is yielding nearly 30 basis points more than the 30-year money market rate.

"This is a deleveraging period, and financing is being squeezed and people are having to sell assets," says Steve Kane, portfolio manager at Metropolitan West Asset Management. "Some managers are under pressure from redemption requests and obviously levered investors [hedge funds] are getting creamed." However, some such as Lena Komileva, head of G7 economics at Tullett Prebon, believe that using the Tarp for capital injections will ultimately prove more successful than buying bad assets would have been. "However, the ambiguity of the Treasury's announcement has done little to restore visibility, transparency and confidence into the policy approach, leaving investors concerned about the eventual policy impact [and liquidity]," she says. "The implications for money markets are worrisome."

As forced selling roils markets, dealers report a big increase in the number of "bid lists" circulating, as owners of mortgage-backed securities try to attract buyers, even at extremely discounted prices. Some of the requests for prices have been left unfilled, dealers say, highlighting the risks of buying these distressed assets, for which there are few buyers. The current index compiled by Markit for triple-A rated subprime mortgage derivatives, called the ABX index, fell to an all-time low on Tuesday of 32.75. This index has lost more than 20 per cent in November alone, with the Tarp effect compounded by concerns that increased unemployment will put up defaults on mortgages and foreclosures.

Assets backed by commercial mortgages have been equally hard-hit and the current index compiled by Markit for derivatives on commercial mortgage-backed securities has risen to its widest spread ever. "As has been the case over the past two years, such disruption in the credit markets does not portend well for the equity markets," says Ms Whitney. This week, the S & P 500 has been trading near its recent five-and-a-half year low. While some traders believe the market is in the process of establishing a bottom, credit spreads, which have been a leading barometer since the credit crunch began, have moved to much weaker levels. For many investors, waiting for the turn in markets has become ruinous, which also explains the latest plunge in valuations. "As you get towards the bottom the pain becomes too great and that usually marks the moment of catharsis," says Mr Kane.

Citigroup's axe to fall on London
Citigroup's 12,000 UK workers expect to hear this week who will be axed as the crisis that engulfs the Wall Street giant escalates. Citigroup bankers have told The Observer they believe at least 1,250 jobs will be slashed from its Canary Wharf London base, together with additional jobs at its subsidiary Schroders and the Egg credit card business in Derby. It is understood that Citigroup human resources staff have been overwhelmed by offers from staff to accept voluntary redundancy. Bankers fear if they continue at Citi, they may end up with nothing if its position deteriorates further.

Citi's share price closed down another 20 per cent at $3.71 on Friday after losing more than 60 per cent of its value last week. What was once the world's biggest bank was worth just $20bn this weekend, compared with $250bn in 2006. A Wall Street rout was averted on Friday as news leaked of the likely appointment of Tim Geithner, the New York Federal Reserve chief, as Treasury Secretary in the Obama adminstration. But it was not enough to reverse the tumbling Citi share price as the board of the New York bank raced to keep it afloat.

Respected Wall Street analyst Meredith Whitney, whose coverage of Citigroup has been blamed for wiping tens of billions of dollars off the bank's market value, called chief executive Vikram Pandit and his minions 'naive' for their continued belief that the bank could shrug off recent massive share price declines. She baulked at Pandit's belief that Citigroup could forgo the sale of major assets like Smith Barney or the global credit card business. 'Pandit is wrong: Citi will not be able to stay in its current form,' she said, adding that the banking giant must break itself up and sell off the pieces to raise capital and reduce its size. 'It is in such a mess Stephen Hawking couldn't turn this company around.'

Senior sources within Citigroup were fighting the share price fire all week, trying to boost the bank's standing among investors as speculation mounted that it could follow Lehman Brothers and Bear Stearns into the banking graveyard. Whitney gained notoriety in 2007 when she published a damning research note about Citigroup, claiming the bank needed to cut its dividend and sell assets to avert a $30bn capital shortfall. Citi lost more than $15bn of market value in the turmoil that ensued and Whitney started getting death threats from the bank's investors.

Elephantine Citigroup will be bail-out's next chapter
Citigroup's crisis is the most palpable evidence so far during this crisis that the merits of existence on a mega-scale for financial institutions have evaporated. It was less than three months ago that Sir Win Bischoff, the British chairman of Citigroup, trumpeted to Wall Street his belief that there were unlikely to be any further large bank failures. It is unusual to say this about any investment banker but perhaps he had not been spending enough time looking in the mirror.

This weekend, what was until recently the world's largest bank is considering breaking itself up or even surrendering its cherished independence by finding a willing merger partner. Citigroup's crisis is the most palpable evidence so far during this crisis that the merits of existence on a mega-scale for financial institutions have evaporated, perhaps for good. It is its size, coupled with some spectacularly bad investments, which means that Citigroup may well need another $100bn in funding to see it through a global recession, according to some analysts – a sum that makes Royal Bank of Scotland look almost thrifty.

That also spells a problem for efforts to sell itself. There are almost no banks in the world with both the capacity and the appetite to swallow Citigroup in this climate. One solution might be to attempt a merger with Goldman Sachs or HSBC but, as one senior London-based banker put it to me on Friday: "The result would be so complicated that I'd happily compete with them." By the middle of this week, that might be the only option left on the table for Bischoff and Vikram Pandit, Citigroup's under-fire chief executive, before the US government has to dip into its pockets once more.

Richard Lambert, the quietly-spoken director-general of the Confederation of British Industry, must have a hide of steel. To say, as Lambert did late last week, that the Government must not yield to calls to bail out the British car industry takes some nerve. Fortunately for Lambert, his comments were timed perfectly to coincide with what looked to be the slow death of attempts to engineer a rescue deal in the US. In Detroit, the idea of a Ford or a General Motors filing for bankruptcy (both said last week that they have no plans to do so – the 'yet' was tacit) is almost as seismic as the events that have shaken Wall Street to its core.

Last week's appeal by the trade unions and the Society of Motor Manufacturers and Traders for direct Government assistance was the first of what will inevitably be many plaintive cries for help in the months ahead. But I'm with Lambert – the Government should resist the urge to provide such succour. That is not to say that the country's car industry is not deserving of assistance. The story of its decline is well-rehearsed but no less shocking for that. And it continues to employ hundreds of thousands of people in this country, either directly or through parts-suppliers, dealers and the like.

But economies do not function properly when they are led by sentimental attachments. Organising any kind of bail-out here would be risky and set a terrible precedent. Shoring up this industry, parts of which remain deeply inefficient, through direct loans is an immediate but imperfect bandage, and certainly not a long-term cure in any case. Secondly, there are other, no less deserving, cases that could be made for direct Government assistance.

There is no point in the Government being the principal shareholder in major banks unless it can exert an influence on their strategy and lending behaviour. That's partly why Barclays, which will win its vote in the City tomorrow on its Middle Eastern capital-raising, saw the need to avoid taking Government money. As the banks in which the Treasury is taking a stake decline ever further in value, so Barclays' arguments for 'independence' gain in comparative strength.

So far, efforts to persuade banks to accelerate their lending on reasonable terms have been supine. That must change, but failing businesses (think Woolworths' high street arm) must be allowed to fail. If businesses deserve cash to see them through the recession, then the Government must exert its influence through the banks in which it has staked taxpayers' money to rescue, not by ladling cash into new begging bowls.

City shareholders can often find themselves caught between a rock and a hard place when it comes to matters of corporate governance. Damned if they don't intervene, they can be equally damned when they do: would, for example, Legal & General's asset management arm really have wanted Sir Stuart Rose to walk away from Marks & Spencer over the row about his elevation to the executive chairmanship earlier this year? Paradoxically, the worse the outlook for M&S becomes, the more likely you are to hear a negative response to that question.

A classic example of the dilemma facing institutional investors may well present itself with Carphone Warehouse's proposal to split itself into two listed companies, one focused on its high street arm and the other on its broadband operations. So far, so sensible – Dunstone has listened to investors who questioned whether he would put the two divisions together if they were not already linked through common ownership. The strategic review therefore makes sense. But Dunstone has already sensed trouble. As he pointed out last week, his intention to be chairman of one of the companies and chief executive of the other is almost certain to raise governance concerns in the City.

My advice to Dunstone, who has created more genuine value for his investors than most fund managers could ever dream of, is to let them vent their spleens, issue their red-top warnings and stage their protest votes at shareholder meetings – the institutions have simply got to pick their targets more effectively. During my career as a journalist, there have been few more embarrassing moments than when I approached George Davies, the Per Una fashion designer and general legend of the British high street, at a party last summer. Me: "Hello, how are things going at Matalan?" George: "Matalan?" Me: "Yes, you are Jeff Banks, aren't you?" George: An extremely unamused look.

In fairness, Davies eventually took the mix-up in very good humour. Now, having stepped down as chairman of the Marks & Spencer fashion label, he has more reasons to be cheerful and fewer to be mistaken for one of his main rivals. As my colleague James Hall reveals and in his interview with Davies, the clothing tycoon is already plotting his return to the British high street. I won't be betting against him – and I doubt Sir Stuart Rose will be, either.

Citigroup launches ‘Don’t panic’ ad blitz as shares dive
Citigroup, the embattled financial giant, is taking out advertisements in major US newspapers today in an attempt to shore up customer confidence after a downward spiral in its share price raised doubts about its future. The tactic comes as executives and US government officials huddled in meetings through the weekend to decide whether more radical steps were needed to restore order.

With $2 trillion in assets and 200 million customer accounts in more than 100 countries, Citigroup is one of the world’s most powerful financial institutions. Yet its shares lost 60 per cent of their value in five days as investors questioned whether it can absorb billions more in losses on loans and commercial mortgage investments. Although governments typically insure depositors’ money, and although Citigroup has access to potentially unlimited funding from the US Federal Reserve or the government’s Wall Street bail-out fund, executives still fear that the bad headlines could cause panic.

The advertising blitz is designed to reassure. The company is running full-page ads that acknowledge “our financial markets have been tested in unprecedented ways”, but argue that the company’s strength is rooted in a broad range of businesses and the expertise of its staff. It says customers can look to Citigroup for “providing stability” and “securing the future”, and concludes: “Now, more than ever, you can feel confident that Citi never sleeps.”

President-elect Barack Obama’s pick of Timothy Geithner, president of the Federal Reserve Bank of New York, as the next treasury secretary has intensified the drama. In his current role, he has responsibility for regulating Wall Street banks, and the New York Fed was involved in talks this weekend on how best to shore up market confidence in Citigroup.

Along with current Treasury Secretary Hank Paulson, Mr Geithner held conversations on Friday with Citi’s management about making a public expression of support, or providing a new infusion of government cash. Other options include the possible ouster of Vikram Pandit, Citigroup’s unloved chief, and more radical surgery such as spinning off divisions or selling the bank. Some analysts said a solution had to be found this weekend, before trading resumes tomorrow.

Citigroup's troubles will not sleep
The US banking giant’s shares took another bath on Thursday, with big rivals Bank of America and JPMorgan not far behind. The lack of specific bad news isn’t soothing investors. They’re worried about economic gloom, more losses and the uncertain outlook. At least on Thursday, fear was circling these institutions more ominously than it was former investment banks Goldman Sachs and Morgan Stanley. That may be because commercial property, consumer debt and corporate lending – fortes of the universal banks – all look vulnerable as the picture painted by economic indicators gets darker.

One problem is that the banks’ recent financial history doesn’t really help as a guide to the future. The credit losses which already have unfolded exceed almost all expectations. Even supposing mortgage losses, for instance, are fully taken into account, investors worry that write-downs on other types of assets could follow, in equally unexpected doses. That makes the information value of the banks’ balance sheets pretty low.

Another is that the earnings power of financial firms in a post-crisis era when less leverage is available and markets are less predictable is anybody’s guess. So, that renders valuations based on earnings as untrustworthy as those based on assets. And finally, investors are increasingly sceptical of turnaround plans involving asset sales or capital raising.

So what’s the endgame? It’s unlikely to be collapse for Citi or its big rivals. Despite dwindling market capitalisations – Citi’s is now less than $30bn – they remain too big to fail. But additional infusions of cash from the US government also could hurt shareholders by diluting them, potentially to zero. That’s putting once unthinkable options onto the table: Citi is reportedly weighing an outright sale of the whole group. There may be other recovery scenarios, but precious few investors have the nerve to bet on them. It’s all about safe, relatively predictable investments that won’t lose any more money. That may, perhaps, be a particularly acute feeling as an exhausting 2008 winds down – the end of the reporting year for most market players.

No wonder Citi boss Vikram Pandit is trying to get the US ban on short-selling financial stocks reinstated. It’s a futile move, but as Pandit struggles to stabilise the group, he may think investors will lose confidence in him if he isn’t seen to be trying something. In any case, the bank that never sleeps may not get any respite for a while.

Auto advertising cuts will have ripple effect
Economic turmoil at the Big Three automakers could have a devastating ripple effect on a number of industries, from advertising, marketing and media to sports and entertainment, all of whom rely upon marketing dollars from the giant car companies. The automotive industry spends more on advertising than any other business sector, and General Motors is by far the biggest spender in the category. But that is shifting dramatically: The embattled car company said in announcing fiscal third-quarter results earlier this month that it would slash advertising spending worldwide by 20% and promotional spending by 25%.

Between January and July, 2008, the Big Three car manufacturers showed advertising spending declines compared with the same seven-month period in 2007, according to Nielsen Monitor-Plus in the U.S. Ford and Chrysler each spent 22% less on ads, and GM cut its spending by 6%. In Canada, which usually lags the U.S. market, Nielsen Media Research reported that automotive advertising spending in measured media increased by 2.9% in the first six months of the year compared with the equivalent period in 2007.

In the meantime, GM has ended its sponsorship of the Toronto Blue Jays and will no longer sponsor the United States Olympic Committee after 2008 and has decided not to run TV ads during high-profile programming events such as the Emmys in September and the upcoming Super Bowl game. There are grim predictions about what might get axed next, and how much the industries who depend on that revenue will suffer. Sunni Boot, president of media agency ZenithOptimedia, noted the bulk of Canadian advertising agencies are owned by five multinational holding companies, "so [the automakers' woes] are affecting media, ad agencies -- all of them have a chunk in one of the Big Three.

Everybody has a link to one of them in some country. ... Auto [advertising] is so pervasive that it's going to hit everybody," she said. ZenithOptimedia recently slashed its forecast of national advertising spending to 2.2% in 2009 from a June prediction of 5.1% growth, and cut its 2008 forecast to 3.2% from 4.9% growth for the $10-billion Canadian industry. "Car companies are huge supporters of mass media," Ms. Boot said. "They play a big role in automotive media, not just through national brand advertising, but also through dealer advertising." But sponsorships of sporting teams and events stand to suffer more than traditional advertising channels in the months ahead, she believes.

"[Automakers will want to] focus every dollar on sales productivity, and sponsorships are not as consumer-focused as advertising," she said. "It is more peripheral ... [sponsorship] is building your brand over time and building social and cultural connections over time. And if you are going to the government for a bailout you can't say [that you are] going to spend millions sponsoring an Indy car." GM has pulled its Cadillac brand's sponsorship of the Masters golf tournament and two Nascar racetracks, Bristol Motor Speedway in Tennessee and New Hampshire Motor Speedway. But GM Canada insists it is committed to being a national partner of the 2010 Vancouver Olympics and keeping its name on GM Place in the west coast city, home of the Canucks.

"We are hugely committed to the Olympics and will do everything in our power to continue on with that, and the same thing goes with GM Place," GM Canada spokesman Stewart Low told the Vancouver Sun. "We call GM Place a cornerstone property, really a linchpin to what we're trying to do across the country with sponsorships of various properties." Brian Cooper, chief executive of Toronto-based sponsorship marketing firm Sports and Entertainment LP, said he has noted "a slight pullback from clients -- everyone is looking at their budgets and trying to cut out the fat. But are they abandoning this type of advertising? Not at all."

Ford Motor Company of Canada is "a huge sponsor of Hockey Night in Canada and they have Wayne Gretzky on the contract, and I have not heard about anybody pulling out," said Mr. Cooper. It would be a costly hit for many sponsors to pull out of sponsorships, he added. "In many cases these are multi-year contractual agreements and you would have to pull out with a negotiated settlement." Mr. Cooper said automakers are likelier to trim marketing avenues with no long-term commitments -- ads on TV and in newspapers and magazines -- while exploring less expensive newer media opportunities.

The latter was seemingly confirmed by Rick Wagoner, chief executive officer of General Motors Corp., when he spoke on Capitol Hill in Washington on Thursday. "We're not going to do SuperBowl ads this year, frankly, because we're cutting back," he said. "We're actually shifting a huge amount of our ad budget that remains to digital marketing, which is less expensive and more efficient."

Woes at Citigroup Began With Failed Bid for Wachovia
Less than two months ago, Citigroup emerged from the wreckage of the financial crisis as one of the last titans left standing on Wall Street. Now, in a stunning turnabout, the banking giant has sunk to its knees after a series of blows that have driven its stock price to a mere $3.77 on Friday — and left it running short on time and options.

In the decade since Citigroup was born from the merger of Citicorp and Travelers Group, it weathered many storms that threatened to pull it apart. But the current turmoil can be traced back to the last weekend of September, when it sought to reassert itself by swallowing Wachovia, the stricken bank based in Charlotte, N.C., whose vast deposit base would have turned Citi into one of America’s dominant lenders.

As the global financial crisis drove Wachovia toward collapse, the government frantically engineered their marriage. At a bargain price of $1 a share, Vikram S. Pandit, Citigroup’s chief executive, was happy to oblige: The deal would have greatly enhanced Citi’s retail banking presence and added more stable consumer deposits to a balance sheet staggered by billions in write-downs on bad mortgage loans and related securities.

But like so many other things for Citigroup over the last several years, it fell apart. Less than a week later, Wells Fargo, the powerful San Francisco-based bank, swooped in with a higher offer. Citi was left in the lurch, without a business that was vital to its future. That collapse began a steady decline in Citigroup shares that snowballed this week as speculation grew that the bank might require a government bailout, a forced merger that would crush common equity holders, or an ouster of Mr. Pandit.

In the last five days alone, more than half of Citigroup’s market value was vaporized, and investors and analysts intensified calls for the bank to find ways to lift its stock price, including splitting the company, selling pieces or selling itself outright. “They don’t have the sovereign wealth funds or other big investors to turn to anymore,” said William Fitzpatrick, an equity analyst for Optique Capital Management. “There are two remaining options: a federally forced merger or nationalization.”

The bank has fought back vigorously with assertions that its capital position is strong. It announced plans Monday to cut costs and slash 52,000 jobs. On Thursday, Saudi Prince Walid bin Talal, Citi’s biggest individual shareholder, said he would increase his stake in the bank to 5 percent from 4 percent. But none of that has appeased investors, some of whom believe Citigroup must raise $20 billion or more in new capital to offset expected losses — and may have trouble doing so.

To some extent, Citigroup’s fortunes have declined as the storm in the broader financial industry has grown angrier. Many analysts argue that the globe-spanning conglomerate, largely built by Sanford I. Weill, had never really worked as a cohesive unit. Different divisions have consistently battled, and promised synergies between units have rarely emerged.

“They never spent the time, the money or the energy to integrate all of the businesses,” said Meredith Whitney, analyst at Oppenheimer. “And so the credit card business speaks Mandarin while the mortgage business speaks Cantonese. It’s not a functional family. And because it’s not a functional family, it’s extraordinarily expensive to operate all the separate businesses, and you don’t get any of the advantages.” Many of these problems were masked during the credit boom this decade. But with the financial crisis in full swing, the bank’s failure to unite its empire has become more exposed than ever.

“A lot of the issues facing Citigroup are not new issues, they have simply grown greater in severity,” said Michael Mayo, an analyst at Deutsche Bank. These strains intensified significantly in recent days, when a near three-week grace period in financial markets came to an abrupt halt. Credit markets had begun to thaw as a $700 billion bailout for the financial industry took effect, and the United States presidential elections breathed a temporary euphoria into markets worldwide.

But financial stocks came under renewed assault last week after Treasury Secretary Henry M. Paulson Jr. said the agency was abandoning its plan to buy troubled assets from banks — including the likes of Citigroup. While the program was not a panacea for the banking industry’s ills, investors had been expecting the government to absorb vast amounts of troubled assets from bank balance sheets, putting the companies on the path toward financial health.

The price of these securities had seen a nascent recovery in late October and early November as investors awaited more details about the plan. Policy makers had suggested the government would have paid higher prices for the securities than they could fetch on the open market, something that would have helped reduce the financial pressure on Citigroup. Allen L. Sinai, president of Decision Economics in New York, said that while the original plan to buy assets was poorly conceived, the decision to scrap it severely damaged banks like Citigroup that were holding billions of dollars of mortgage-related assets.

Now “those balance sheets will continue to contract as long as housing prices continue to go down,” said Mr. Sinai. “What the flip-flopping has done is put another nail in some of our financial institutions.” Investors pounded financial shares further as continued dire news about consumers and unemployment made clear that banks will face larger losses on consumer loans, as well as the prospect of billions more in mortgage-related write-downs. While financial shares fell across the board, Citigroup, with its large costs and troubled holdings, quickly became viewed as the most vulnerable, spurring huge sell-offs that worsened as hedge funds bet on a decline in its stock.

Then, on Tuesday, a report about imminent defaults on two large commercial mortgages sent the price of bonds backed by those loans tumbling. The first $209 million loan was backed by two Westin hotels in Arizona and Hilton Head, S.C., and the second was a $125 million loan backed a shopping complex in Southern California. These problems renewed fears that a vast wave of damaged commercial loans would course through banks — including Citigroup — already hit by a tsunami of toxic mortgage products.

Obama, Bush urge vastly different approaches to ease economic crisis
The incoming and outgoing presidents Saturday urged solutions to the country's economic crisis that seemed to be worlds apart. President-elect Barack Obama, reversing his post-election practice of not announcing major policy initiatives until he takes office, promised a sweeping, New Deal-like plan to jump-start the economy by creating 2.5 million public works and alternative-energy jobs as he implicitly criticized President Bush yet called for bipartisan support.

Bush, meeting with international leaders in Peru, warned against government intervention in free markets after weeks of overseeing one of the largest government financial interventions in U.S. history. The two captains seemed to be trying to steer the ship of state in very different directions. Even more unusual was that Obama offered his policy prescriptions while Bush was abroad and speaking on a similar theme. Obama, in the first of what aides say will be weekly radio addresses to the nation, said he will take aggressive steps to revive the economy after his Jan. 20 inauguration.

"I have already directed my economic team to come up with an Economy Recovery Plan that will mean 2.5 million more jobs by January of 2011 - a plan big enough to meet the challenges we face that I intend to sign soon after taking office," Obama said. The bad news of recent days - marked by further stock declines, plus new data showing increased unemployment and declining home purchases - signaled "an economic crisis of historic proportions" with the "risk (of) falling into a deflationary spiral," Obama said.

While saying he "will need and seek support from Republicans and Democrats," Obama indirectly blamed Bush and his GOP congressional allies for much of the current malaise. "There are no quick or easy fixes to this crisis, which has been many years in the making, and it's likely to get worse before it gets better," Obama said. "But January 20th is our chance to begin anew - with a new direction, new ideas and new reforms that will create jobs and fuel long-term growth."

Obama urged "long-term investments in our economic future that have been ignored for far too long." He vowed to "put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children," developing wind and solar power and making more fuel-efficient cars. Obama has already had a positive impact on financial markets by allowing the leak Friday of his selection for the next Treasury secretary, Tim F. Geithner, president of the New York Federal Reserve Board. Battered markets rose in response.

Chris Byrne, a White House spokesman, said Obama had not spoken with Bush or given him notice about the radio address or its contents. "We're talking about the president-elect, and certainly it's his prerogative to give such an address if he chooses to do so," Byrne said. Byrne declined to comment on Obama's indirect criticisms or substantive economic claims. Obama's aides defended his speech. "Barack Obama made it clear that he wants to hit the ground running as president, and a critical part of that is developing the economic plans necessary to create job growth and stimulate the economy," said Jen Psaki, an Obama spokeswoman.

Obama earlier spoke with Bush about the president-elect's plans to revive the economy, Psaki said, and he has reached out to Republican leaders in Congress to lay the groundwork for moving legislation after the inauguration. Obama, she added, will continue to give weekly radio addresses. Bush, on his last official foreign trip as president, acknowledged there had been "economic turmoil," but he urged other leaders at the Asia Pacific Economic Cooperation summit in Lima, Peru, to "resist the temptation to overcorrect by imposing regulations that would stifle innovation and choke off growth."

While Bush said the spreading global crisis shows "there are times when government intervention is essential," he added that it should be only temporary. "I think we ought to focus our efforts on three great forces for economic growth - free markets, free trade and free people," Bush said. The dueling addresses by Democrat Obama and Republican Bush highlighted their stark differences over the long-term role of government in stimulating economic growth. Bush criticized Congress for failing to ratify bilateral free-trade agreements his administration has negotiated with Colombia, Panama and South Korea.

Despite the financial fears now gripping much of the world, Bush took credit for having helped spur economic growth in many countries by opening markets, expanding trade and providing U.S. aid. "Our nations must maintain confidence in the power of free markets," Bush said. Obama painted a darker picture. He praised Congress for passing "a long-overdue extension of unemployment benefits" but said more urgent steps are needed.

"We have now lost 1.2 million jobs this year, and if we don't act swiftly and boldly, most experts believe that we could lose millions of jobs next year." While Obama said he would "welcome ideas and suggestions from both sides of the aisle," he added: "But what is not negotiable is the need for immediate action."

Obama Sets Expansive Goal for Jobs
President-elect Barack Obama is developing a plan to create or preserve 2.5 million jobs over the next two years by spending billions of dollars to rebuild roads and bridges, modernize public schools, and construct wind farms and other alternative sources of energy. The plan, which Obama announced yesterday during the weekly Democratic radio address, is more expansive -- and undoubtedly more expensive -- than anything proposed so far to revive the nation's deteriorating economy. Obama said the darkening economic outlook demands that Washington act "swiftly and boldly" to diminish the risk that the nation "could lose millions of jobs next year."

"The news this week has only reinforced the fact that we are facing an economic crisis of historic proportions," Obama said, citing chaotic financial markets, rising jobless claims and the specter of a "deflationary spiral that could increase our massive debt even further." He provided few details and no price tag, but said his economic team is working on "a plan big enough to meet the challenges we face that I intend to sign soon after taking office." While cast as a response to a rapidly worsening crisis, the plan could enable Obama to shift massive sums to domestic priorities that Democrats say have long been neglected, such as health care and education. It also could provide seed money to reshape major U.S. industries, hastening the production of wind and solar energy and fuel-efficient cars, for example. Obama said the plan would be "a down payment on the type of reform my administration will bring to Washington."

Obama has scheduled his second formal news conference since the election for tomorrow to introduce his economic team, including Federal Bank of New York President Timothy F. Geithner, Obama's nominee for Treasury secretary. According to Democratic sources, Harvard economist Lawrence Summers, a Clinton administration Treasury chief, will be named director of the National Economic Council. In this capacity, Summers will coordinate the Obama administration's overall economic policy. Obama's advisers are coordinating with Democrats in Congress to craft a proposal intended to spur economic activity. Congressional leaders have said they hope to pass it shortly after the new Congress convenes next year and have it on Obama's desk soon after he takes office on Jan. 20.

Obama's address echoed many of the same ideas Democrats on Capitol Hill have been advocating for nearly a year. Obama said his plan would launch "a two-year nationwide effort to jump-start job creation in America and lay the foundation for a strong and growing economy. We'll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels," as well as producing fuel-efficient cars. "These aren't just steps to pull ourselves out of this immediate crisis; these are long-term investments in our economic future that have been ignored for far too long," he said.

Economists have called on the federal government to spend at least $150 billion and as much as $500 billion to ease the effects of what is expected to be the most painful and prolonged recession since World War II. A stimulus package signed by President Bush in February cost $168 billion. House Democrats have been talking about a new package worth at least $150 billion, and possibly much more. During the presidential campaign, Obama proposed a two-year, $175 billion stimulus package with money for cash-strapped state governments and infrastructure projects as well as a $1,000 tax credit for working families. The campaign did not release an estimate of the number of jobs that his latest proposal would create. But congressional aides who have been involved in developing stimulus proposals said that any plan to create 2.5 million jobs is likely to be significantly larger -- probably well over $200 billion, or between 1 and 2 percent of the gross domestic product.

Such a plan would be bold by historic standards. President Bill Clinton, facing a weak economy when he took office in 1993, proposed a $16 billion stimulus package, which was blocked in the Senate. Obama's proposal would be an order of magnitude larger, even when adjusted for the larger size of today's economy. Some economists have compared Obama's proposals to the spending spree President Franklin D. Roosevelt launched during his early months in office in 1933. Roosevelt offered jobs programs, such as the Civilian Conservation Corps, and cash for public-works projects, such as the Tennessee Valley Authority, in hopes of easing the pain of the Great Depression.

While the stimulus plan Obama discussed on the campaign trail included tax cuts, he did not mention any changes in tax policy in his address yesterday. But House Democrats say they expect to push much of Obama's tax-cutting agenda along with a stimulus measure in January. That could mean enacting legislation that would extend Bush tax cuts for families who earn less than $250,000 past the 2010 expiration date. Democrats are debating whether to roll back the tax cuts for wealthier families or let them expire on Dec. 31, 2010, as current law requires. Allowing them to expire would give the government additional revenue without forcing Democrats to vote to raise taxes. It also would avoid enacting a tax hike during a recession, which economists say would be unwise.

Without details, it is impossible to say if Obama's goal of creating 2.5 million jobs is realistic. It is also likely to be difficult to assess its effectiveness. Because unemployment is expected to soar in the coming months, the country is expected to shed jobs regardless of any government action. Obama is pledging to add 2.5 million jobs to that lower employment level. There also is no assurance that Congress will approve such a large package. Republicans, particularly in the Senate, have resisted additional spending on the economy. While Democrats will have stronger majorities in both chambers in January, Obama acknowledged that "passing this plan won't be easy." He called on both Republicans and Democrats to offer "ideas and suggestions."

The deleveraging monster will get hungrier and hungrier
Markets are spooked by three “Ds”. Deleveraging, deflation and depression are feeding one another in a potentially vicious manner. With banks facing strain again, governments must rapidly complete existing recapitalisation plans and probably take further steps to prevent excessive belt-tightening.

The most recent downward lurch in the markets has been driven by news of inflation turning negative in the US and fears that the main industrialised economies could face a depression rather than just a severe recession. Worries have also resurfaced about the banks. Citigroup’s shares dived 23pc on Wednesday, while spreads on bank credit default swaps – which measure the market’s view of the likelihood of going bust – have started to rise again.

A key component in this tangled story is deleveraging. Unfortunately, so much debt was built up in the good times that the deleveraging story has a long way to go. Between 1983 and 2007, the ratio of private credit to GDP in the Group of Seven large industrial economies plus China rose from 92pc to 155pc, according to a Nomura Securities calculation. There are two main feedback loops between deleveraging and recession/depression. First, as banks cut lending, the prices of assets that have been financed by borrowing fall.

The fall in asset prices then hits banks' balance sheets – both because they own many of these assets themselves and because some of their loans have gone sour. Between the beginning of the crisis and the end of September, there had been $580bn of asset writedowns, according to the IMF. But further falls in asset prices over the past six weeks mean there is more to come. As banks’ balance sheets get hit, they then cut their lending further. This deleveraging isn’t just affecting the speculative borrowing. As loans to companies are called and credit is withheld, the recessionary contraction mounts.

Second, as the downturn gets more severe, banks will be hit by more losses. This next wave of recession-induced losses could reach 475bn euros ($600bn) for European banks alone over the next four years, according to Nomura. US banks could lose even more, since house prices there have not stopped falling and the overall level of consumer debt is higher. The total losses that banks have yet to suffer globally could therefore easily be more than double the $580bn suffered so far. Again, as banks stare into this recessionary abyss, they are becoming more cautious in their lending, adding a further twist to the deflationary ratchet.

The governments’ plans last month to inject capital into the banks did help stem the panic in the banking industry. But they have not done much to stop the cycle of deleveraging. Part of the problem is that both banks and markets have come to the view that the extra capital is there just to fill holes in balance sheets – rather than to keep the lending spigot open. Another problem is that, in many cases, the governments’ plans are just plans. Much of the money hasn’t yet been deployed.

In the US, for example, Treasury secretary Hank Paulson has pretty much put a pause on new capital injections after his first tranche of bailouts. Meanwhile, in continental Europe, the recapitalisations have so far been slow and patchy. Governments should get their skates on and pump the required capital into the banks now. They should then rapidly examine whether even more will be needed to stop the deleveraging monster from devouring the real economy. The answer is probably yes.

Carmakers' crisis deepens Detroit's despair
While U.S. automakers wait for federal action on loans they say are key to their survival, former restaurant worker Richard Thomas is waiting on his own bailout — odd jobs that barely pay the bills. "Every single thing that goes on in my household, depends on what I make," Thomas says as he helps a friend fix the water pump on a rusting Dodge van. "If something doesn't happen for me for two or three weeks, then I'm in a hole."

It's not just a hole facing General Motors Corp., Ford Motor Co. and Chrysler LLC. It's a gaping chasm that threatens not only their own futures, but the livelihoods of thousands of Detroit families who depend on the struggling auto industry. That made it personal when this past week's congressional hearings on whether to grant the automakers' request for $25 billion in loans turned into a confrontation, partly because some of the auto leaders took private jets to the Washington hearings. "Everybody's got their own personal agenda," said Raj Dhanasri, a 30-year-old marketing contractor for GM. "We'd expect you to be smart enough to understand the pains of not just your town or city."

The country's leaders need to look past mistakes by GM, Ford and Chrysler and focus on what's best for people, said restaurant owner Anton Nikollbibaj. The Detroit automakers employ nearly a quarter-million workers, and more than 730,000 other workers produce materials and parts that go into cars. About 1 million more people work in dealerships nationwide. "I could understand the average Joe not understanding what Detroit is about, but the Congress should know what Detroit means to the country," Nikollbibaj said. "How are you going to tell a guy who has five or six kids at home and whose been working for Chrysler all his life that you are not going to help?"

Local newspaper editorials and some columnists called Congress misinformed or callous for seemingly ignoring the impact a collapse of one or more of the car companies would mean to Detroit, a city that already is among the nation's leaders in unemployment and home foreclosures. From the gleaming towers of General Motors' world headquarters rising above the downtown riverfront to factories that dot the city and its suburbs, the auto industry has been the lifeblood of the "Motor City." Despite decades of blight, disinterest and national scorn, optimism had been high, especially after Detroit won praise for hosting Major League Baseball's All-Star game in 2005 and the Super Bowl in 2006.

Luxury homes and condominiums have been built and others still are planned for downtown. And the last of the city's three casinos is expected to open its luxury hotel early next year. But 2008 has been rocky for Detroit, beginning with the sex scandal that cost Mayor Kwame Kilpatrick his job and freedom. He was sentenced Oct. 28 to four months in jail as part of a plea in two criminal cases. The mismanaged and often-criticized public schools are in line to lose millions of dollars in state aid because enrollment dropped below 100,000. And Detroit's chief financial officer has said the city faces a $125 million budget deficit that could force layoffs and cut services for residents.

"The mood in the city now is not good," 76-year-old retired carpenter Glen White said. "A lot of people are losing their homes. A lot of people are losing their jobs. "I'm making it all right, but it's tight." Misfortunes and missteps by the auto industry add to the woes, and Thomas said this past week's last-minute plea from the auto chief executives is typical of how things are done in Detroit. "We wait for something bad to happen before we do something," he said. "Everybody is scared," said Nikollbibaj, concerned about keeping his restaurant afloat following shift and job cuts at two east side Chrysler plants. His eatery, Joseph's Coney Island, and others like it sprang up near car factories around the city, most staying open 24 hours.

"Business is less than half of what it used to be since the late '90s," Nikollbibaj said. "We did really good until 2002. It's been getting worse since. I don't know where the bottom is going to be. I hope when the bottom hits I'm still going to be here." But auto executives also need to shoulder some of the blame for their failures, Bill Fink said. "I think they shouldn't get paid more than the highest paid worker on the line," said Fink, 51, a former food deliverer who has been unemployed for months and spends two days each week shopping his resumes online.

"It's frustrating. I don't want to go back to what I was doing before," Fink said. Still, he said, "My wife works, so I'm not going to lose my house or anything." The auto industry's trouble and deteriorating local economy have been a reality check for a lot of people, Fink said. "For way too long people were thinking as long as they have a job they don't have to worry about the guy down the street until it affects them," he said.

Cost of living falls most in nearly 50 years
The cost of living in Canada fell by the most in almost 50 years last month as prices for gasoline, clothes and furniture declined amid a slowing economy and a nosedive in oil prices. The sharp fall in consumer prices has raised the odds that the Bank of Canada will slash interest rates by half a percentage point in just over two week's time to stimulate economic activity and avert deflation, said Eric Lacelles, chief economist and rates strategist at TD Securities.

Consumer prices fell 1% in October from the previous month, bringing the annual rise in the consumer price index down to 2.6% from 3.4% in September. It was the biggest monthly drop since June 1959 -- a sharp turnaround from the fears of rampant inflation driven by the surge in oil prices in the first part of the year. Driving the decline was a 13.4% fall in the cost of gasoline over the month, while furniture prices fell 1.3%, clothing was down 0.9%, and cars dropped 1.1%. Food prices bucked the trend, rising a slight 0.4% from September. Now, with oil down almost US$100 a barrel since its July peak of US$147, and the economy slowing amid what looks to be the onset of a global recession, the latest fear is for a sustained drop in consumer prices, known as deflation.

Mr. Lacelles said it is a scenario the Bank of Canada would work hard to avoid because deflation would have a crippling effect on the economy. Sustained deflation generally comes hand in hand with a rise in job losses. "The risk is very clearly that of deflation and not inflation at a time like this," Mr. Lacelles said. However, he said the actual chance the economy would slip into a sustained deflationary environment was slim, particularly when focusing on the Bank of Canada's preferred core inflation measure. Core inflation, which excludes volatile items such as gasoline and food from the calculations, was unchanged in October at an annual rate of 1.7%.

"Annual core inflation has never been negative in the modern era," Mr. Lacelles said, citing data as far back as 1985. "Since the Bank of Canada started to target inflation [in the early 1990s] only two months have been outside their one to two percent band, which is pretty remarkable." He expects headline inflation to bottom out at 0.7% in the third quarter of next year and core inflation to hit a low of 1.4% in the fourth quarter of 2009. "Inflation is poised to plunge again next month, as gasoline prices have dropped in the double-digits again this month, which alone could take the annual inflation rate well below 2%," said Douglas Porter, the deputy chief economist at BMO Capital Markets. He said gasoline prices would likely fall about 18% in November following the 13.4% drop in October.

The cost of other goods, such as clothing and cars, could fall further in the coming months as consumers reign in spending amid the slower economic conditions. "Canadian inflation is melting in real time," Mr. Porter said. "With notable weakness in a variety of core components adding to the deep dive in gasoline, the Bank of Canada has the all-clear signal to continue cutting rates." Bank of Canada governor Mark Carney has signalled it is likely to cut interest rates when it meets on Dec. 9. The central bank has already lopped two percentage points off the benchmark interest rate this year, taking the target down to 2.25%. The market expects a 50 basis point cut to 1.75%.

Obama to unveil economic team on Monday
President-elect Barack Obama will announce the members of his economic team at a news conference in Chicago at 11 a.m. CST (1700 GMT) Monday, his transition office said. Obama plans to name Timothy Geithner, president of the New York Federal Reserve, as his Treasury secretary, and former Treasury Secretary Lawrence Summers as the director of the White House National Economic Council, a transition aide has told Reuters.

A main part of Geithner's portfolio will be managing the $700 billion bailout for the troubled financial industry. Geithner, 47, was a point person on the international economy at Treasury during the Clinton administration, where he worked closely with Summers. The 53-year-old Summers, who gained Obama's trust by helping guide his response to the financial meltdown during the campaign, will play a broad role in shaping policy and coordinating among other economic advisers. The two will lead the Obama's administration's efforts to rescue the slumping economy and stem the worst financial crisis in more than 70 years.

The picks come after Obama has announced he is crafting a very large stimulus package to include middle-class tax cuts and spending on public works programs, such as the building of roads, bridges and mass transit projects. Peter Orszag, a former Clinton administration economic aide, is expected to be tapped by Obama as the White House budget director. Orszag has been director of the Congressional Budget Office since January 2007.

University of Chicago economist Austan Goolsbee, a longtime adviser to Obama, has been discussed as a leading contender for the White House Council of Economic Advisers. Jason Furman, Obama's top economic policy coordinator during the presidential campaign, is likely to get a senior role, probably as the No. 2 official at the National Economic Council. U.S. media have widely reported that New Mexico Gov. Bill Richardson would be nominated as commerce secretary.

With Washington Paralyzed, Wall Street Gets the Shakes
Wall Street isn't feeling much love from Washington these days. With the lame-duck Congress and the Bush administration unable to agree on any action to boost the economy or ease the financial crisis, the markets have nosedived. The Dow Jones Industrial Average alone has plunged 2,000 points since Election Day. "It can't get much worse,” says Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi. “We're discounting they're going to rise to the rescue.”

Analysts say the problem goes well beyond the normal lame-duck government issues. “They are working against confidence building,’ says David Resler, chief economist at Nomura International. “We're in a world where we need to deliver.” The examples of paralysis are everywhere—from Treasury Secretary Henry Paulson’s frequent policy surprises to Congress’ inability to forge an auto bailout or second stimulus package. President-elect Barack Obama’s delay in naming a Treasury Secretary had been a factor, as well, until the announcement late Friday that he had nominated Tim Geithner, president of the Federal Reserve Bank of New York and a key player in the government's rescue efforts, who was widely seen as a solid pick.

“Right now, it's almost too big for people to comprehend,” says Donald W. Riegle Jr., who chaired the Senate Banking Committee during the savings and loan crisis nearly 20 years ago. “You have divided government and a form of paralysis. And the main leadership force—the President—is sort of missing in action.” The stock of the administration’s man of action—Paulson—seems to have fallen as sharply as the market lately. Critics cite his stunning reversal on how the Wall Street bailout fund should be used, as well as signs this week that he's becoming disengaged from the whole crisis. “I'm really at a loss to understand what he is doing,” says Dean Baker, co-director of the Center for Economic and Policy Research. “He's made a lot of big mistakes.”

Paulson’s announcement a week ago to abandon using the TARP fund to buy troubled mortgage assets in favor of injecting capital directly into banks is still reverberating in financial circles—as well as Washington. “The abrupt change caught us by shock because that was not part of the debate,” Sen. Charles Grassley (R.-Iowa), told CNBC. “Secretary Paulson is not getting the phone calls we're getting,” adds Sen. Claire McCaskill (D.-Missouri), who—along with Grassley—is cosponsoring legislation to strengthen the oversight board of the TARP. “It is uncomfortable to rationalize that what we voted for is not what they're going to do. He has to understand in this climate, it’s very frustrating for the average American to understand what we're doing.” Days after that policy move, Paulson surprised many again in saying he would not seek authorization for the second $350 billion of the TRAP program, leaving that to the Obama administration.

That raised questions about how Paulson viewed the urgency of the current situation, given that he had rushed to Capital Hill in late September and urged swift passage of the $700 billion package. It also emboldened Congressional Democrats to consider using the rescue fund for non-depository institutions. "It’s not big enough and it’s not going in the right direction," Christian Thwaites, CEO of Sentinel Asset Management, told CNBC, echoing a common criticism. "It’s a disaster from a PR point of view and a confidence point of view. He keeps making these opaque speeches. He's completely lost the thread of his communication." Thwaites thinks the market can fall another 5-10 percent before the Jan. 20 inauguration, in what appears to be a new stage of the financial crisis, which has been particularly brutal on bank stocks, such as Citigroup .

Even more surprising, Paulson made public comments twice this week that the government’s efforts had succeeded in stabilizing the financial system. On Thursday, he made that point in a major speech at the very moment Congressional leaders were holding a news conference to say there was no compromise agreement to bail out the nation’s automakers. “It’s not clear to me that we’ve stabilized the financial system—the markets don’t think that,” says Lawrence White, a former white house economist and regulator, now with NYU’s Stern School of Business. “I'm really surprised that Paulson has thrown in the towel.”

Supporters and critics say Paulson’s lame-duck status may be more worrisome and unsettling than President Bush’s, because the bailout legislation gives vast and unprecedented authority to the Treasury Secretary. At one point Paulson seemed “almost presidential,” says Bon Bixby, executive director of the Concord Coalition, which preaches fiscal responsibility. “If you start changing your mind about what the $700 billion is for, it detracts from your credibility.” “There was an atmosphere here in Congress, ‘Oh my god, we need somebody smarter than ourselves, give him the money,” says Rep Brad Sherman (D. Calif.), who voted against the legislation. Paulson’s missteps and step-back have both emboldened members of Congress, some of whom clearly regret voting for the TARP, say observers, and is now rethinking its use.

“Congress wants influence over it,” says the Cato Institute’s Dan Mitchell, who served as an economist to Sen. Bob Packwood. “They don't have much incentive to compromise with Paulson at this point,” says Baker. That, too, has had negative repercussions for the markets. “The kind of spread-it-around mentality shows a lack of understanding of the issue that's out there,” says Brian Bethune, chief US economist at Global Insight. That was aptly illustrated by the desire of some Democrats to use the TARP to bail out the auto industry. Former ten-term Republican congressman Bill Frenzel, now with the Brookings Institution, calls it “a new-use mandate.” What’s worse, ideological differences and partisan politics boiled over during the auto bailout debate.

“It’s very hard for the Congress to do itself,” says Riegle, who represented Michigan and spearheaded the Chrysler bailout three decades ago. “You have a vacuum. “If the president had a plan to direct some of that money, then you could get the votes in the Congress.” Instead, the Congress spent about as much time on a $25 billion package as it did on the $700 billion TARP, failing to produce any legislation but creating more uncertainty. “Congress is going back to a business-as-usual approach,” says Frenzel. In doing so, the lame-duck Congress probably gave up any chance of creating a second stimulus package, whose broad support includes Fed Chairman Ben Bernanke, business leaders, supply-side economic maestros such as Martin Feldstein of Stanford University and, of course, President-elect Obama.

Obama, who quickly convened a group of economic advisors for a one-day summit the same week he was elected, certainly did what he could in naming his Treasury nominee, who by virtue of already being in government should be able to achieve a faster transition than others. Until that decision Friday, observers like Resler worried the President-elect would soon "squander his honeymoon period.” For former senator Riegle, who was among those applauding the choice of Geithner, much of the responsibility still rests on the sitting president, George W. Bush. “The President should assemble a task force and working group, meeting seven days a week to come up with a plan to get us thru November, December and January,” says Riegle.

The lessons of the 1979 Chrysler loan guarantee
When Chrysler teetered on the brink of bankruptcy in 1979, the automaker spent months building support for a $1.5 billion loan guarantee that helped save the company and tens of thousands of jobs. Nearly 30 years later, the U.S. auto industry is getting only weeks to make its case. Still, the Chrysler chapter offers lessons to the executives of General Motors Corp., Ford Motor Co. and Chrysler LLC — the private equity successor to the old Chrysler Corp. — as well as the United Auto Workers union as they try to win support in Congress for a stalled $25 billion rescue plan.

Chrysler's predecessor secured the loan guarantees because labor, management and other stakeholders all made concessions, analysts and lawmakers said. The company also benefited from the salesmanship of its chairman, Lee Iacocca, as well as a broad coalition of supporters and a more dominant hold of the domestic auto market. "The loan guarantee wasn't just handed to them on a silver platter," said Charles Hyde, author of "Riding the Roller Coaster: A History of the Chrysler Corporation." Contrast that to the two days of high-profile hearings this past week when automakers stumbled and congressional leaders told them to come back after Thanksgiving with a better case.

Detroit's chief executives arrived aboard private jets, denied culpability for the jam their companies are in and blamed their problems on the economic downturn. The UAW said it had already taken wage and benefit concessions in 2007 and declined to endorse new givebacks. "We're asking the taxpayers to throw money in. We're not asking management to do anything," said Sen. Charles Grassley, R-Iowa, who supported the Chrysler deal as a House member. "We're not asking unions to do anything and we aren't asking government to do anything except throw the money in. We aren't undoing a lot of the reasons why they're in trouble."

Chrysler's efforts in 1979 did not get off to a fast start, either. Struggling with its largest-ever quarterly loss, a fleet of inefficient cars and high gas prices, chairman John Riccardo appealed to the Carter administration that July for $1 billion to stabilize the company and protect its 250,000 workers. Hyde, a Wayne State University history professor, said many people forget that Chrysler was forced to come up with $2 billion in concessions from unions, white-collar employees, dealers, suppliers and banks as part of the deal. State and local governments connected to plants provided tax concessions and Chrysler was required to adhere to tight government supervision after they received the loans.

Sen. Richard Lugar, R-Ind., who helped write the 1979 legislation with the late Sen. Paul Tsongas, D-Mass., remembered that UAW president Douglas Fraser told him that his union "never made concessions — never" and Chrysler's leaders were "equally cavalier about it." But Lugar said Congress approached the Chrysler loans "pragmatically — that there would need to be substantial changes in the offerings by Chrysler, likewise substantial changes in the labor agreement with the UAW." Riccardo announced his resignation in September and was replaced by Iacocca, a master salesman who introduced the wildly popular Ford Mustang in the 1960s.

Iacocca agreed to work for a $1 a year until Chrysler turned a profit. He traveled between Detroit and Washington on commercial airlines. "You don't fly around on your private jet when you're asking the government for a big loan," said Reginald Stuart, who covered the 1979 rescue as The New York Times' Detroit bureau chief and wrote a book about it. Iacocca teamed with then-Detroit Mayor Coleman Young to make the case for the loans. Together, they served as a "one-two punch," Stuart said in an interview, bringing in the Urban League and National Association for the Advancement of Colored People to their cause and organizing a grass-roots campaign by business and city leaders, dealerships, auto suppliers and others.

Four days before Christmas, Congress passed the bill, providing Chrysler a $1.5 billion loan guarantee — 50 percent more than the company originally sought. Signed by President Jimmy Carter in January 1980, the legislation gave the government broad oversight of the company and an ownership stake. Chrysler avoided bankruptcy and went to develop its highly successful fuel-efficient K-cars. Chrysler eventually drew down $1.2 billion in loans and repaid them within three years, seven years early. Chrysler turned a profit in 1982 and the government made $311 million in the sale of stock warrants and another $25 million in loan guarantee fees. "We at Chrysler borrow money the old-fashioned way," Iacocca said later. "We pay it back."

Former Michigan Gov. James Blanchard, as a congressman, spent five months helping steer the Chrysler loan guarantees through the House. "They don't have this kind of time now, in my opinion," he said. He said the car makers now need to present an operating plan that shows they can return to profitability in the next three to five years. "It's going to be very hard to help them if it appears that all it's going to do is let them limp along until we get an upturn in the economy."

U.S. automakers also face a different sales reality now. None of the Japanese companies had started building cars in the United States in 1979 and Detroit's automakers held more than three-fourths of the market. Cars carrying foreign nameplates represented 49 percent of U.S. sales last year and Toyota is on the NASCAR circuit. Now, Hyde says, "The minute you leave Detroit, most of the rest of the county says, 'We're not against the auto industry, we're only against those backward Detroit companies.'"

APEC Leaders Say Crisis Can Be Overcome in 18 Months
The financial crisis threatening to plunge the world into recession can be overcome by mid-2010, Pacific Rim leaders said Sunday as they wrapped up a two-day summit. "We are convinced that we can overcome this crisis in a period of eighteen months," the 21 leaders said in the statement. "We have already taken urgent and extraordinary steps to stabilize our financial sectors and strengthen economic growth."

The words of confidence were added early Sunday to a joint declaration that the leaders of the Asia-Pacific Economic Cooperation forum originally issued on Saturday. One delegate, who spoke only on condition of anonymity, said the changes were made at the request of the summit's host, Peruvian President Alan Garcia. The leaders also added language saying they were sending their ministers to Geneva next month to jumpstart the so-called Doha round of World Trade Organization talks. Concern over the global financial crisis injected new urgency into the negotiations.

The 21 members, who represent more than half the world's economy, are struggling to restore confidence in the world's ailing financial system by declaring their opposition to new trade barriers. The summit endorsed a blueprint worked out at a summit of top economies in Washington, but stopped short of major new proposals to ward off a punishing global recession. A broad 12-point declaration was expected at the end of the summit Sunday. A preliminary draft provided by two delegations sad the nations were deeply concerned about instability in food prices, were committed to battling piracy, and supported "decisive and effective long-term cooperation" to combat climate change.

While such summits have in the past focused on a grab bag of issues, this year's meeting in the Peruvian capital has been dominated by the world's economic meltdown. A credit crunch in the United States has roiled global markets and dragged part of the world into recession. On Saturday, APEC nations -- including those not represented at the Washington summit -- endorsed the conclusions of that meeting. Those included a pledge to resist domestic pressures to protect industries, while ensuring that small- and medium-sized companies have enough credit to stay afloat.

The leaders called for greater APEC participation in the International Monetary Fund and other multilateral lenders. Japan said last week it was ready to lend up to $100 billion to the IMF, but China has so far resisted entreaties to dig into its $1.9 trillion in reserves. The summit was expected to be the final foreign trip for George W. Bush as U.S. president. President-elect Barack Obama takes office Jan. 20, and delegates in Lima said there was little incentive to propose more concrete action without his presence. Mr. Obama did not send representatives to Lima. Even people who work for Bush acknowledged that tough issues such as a stalled U.S.-South Korea free-trade agreement would likely have to wait.

"I think the very understandable concern of these foreign governments is, will the new administration do some sort of policy review," said Dennis Wilder, senior director for Asian affairs at the National Security Council. Mr. Obama has said one area he wants to review is the U.S. free-trade agreement with Canada and Mexico, but in Lima the leaders of those two countries telegraphed their resistance to that idea. Mexican President Felipe Calderon said any attempt to renegotiate the 15-year-old pact would create "not more markets and more trade, but fewer markets and less trade." Canadian Prime Minister Stephen Harper hailed NAFTA as a great success.

Barclays and Santander set unwanted precedent in their rush for capital
The notion that all shareholders should be allowed to participate in any discounted rights issue is a central tenet of European capitalism. Or it was. Both Santander and Barclays have snubbed shareholders in recent weeks. The Spanish bank’s deeply discounted €7.2bn rights issue has been closed off to 1.8m UK retail shareholders. They may only represent 6pc of Santander’s capital – but account for 60pc of its investors.

This mass of holdovers from the demutualised building societies acquired by Santander will at least be compensated for the dilution they’ll suffer, though probably just a pittance. Still, it’s more than what Barclays’ shareholders got. The UK bank’s board originally bypassed all but one of its existing shareholders in favour of raising £5.8bn from Middle Eastern investors (the Qataris already owned a stake).

An uproar over the dilutive slight forced Barclays to backpedal. Shareholders were tossed a scrap – £500m of the £3bn of preference-like shares, but without any of the warrants given the sheikhs. They scarfed up their morsel. Both banks cited a need for speed – but the excuse doesn’t entirely wash. If Santander had not so stubbornly resisted raising capital, the long UK acceptance period would not have been an obstacle. The same can be said of Barclays, whose “rush” for capital was somewhat artificially created.

Neither institution necessarily wanted to run roughshod over pre-emption rights. But it’s all too easy to blame extraordinary circumstances for a precedent-setting violation of principles held dear. The real danger is that it opens the door to further violators with fewer excuses. The door should be slammed shut henceforth.

There is really no choice: we must back Gordon Brown’s blitz
The Prime Minister may be the architect of the financial mess we are in, but he is right about the measures that must now be taken – and the Tories are wrong to oppose them Perhaps the catastrophic withdrawal of credit lines across North America, Europe, and now the Far East, has yet to reach Notting Hill. One has the unsettling impression that David Cameron and George Osborne are not quite aware of what is happening in the world.

In any normal circumstances, the new-found Tory zeal for fiscal restraint and small government would be splendid. But we are not in normal circumstances. If this crisis is botched by the major powers – as the lesser crisis of 1930-1931 was so botched by politicians stuck in a mould – we risk a self-reinforcing spiral into devastation. We have no responsible choice other than backing Gordon Brown’s largesse in the pre-Budget report tomorrow, and more later no doubt.

Matters are getting out of hand. The American bank JP Morgan has just told clients that the US Federal Reserve will cut interest to zero by February. This never happened in the Great Depression. You can’t cut below zero. At that point, deflation increases the “real” burden of debts at a compound rate. And debt is all we seem to have these days. The Bank of Japan may beat the Fed to zero. The Bank of England has already hit the nuclear button: within a few weeks we may see the lowest rates since its creation in 1694.

Some cavil that this monetary adventure is not “working”. True, but nothing can work. All central banks can do is limit damage. Imagine what would have happened if the Fed and the Old Lady had sat on their hands as the credit lifeblood of the economy drained away. The transmission mechanism of monetary policy has broken down even more swiftly and violently than it did in the early 1930s. The juice is not getting through. Or, to borrow a phrase from that erstwhile monetarist John Maynard Keynes, central banks are pushing upwards on a dangling string.

Hence the IMF has ditched half a century of fiscal orthodoxy and called for a global spending blitz equal to two per cent of world output, or $1.25 trillion. We are all Keynesians now. There are no atheists in a foxhole, and no ideologues in a liquidity trap. Iceland, Pakistan, Ukraine, Hungary, Belarus, Serbia and Latvia are in the arms of the IMF, and a long list of countries are near tipping point. Argentina has reverted to Peronist type, seizing the private pension system. The benign global order of the post-Cold War – what Francis Fukuyama claimed was a triumph of liberal moderation – is fraying fast. We have lost Russia, where the interior ministry is already mobilising “anti-crisis units” to stem unrest, and journalists face prosecution for reporting economic news.

In China, rioters have run amok in Longnan, torching a section of the city in hand-to-hand street fights with the police. Yin Weimin, the human resources minister, warns that the coming tsunami of job losses poses a serious threat to China’s social stability. Beijing is taking no risks. It is spending a colossal 14 per cent of GDP on a fiscal rescue plan. Japan is letting rip, too, and even Germany has woken from its trance. This is now official world policy, nota bene. The G20 bloc of leading states signed off on plans for a universal fiscal boost at the Washington summit. Quite right, too. The lesson of the 1930s is that countries trying to reflate alone are punished by capital outflows, forcing them to retrench.

Then, the crisis ricocheted from state to state until all were reduced to the lowest denominator of destructive madness – at least until they retreated into autarky (Germany) or Imperial Preference (Britain). We all hang together or hang separately once debt deflation has taken hold. If you look at the world through this prism, Gordon Brown ought to be cutting taxes (especially for the poor) and ramping up spending in his pre-Budget report. To do otherwise would be remiss. Britain is bound by a gentleman’s agreement. Besides, the British economy is quite obviously in free-fall. Heavens knows how the Cameron-Osborne team manoeuvred themselves into a mistimed policy of belt-tightening with all this going on. They have revealed a lack of feel for the deeper currents of world affairs.

Was Lord Mandelson wrong in rebuking George Osborne for “reckless and irresponsible” behaviour in talking up a sterling crisis? The fall in the pound has nothing to do with the Prime Minister’s fiscal plan. It is the result of drastic rate cuts by the Bank of England, and the dawning reality that we are about to suffer the mother of all slumps. In any case, a weak pound is a godsend. It shields us against incipient deflation and serves as a pressure valve. Let it never be forgotten that Gordon Brown is the architect of our particularly British debacle. It was he who ran a budget deficit of three per cent of GDP at the top of the economic cycle, when we should have been in surplus like Australia, Canada, Germany, Holland and Spain.

We start this slump disarmed. Our budget deficit may soon balloon to £120bn. This, at nine per cent of GDP, is banana-land. As the watchdog Fitch Ratings warns, the national debt is rocketing at the fastest pace of any major country. It will hit the Maastricht ceiling of 60 per cent of GDP within two years. The great roll-back of public debt under Margaret Thatcher and John Major has been squandered. The “fiscal cost” of the bank bail-outs will alone reach seven per cent of GDP. So we can cheer Mr Osborne for landing some blows. “My job as shadow chancellor is to tell the British people the truth about the British economy. The truth is that it is the worst prepared economy in the world for recession. The truth is that we have got the highest levels of personal debt in the world.”

Bravo, but this is not in itself a policy for a country facing 1930s levels of economic contraction next year – whether minus two per cent, or even minus three per cent as some fear. Would the Tories really pursue a Neanderthal policy of deliberate job wastage, if in office? The Labour debt legacy is a mess we will have to clear up later – and for years to come – not now. A fiscal squeeze in this crisis would be self-defeating. Tax revenues would collapse. Public debt might rise almost as fast anyway. The Tories will have to extract themselves as gracefully as they can from their silly campaign before it is too late. George Osborne is an honourable, brave and gifted man. He may prove a fine chancellor. But something has gone badly awry in the policy kitchens of Central Office.

TARP and ADD: Unconstitutional bail-outs
Congress has made bureaucrats into legislators; or perhaps it has made Hank Paulson into the fourth branch of government.

It is futile, but not pointless, to note that the federal government's blizzard of bail-outs is unconstitutional. At least that would be the correct judgment were the policy brought before the Supreme Court to be judged with reference to the doctrine of "nondelegation." That doctrine, a necessary concomitant of the Constitution's separation of powers, usually concerns improper delegation of legislative powers to the executive branch. Robert Levy, chairman of Washington's libertarian Cato Institute, notes that although the court has condoned some forms of delegation, it has stipulated that Congress "shall lay down ... an intelligible principle to which the person or body authorized ... is directed to conform."

Can anyone discern the principle implicit—it certainly is not explicit—in the Troubled Asset Relief Program (TARP) that authorizes disbursement of perhaps $1 trillion in bailouts? The original purpose of the exercise, to move "toxic" mortgage assets from the books of financial institutions, is no longer controlling. Improper delegation is inherent in unlimited government, under which hyperkinetic legislators, for whom Attention-Deficit Disorder is an occupational hazard, are jacks of all trades and masters of none. Their expertise is inadequate to their pretensions of omnicompetence. Their desire to intrude government into every nook and cranny of life requires that their attentions be spread thin.

So the "laws" they pass are often little more than endorsements of vague aspirations. If a law is a substantive rule that regulates private conduct or directs the operations of government, many laws are effectively written by the executive branch, exercising vast discretion in administration and rulemaking. In 1989, the Supreme Court said: "Congress simply cannot do its job absent an ability to delegate power under broad general directives." Leaving aside whether that means Congress's understanding of "its job" is radically inflated, how broad is TARP's "general directive"? Is it simply to "make everything nice again"?

John Locke's "Second Treatise of Civil Government" (1609), which deeply influenced America's Founders, says: "The legislative cannot transfer the power of making laws to any other hands: for it being but a delegated power from the people, they who have it cannot pass it over to others." And: "The power of the legislative ... being only to make laws, and not to make legislators, the legislative can have no power to transfer their authority of making laws, and place it in other hands." But that is essentially what TARP has done. It has made Treasury Department bureaucrats into legislators; or perhaps it has made Secretary Hank Paulson the fourth branch of government. Under TARP, policy derives not from John Maynard Keynes but from the song "Dry Bones":

With the leg bone connected
to the knee bone,
And the knee bone connected
to the thigh bone,
And the thigh bone connected
to the hip bone.
Oh mercy how they scare!

Detroit is connected to the auto-parts suppliers, those suppliers are connected to the truckers who haul the parts, and the truckers are connected to Ralph and Madge's Bar and Grill out by the interstate, and oh mercy! if one goes, they all will go. Maybe. No one knows. It is true but inadequate to say that the government has not known what it has been doing since March, when it said that the contagion afflicting Bear Stearns required federal intervention lest the entire financial system be infected. Actually, the government cannot know what it is doing, for two reasons.

First, the government is operating in an environment without rules, or—what is much the same—in an environment of constantly changing rules. Second, constant, fog-shrouded improvisation is one consequence of operating without reliable prices. Prices are information; markets are information-generating mechanisms. Government has plunged into allocating wealth and opportunity even though proper prices for important assets cannot be known because markets are not functioning. When prices are arbitrary, which they must be when not set by markets, you have the essence of socialism. The results must be irrationality and, eventually, corruption. Socialism is not merely susceptible to corruption; it is corruption—the allocation of wealth and opportunity by political favoritism. Under democratic socialism, such favoritism is then rewarded by financial support, by those favored, of the dispensers of favors.

Because a Republican administration began the bailouts, many Republicans have endorsed them—grudgingly, queasily and with uneasy consciences. It is, however, probable that some Democrats relish this eruption of government into finance and industry. It serves the left's agenda of expanding the scope of politics by multiplying the forms of dependency on government. Hence liberalism's enthusiasm for enriching the menu of entitlements; hence liberalism's promotion of equality by making more groups and entities equally dependent on government. A Republican revival requires both Democratic blunders and Republican talent to refute them. The occurrence of the former is certain because of the enthusiasm for bailouts; the appearance of the latter is less so, but will be encouraged by the former.

Food crisis leading to an unsustainable land grab
The world map is being redrawn. Over the past six months, China, South Korea, Japan, Saudi Arabia, Kuwait and other nations have been buying and leasing huge quantities of foreign land for the production of food or biofuels for domestic consumption. It's a modern day version of the 19th-century scramble for Africa. This year's bubble in food prices – driven by financial speculators, biofuels and compounded when some countries halted food exports to ensure their own supplies – led to pain for nations dependent on imports.

Alarm bells rang, with many governments alerted to what might lie ahead as climate change and soil destruction reduce the supply of food on the world market. The result, a huge international land grab, raises many troublesome issues. Although governments are encouraging the trend, the acquisitions are generally made by the private sector. Along with agribusiness, corporations and food traders, investment banks and private equity funds have been jumping on board, seeing land as a safe haven from the financial storm.

Indeed, with the supply of the world's food under long-term threat, investment in land may prove a more solid bet than earlier speculation in dotcoms and derivatives. Yet from a global perspective, it is difficult to see how such investments can deliver long-term food security. The investors will want a quick return. They will practise an industrial model of agriculture that in many parts of the world has already produced poverty and environmental destruction, as well as farm-chemical pollution.

Furthermore, many local communities will be evicted to make way for the foreign takeover. The governments and investors will argue that jobs will be created and some of the food produced will be made available for local communities, but this does not disguise what is essentially a process of dispossession. Lands will be taken away from smallholders or forest dwellers and converted into large industrial estates connected to distant markets.

Ironically, these very small communities may have a key role to play in helping the world confront the interlinked climate and food crises. Many such communities have a profound knowledge of local biodiversity and often cultivate little-known varieties of crops that can survive drought and other weather extremes. Scientific studies have shown that farming methods that are not based on fossil-fuel inputs and are under the control of local farmers can be more productive than industrial farming and are almost always more sustainable.

The reason why this year's food crisis had such a harsh impact, particularly in Asia and Africa, was that many countries had been pushed by the International Monetary Fund (IMF) and other institutions to produce food crops for external markets. They would have been far less vulnerable if they had concentrated first and foremost on feeding their populations through local production.

Many of the countries that are rushing to outsource their food supplies should perhaps be looking first to see if they can produce more of their food locally, even if it means carrying out difficult measures like land reform. By seeking a quick fix to their food shortage, they may well end up without a long-term sustainable solution. And even if they succeed in generating a steady stream of food imports, they may simply be exporting their food insecurity to other nations.

Banking Regulator Played Advocate Over Enforcer
When Countrywide Financial felt pressured by federal agencies charged with overseeing it, executives at the giant mortgage lender simply switched regulators in the spring of 2007. The benefits were clear: Countrywide's new regulator, the Office of Thrift Supervision, promised more flexible oversight of issues related to the bank's mortgage lending. For OTS, which depends on fees paid by banks it regulates and competes with other regulators to land the largest financial firms, Countrywide was a lucrative catch.

But OTS was not an effective regulator. This year, the government has seized three of the largest institutions regulated by OTS, including IndyMac Bancorp, Washington Mutual -- the largest bank in U.S. history to go bust -- and on Friday evening, Downey Savings and Loan Association. The total assets of the OTS thrifts to fail this year: $355.7 billion. Three others were forced to sell to avoid failure, including Countrywide. In the parade of regulators that missed signals or made decisions they came to regret on the road to the current financial crisis, the Office of Thrift Supervision stands out.

OTS is responsible for regulating thrifts, also known as savings and loans, which focus on mortgage lending. As the banks under OTS supervision expanded high-risk lending, the agency failed to rein in their destructive excesses despite clear evidence of mounting problems, according to banking officials and a review of financial documents. Instead, OTS adopted an aggressively deregulatory stance toward the mortgage lenders it regulated. It allowed the reserves the banks held as a buffer against losses to dwindle to a historic low. When the housing market turned downward, the thrifts were left vulnerable. As borrowers defaulted on loans, the companies were unable to replace the money they had expected to collect.

The decline and fall of these thrifts further rattled a shaky economy, making it harder and more expensive for people to get mortgages and disrupting businesses that relied on the banks for loans. Although federal insurance covered the deposits, investors lost money, employees lost jobs and the public lost faith in financial institutions. As Congress and the incoming Obama administration prepare to revamp federal financial oversight, the collapse of the thrift industry offers a lesson in how regulation can fail. It happened over several years, a product of the regulator's overly close identification with its banks, which it referred to as "customers," and of the agency managers' appetite for deregulation, new lending products and expanded homeownership sometimes at the expense of traditional oversight. Tough measures, like tighter lending standards, were not employed until after borrowers began defaulting in large numbers.

The agency championed the thrift industry's growth during the housing boom and called programs that extended mortgages to previously unqualified borrowers as "innovations." In 2004, the year that risky loans called option adjustable-rate mortgages took off, then-OTS director James Gilleran lauded the banks for their role in providing home loans. "Our goal is to allow thrifts to operate with a wide breadth of freedom from regulatory intrusion," he said in a speech. At the same time, the agency allowed the banks to project minimal losses and, as a result, reduce the share of revenue they were setting aside to cover them. By September 2006, when the housing market began declining, the capital reserves held by OTS-regulated firms had declined to their lowest level in two decades, less than a third of their historical average, according to financial records.

Scott M. Polakoff, the agency's senior deputy director, said OTS had closely monitored allowances for loan losses and considered them sufficient, but added that the actual losses exceeded what reasonably could have been expected. "Are banks going to fail when events occur well beyond the confines of reasonable expectation or modeling? The answer is yes," he said in an interview. But critics said the agency had neglected its obligation to police the thrift industry and instead became more of a consultant. "What you had here is a regulatory motif that was too accommodating to private-sector interests," said Jim Leach, a former Republican lawmaker who led what was then the House Banking Committee and now lectures in public affairs at Princeton University. "In this case, the end result is chaos for the industry, their customers and the national interest."

On a hot Friday afternoon in June 2001, federal regulators swept into the suburban Chicago offices of Superior Bank and told stunned employees that it had been closed by OTS. Superior was the largest thrift to fail since the savings and loans crisis in the early 1990s. Its demise foreshadowed the current upheaval. The company had made billions of dollars in mortgage loans to customers with credit problems but boosted profits instead of setting aside enough revenue to cover the eventual losses. OTS regulators had not questioned the company's assurances about the quality of its loans. They had not required Superior to set aside more money. Even after the problems were identified, several federal investigators concluded that regulators had continued to rely on the company's promises rather than forcing it to take action.

"The whole Superior episode should have served as a warning," Ellen Seidman, then-director of OTS, said in a recent interview. Seidman acknowledged that she should have acted faster and more forcefully to address Superior's problems. Seidman, a Democrat, left her post shortly after the Bush administration began and had little role in revising the agency's approach. Although the failure and disappearance of Superior triggered minor reforms, OTS did not learn the broader lesson. Thrifts were expanding into high-risk mortgage lending, but OTS was not requiring stronger safeguards.

John Reich, who has been OTS director since 2005, and Polakoff, his deputy, were well positioned to have learned the lesson. At the time of Superior's difficulties, Reich was one of the leaders of the Federal Deposit Insurance Corp. and Polakoff ran FDIC's Chicago office. Indeed, Polakoff's office recognized Superior's problems before OTS and pushed for increased scrutiny of Superior's bookkeeping. In testimony before Congress in the fall of 2001, Reich listed what he considered the lessons of Superior's failure. Among them, he said, "we must see to it that institutions engaging in risky lending . . . hold sufficient capital to protect against sudden insolvency." But instead of increasing oversight, OTS shrank dramatically over the next four years.

In the summer of 2003, leaders of the four federal agencies that oversee the banking industry gathered to highlight the Bush administration's commitment to reducing regulation. They posed for photographers behind a stack of papers wrapped in red tape. The others held garden shears. Gilleran, who succeeded Seidman as OTS director in late 2001, hefted a chain saw. Gilleran was an impassioned advocate of deregulation. He cut a quarter of the agency's 1,200 employees between 2001 and 2004, even though the value of loans and other assets of the firms regulated by OTS increased by half over the same period. The result was a mismatch between a short-handed agency and a burgeoning thrift industry. He also reduced consumer protections. The other agencies that regulate banks review corporate health and compliance with consumer laws separately, which consumer advocates say helps ensure that each gets proper scrutiny from specialists. Gilleran merged the consumer exam into the financial exam.

Gilleran did not respond to multiple requests to be interviewed for this article. But at the time he headed the agency, he defended the consolidation of the exams, saying thrifts would be required to conduct "self-evaluations of their compliance with consumer laws." Then-Rep. John J. LaFalce (D-N.Y.), who at the time was the ranking Democrat on the House Financial Services Committee, wrote in a letter to Gilleran that this was "a complete abrogation of the mandate your agency has been given by Congress." The consumer exam had in part monitored whether thrifts were complying with the law by providing quality loans in lower-income communities. During Gilleran's four-year tenure, OTS cited only one institution for failing to meet that obligation, compared with 12 citations in the previous four years. John Taylor, chief executive of the National Community Reinvestment Coalition, and other advocates say better enforcement of consumer protections, such as rules against predatory lending, could have kept thrifts healthy because consumer complaints are an early warning of unsustainable business practices.

For thrifts regulated by OTS, the option ARM was the rocket fuel of the mortgage boom, the product most responsible for driving profits to record heights and for burning lenders badly on the way back down. Yet even after other bank regulators urged higher lending standards for these mortgages, OTS was reluctant to insist on it. Simeon Ferguson, an 85-year-old Brooklyn resident with dementia, according to his attorney, signed up in February 2006 for an option ARM. The monthly cost was $2,400, but the terms of the loan from IndyMac Bancorp, a major thrift based in Pasadena, Calif., allowed Ferguson to pay less than that each month, the way people can with a credit card.

Many of the loans made by IndyMac and other thrifts were extended to borrowers without ensuring they could afford their full monthly payments. Ferguson, who lived on a fixed monthly income of $1,100, was one such borrower, according to a pending lawsuit filed on his behalf in federal court. The suit alleges that IndyMac never checked on his income or assets. In 2006, at the peak of the boom, lenders made $255 billion in option ARMs, according to Inside Mortgage Finance, a trade publication. Most option ARMs were originated by OTS-regulated banks.

Concerns about the product were first raised in late 2005 by another federal regulator, the Office of the Comptroller of the Currency. The agency pushed other regulators to issue a joint proposal that lenders should make sure borrowers could afford their full monthly payments. "Too many consumers have been attracted to products by the seductive prospect of low minimum payments that delay the day of reckoning," Comptroller of the Currency John C. Dugan said in a speech advocating the proposal.

OTS was hesitant to sign on, though it eventually did. Reich, the new director of OTS, warned against excessive intervention. He cautioned that the government should not interfere with lending by thrifts "who have demonstrated that they have the know-how to manage these products through all kinds of economic cycles." Reich, through a spokesman, declined to be interviewed for this article. The lending industry seconded Reich's concerns at the time, arguing that the government was needlessly depriving families of a chance at homeownership. IndyMac argued in a letter to regulators that in evaluating loan applications it was not fair to rule out the possibility that a prospective borrower's income might increase. "Lenders risk denying home ownership to qualified borrowers," chief risk officer Ruthann Melbourne wrote.

The proposal languished until September 2006, when it was swiftly finalized after a congressional committee began making inquiries. The long delay in issuing the guidance allowed companies to keep making billions of dollars in loans without verifying that borrowers could afford them. One of the largest banks, Countrywide Financial, said in an investor presentation after the guidance was released that most of the borrowers who received loans in the previous two years would not have qualified under the new standards. Countrywide said it would have refused 89 percent of its 2006 borrowers and 83 percent of its 2005 borrowers. That represents $138 billion in mortgage loans the company would not have made if regulators had acted sooner.

Even after the guidance was issued, some banks interpreted it as permission to maintain old habits because the regulatory agencies had stopped short of issuing a binding rule. Washington Mutual, for instance, said in a December 2006 securities filing that it was continuing to qualify borrowers based on their ability to afford a teaser interest rate. In August 2007, the bank was still qualifying borrowers at a 2 percent teaser rate instead of the full rate of 5 percent or higher they would eventually face, according to a shareholders' lawsuit filed by Bernstein Litowitz Berger & Grossmann. As early as 2003, the company set up credit risk teams at more than a dozen offices around the country to assess the growing flood of applications for option ARM loans. The basic job was to "make exceptions" to the bank's standards so loans could be approved, said Dorothea Larkin, a former Washington Mutual credit risk manager and a witness in the Bernstein Litowitz suit.

"As we kept making the same exception over and over again, what was an exception in 2003 and in 2004 became the norm in 2005," Larkin said in an interview. It was clear to some Washington Mutual employees that the company was making loans that borrowers could not afford and that the bank could suffer as a result. In 2005, a small group of senior risk managers drew up a plan that would have required loan officers to document that borrowers could afford the full monthly payment on option ARM loans. The plan was shared with OTS examiners, according to a former bank official who spoke on condition of anonymity because the bank's practices are the focus of a federal investigation as well as several lawsuits. "We laid it out to the regulators. They bought into it. They supported it," the former official said. But when a new executive team at the bank nixed the plan, the former official said, "the OTS never said anything."

In addition to taking more risks, Washington Mutual was setting aside a smaller share of revenue to cover future losses. The reserves had steadily declined relative to new loans since 2002. By June 2005, the bank held $45 to cover losses on every $10,000 in outstanding loans, according to financial records filed with federal regulators. Average reserves at OTS-regulated institutions had declined by about a third since June 2002, but Washington Mutual's reserves had fallen even further. They were 25 percent lower than the average for OTS-regulated thrifts. OTS did not force the company to address the problem with reserves, though agency examiners worked full-time inside Washington Mutual's Seattle headquarters. Polakoff said OTS closely monitored the company's allowance for loan losses and considered it sufficient. "They had good models in place calculating expected losses on the loan portfolio," he said.

But the agency did not fix a basic problem with how Washington Mutual predicted future losses. According to a confidential internal review in September 2005, the company had not adjusted its prediction of future losses to reflect the larger risks associated with option ARM loans. The review described those loans as "a major and growing risk factor in our portfolio." As a result, the company was not setting aside enough money to cover future losses. Management responded in November to the internal review with a memo promising to update its risk assessment by June 30, 2006. During the nine months before the risk model was revised, Washington Mutual issued about $32 billion in new option ARM loans. OTS officials said in an interview that they were unfamiliar with the company's internal correspondence but would consider nine months an unacceptable delay. "Nine months to get that model into compliance?" said Dale George, a former WaMu risk manager and a witness in a lawsuit. "I found that astounding."

Countrywide Financial's decision to reconstitute itself as a thrift and come under the OTS umbrella was a victory for Darryl W. Dochow, the OTS official in charge of new charters in the Western region, home to Washington Mutual, IndyMac and other large thrifts. In the late 1980s, Dochow had been the chief career supervisor of the savings-and-loan industry, and federal investigators later concluded he played a key role in the collapse of Charles Keating's Lincoln Savings and Loan by delaying and impeding proper oversight of that thrift's operations. Dochow was shunted aside in the aftermath and sent to the agency's Seattle office. Several of his former colleagues and superiors say he eventually reestablished himself as a credible regulator and again rose in the organization. Dochow did not return a phone call requesting an interview, and OTS said he declined to give one.

As early as 2005, Angelo R. Mozilo, then the chief executive of Countrywide, approached OTS about moving out from under the supervision of the Office of the Comptroller of the Currency, which regulates national commercial banks. In 2006, Dochow and his OTS colleagues met with Countrywide at its headquarters in Calabasas, Calif., in a room decorated with color photos of the company's float entries in the annual Tournament of Roses parade. One depicted a big bad wolf, with arms outstretched, huffing and puffing on a brick house. Senior executives at Countrywide who participated in the meetings said OTS pitched itself as a more natural, less antagonistic regulator than OCC and that Mozilo preferred that. Government officials outside OTS who were familiar with the negotiations provided a similar description.

"The general attitude was they were going to be more lenient," one Countrywide executive said. For example, he said other regulators, specifically OCC and the Federal Reserve, were very demanding that large banks not allow loan officers to participate in the selection of property appraisers. "But the OTS sold themselves on having a more liberal interpretation of it," the executive said. Winning Countrywide was important for OTS, which is funded by assessments on the roughly 750 banks it regulates, with the largest firms paying much of the freight. Washington Mutual paid 13 percent of the agency's budget in the fiscal year ended Sept. 30, according to OTS figures.

Countrywide provided 5 percent. Individual firms tend to make a larger difference to OTS finances than other bank regulators because the agency oversees fewer companies with fewer assets. Polakoff said in an interview that the main reason Countrywide sought a new charter was that OTS was a better fit because it regulated banks that focus on mortgage lending. He said he challenged Mozilo: "If you're looking for a weak regulator, and if you're calling us because you think we're a weak regulator, stop now. We will walk away." Polakoff said Mozilo told him, "That is absolutely not the reason we're even talking to you about a charter." Mozilo declined to be interviewed for this article.

But critics in government and industry said Countrywide's shift from OCC oversight to that of OTS was evidence of a "competition in laxity" among regulators eager to attract business. "Institutions should not be able to find a safe haven in one regulator from the reasonable concerns of another regulator," said Karen Shaw Petrou of Federal Financial Analytics, referring to the Countrywide episode. In September 2007, six months after helping orchestrate the arrival of Countrywide under OTS, Dochow was promoted to head the agency's Western region. He had arrived just in time for the second savings-and-loan crisis.

Citigroup Saw No Red Flags Even as It Made Bolder Bets
“Our job is to set a tone at the top to incent people to do the right thing and to set up safety nets to catch people who make mistakes or do the wrong thing and correct those as quickly as possible. And it is working. It is working.”
Charles O. Prince III, Citigroup’s chief executive, in 2006

In September 2007, with Wall Street confronting a crisis caused by too many souring mortgages, Citigroup executives gathered in a wood-paneled library to assess their own well-being. There, Citigroup’s chief executive, Charles O. Prince III, learned for the first time that the bank owned about $43 billion in mortgage-related assets. He asked Thomas G. Maheras, who oversaw trading at the bank, whether everything was O.K. Mr. Maheras told his boss that no big losses were looming, according to people briefed on the meeting who would speak only on the condition that they not be named.

For months, Mr. Maheras’s reassurances to others at Citigroup had quieted internal concerns about the bank’s vulnerabilities. But this time, a risk-management team was dispatched to more rigorously examine Citigroup’s huge mortgage-related holdings. They were too late, however: within several weeks, Citigroup would announce billions of dollars in losses. Normally, a big bank would never allow the word of just one executive to carry so much weight. Instead, it would have its risk managers aggressively look over any shoulder and guard against trading or lending excesses.

But many Citigroup insiders say the bank’s risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers eager to increase short-term earnings — and executives’ multimillion-dollar bonuses — failed to rein them in, these insiders say. Today, Citigroup, once the nation’s largest and mightiest financial institution, has been brought to its knees by more than $65 billion in losses, write-downs for troubled assets and charges to account for future losses. More than half of that amount stems from mortgage-related securities created by Mr. Maheras’s team — the same products Mr. Prince was briefed on during that 2007 meeting.

Citigroup’s stock has plummeted to its lowest price in more than a decade, closing Friday at $3.77. At that price the company is worth just $20.5 billion, down from $244 billion two years ago. Waves of layoffs have accompanied that slide, with about 75,000 jobs already gone or set to disappear from a work force that numbered about 375,000 a year ago. Burdened by the losses and a crisis of confidence, Citigroup’s future is so uncertain that regulators in New York and Washington held a series of emergency meetings late last week to discuss ways to help the bank right itself.

And as the credit crisis appears to be entering another treacherous phase despite a $700 billion federal bailout, Citigroup’s woes are emblematic of the haphazard management and rush to riches that enveloped all of Wall Street. All across the banking business, easy profits and a booming housing market led many prominent financiers to overlook the dangers they courted. While much of the damage inflicted on Citigroup and the broader economy was caused by errant, high-octane trading and lax oversight, critics say, blame also reaches into the highest levels at the bank. Earlier this year, the Federal Reserve took the bank to task for poor oversight and risk controls in a report it sent to Citigroup.

The bank’s downfall was years in the making and involved many in its hierarchy, particularly Mr. Prince and Robert E. Rubin, an influential director and senior adviser. Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits. Mr. Prince and Mr. Rubin both declined to comment for this article. When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.

And since joining Citigroup in 1999 as a trusted adviser to the bank’s senior executives, Mr. Rubin, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has been roiled by one financial miscue after another. Citigroup was ensnared in murky financial dealings with the defunct energy company Enron, which drew the attention of federal investigators; it was criticized by law enforcement officials for the role one of its prominent research analysts played during the telecom bubble several years ago; and it found itself in the middle of regulatory violations in Britain and Japan. For a time, Citigroup’s megabank model paid off handsomely, as it rang up billions in earnings each quarter from credit cards, mortgages, merger advice and trading.

But when Citigroup’s trading machine began churning out billions of dollars in mortgage-related securities, it courted disaster. As it built up that business, it used accounting maneuvers to move billions of dollars of the troubled assets off its books, freeing capital so the bank could grow even larger. Because of pending accounting changes, Citigroup and other banks have been bringing those assets back in-house, raising concerns about a new round of potential losses. To some, the misery at Citigroup is no surprise. Lynn Turner, a former chief accountant with the Securities and Exchange Commission, said the bank’s balkanized culture and pell-mell management made problems inevitable. “If you’re an entity of this size,” he said, “if you don’t have controls, if you don’t have the right culture and you don’t have people accountable for the risks that they are taking, you’re Citigroup.”

Though they carry less prestige and are paid less than Wall Street traders and bankers, risk managers can wield significant clout. Their job is to monitor trading floors and inquire about how a bank’s money is being invested, so they can head off potential problems before blow-ups occur. Though risk managers and traders work side by side, they can have an uncomfortable coexistence because the monitors can put a brake on trading. That is the way it works in theory. But at Citigroup, many say, it was a bit different. David C. Bushnell was the senior risk officer who, with help from his staff, was supposed to keep an eye on the bank’s bond trading business and its multibillion-dollar portfolio of mortgage-backed securities. Those activities were part of what the bank called its fixed-income business, which Mr. Maheras supervised.

One of Mr. Maheras’s trusted deputies, Randolph H. Barker, helped oversee the huge build-up in mortgage-related securities at Citigroup. But Mr. Bushnell, Mr. Maheras and Mr. Barker were all old friends, having climbed the bank’s corporate ladder together. It was common in the bank to see Mr. Bushnell waiting patiently — sometimes as long as 45 minutes — outside Mr. Barker’s office so he could drive him home to Short Hills, N.J., where both of their families lived. The two men took occasional fly-fishing trips together; one expedition left them stuck on a lake after their boat ran out of gas. Because Mr. Bushnell had to monitor traders working for Mr. Barker’s bond desk, their friendship raised eyebrows inside the company among those concerned about its controls.

After all, traders’ livelihoods depended on finding new ways to make money, sometimes using methods that might not be in the bank’s long-term interests. But insufficient boundaries were established in the bank’s fixed-income unit to limit potential conflicts of interest involving Mr. Bushnell and Mr. Barker, people inside the bank say. Indeed, some at Citigroup say that if traders or bankers wanted to complete a potentially profitable deal, they could sometimes rely on Mr. Barker to convince Mr. Bushnell that it was a risk worth taking. Risk management “has to be independent, and it wasn’t independent at Citigroup, at least when it came to fixed income,” said one former executive in Mr. Barker’s group who, like many other people interviewed for this article, insisted on anonymity because of pending litigation against the bank or to retain close ties to their colleagues.

“We used to say that if we wanted to get a deal done, we needed to convince Randy first because he could get it through.” Others say that Mr. Bushnell’s friendship with Mr. Maheras may have presented a similar blind spot. “Because he has such trust and faith in these guys he has worked with for years, he didn’t ask the right questions,” a former senior Citigroup executive said, referring to Mr. Bushnell. Mr. Bushnell and Mr. Barker did not return repeated phone calls seeking comment. Mr. Maheras declined to comment. For some time after Sanford I. Weill, an architect of the merger that created Citigroup a decade ago, took control of Citigroup, he toned down the bank’s bond trading. But in late 2002, Mr. Prince, who had been Mr. Weill’s longtime legal counsel, was put in charge of Citigroup’s corporate and investment bank.

According to a former Citigroup executive, Mr. Prince started putting pressure on Mr. Maheras and others to increase earnings in the bank’s trading operations, particularly in the creation of collateralized debt obligations, or C.D.O.’s — securities that packaged mortgages and other forms of debt into bundles for resale to investors. Because C.D.O.’s included so many forms of bundled debt, gauging their risk was particularly tricky; some parts of the bundle could be sound, while others were vulnerable to default. “Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process,” a former Citigroup executive said of the bank’s big C.D.O. push. “Chuck was totally new to the job. He didn’t know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, ‘You have to take more risk if you want to earn more.’ ”

It appeared to be a good time for building up Citigroup’s C.D.O. business. As the housing market around the country took flight, the C.D.O. market also grew apace as more and more mortgages were pooled together into newfangled securities. From 2003 to 2005, Citigroup more than tripled its issuing of C.D.O.’s, to more than $20 billion from $6.28 billion, and Mr. Maheras, Mr. Barker and others on the C.D.O. team helped transform Citigroup into one of the industry’s biggest players. Firms issuing the C.D.O.’s generated fees of 0.4 percent to 2.5 percent of the amount sold — meaning Citigroup made up to $500 million in fees from the business in 2005 alone. Even as Citigroup’s C.D.O. stake was expanding, its top executives wanted more profits from that business. Yet they were not running a bank that was up to all the challenges it faced, including properly overseeing billions of dollars’ worth of exotic products, according to Citigroup insiders and regulators who later criticized the bank.

When Mr. Prince was put in charge in 2003, he presided over a mess of warring business units and operational holes, particularly in critical areas like risk-management and controls. “He inherited a gobbledygook of companies that were never integrated, and it was never a priority of the company to invest,” said Meredith A. Whitney, a banking analyst who was one of the company’s early critics. “The businesses didn’t communicate with each other. There were dozens of technology systems and dozens of financial ledgers.” Problems with trading and banking oversight at Citigroup became so dire that the Federal Reserve took the unusual step of telling the bank it could make no more acquisitions until it put its house in order.

In 2005, stung by regulatory rebukes and unable to follow Mr. Weill’s penchant for expanding Citigroup’s holdings through rapid-fire takeovers, Mr. Prince and his board of directors decided to push even more aggressively into trading and other business that would allow Citigroup to continue expanding the bank internally. One person who helped push Citigroup along this new path was Mr. Rubin. Robert Rubin has moved seamlessly between Wall Street and Washington. After making his millions as a trader and an executive at Goldman Sachs, he joined the Clinton administration. Mr. Weill, as Citigroup’s chief, wooed Mr. Rubin to join the bank after Mr. Rubin left Washington. Mr. Weill had been involved in the financial services industry’s lobbying to persuade Washington to loosen its regulatory hold on Wall Street.

As chairman of Citigroup’s executive committee, Mr. Rubin was the bank’s resident sage, advising top executives and serving on the board while, he insisted repeatedly, steering clear of daily management issues. “By the time I finished at Treasury, I decided I never wanted operating responsibility again,” he said in an interview in April. Asked then whether he had made any mistakes during his tenure at Citigroup, he offered a tentative response. “I’ve thought a lot about that,” he said. “I honestly don’t know. In hindsight, there are a lot of things we’d do differently. But in the context of the facts as I knew them and my role, I’m inclined to think probably not.” Besides, he said, it was impossible to get a complete handle on Citigroup’s vulnerabilities unless you dealt with the trades daily.

“There is no way you would know what was going on with a risk book unless you’re directly involved with the trading arena,” he said. “We had highly experienced, highly qualified people running the operation.” But while Mr. Rubin certainly did not have direct responsibility for a Citigroup unit, he was an architect of the bank’s strategy. In 2005, as Citigroup began its effort to expand from within, Mr. Rubin peppered his colleagues with questions as they formulated the plan. According to current and former colleagues, he believed that Citigroup was falling behind rivals like Morgan Stanley and Goldman, and he pushed to bulk up the bank’s high-growth fixed-income trading, including the C.D.O. business. Former colleagues said Mr. Rubin also encouraged Mr. Prince to broaden the bank’s appetite for risk, provided that it also upgraded oversight — though the Federal Reserve later would conclude that the bank’s oversight remained inadequate.

Once the strategy was outlined, Mr. Rubin helped Mr. Prince gain the board’s confidence that it would work. After that, the bank moved even more aggressively into C.D.O.’s. It added to its trading operations and snagged crucial people from competitors. Bonuses doubled and tripled for C.D.O. traders. Mr. Barker drew pay totaling $15 million to $20 million a year, according to former colleagues, and Mr. Maheras became one of Citigroup’s most highly compensated employees, earning as much as $30 million at the peak — far more than top executives like Mr. Bushnell in the risk-management department.

In December 2005, with Citigroup diving into the C.D.O. business, Mr. Prince assured analysts that all was well at his bank. “Anything based on human endeavor and certainly any business that involves risk-taking, you’re going to have problems from time to time,” he said. “We will run our business in a way where our credibility and our reputation as an institution with the public and with our regulators will be an asset of the company and not a liability.” Yet as the bank’s C.D.O. machine accelerated, its risk controls fell further behind, according to former Citigroup traders, and risk managers lacked clear lines of reporting. At one point, for instance, risk managers in the fixed-income division reported to both Mr. Maheras and Mr. Bushnell — setting up a potential conflict because that gave Mr. Maheras influence over employees who were supposed to keep an eye on his traders.

C.D.O.’s were complex, and even experienced managers like Mr. Maheras and Mr. Barker underestimated the risks they posed, according to people with direct knowledge of Citigroup’s business. Because of that, they put blind faith in the passing grades that major credit-rating agencies bestowed on the debt. While the sheer size of Citigroup’s C.D.O. position caused concern among some around the trading desk, most say they kept their concerns to themselves. “I just think senior managers got addicted to the revenues and arrogant about the risks they were running,” said one person who worked in the C.D.O. group. “As long as you could grow revenues, you could keep your bonus growing.”

To make matters worse, Citigroup’s risk models never accounted for the possibility of a national housing downturn, this person said, and the prospect that millions of homeowners could default on their mortgages. Such a downturn did come, of course, with disastrous consequences for Citigroup and its rivals on Wall Street. Even as the first shock waves of the subprime mortgage crisis hit Bear Stearns in June 2007, Citigroup’s top executives expressed few concerns about their bank’s exposure to mortgage-linked securities. In fact, when examiners from the Securities and Exchange Commission began scrutinizing Citigroup’s subprime mortgage holdings after Bear Stearns’s problems surfaced, the bank told them that the probability of those mortgages defaulting was so tiny that they excluded them from their risk analysis, according to a person briefed on the discussion who would speak only without being named.

Later that summer, when the credit markets began seizing up and values of various C.D.O.’s began to plummet, Mr. Maheras, Mr. Barker and Mr. Bushnell participated in a meeting to review Citigroup’s exposure. The slice of mortgage-related securities held by Citigroup was “viewed by the rating agencies to have an extremely low probability of default (less than .01%),” according to Citigroup slides used at the meeting and reviewed by The New York Times. Around the same time, Mr. Maheras continued to assure his colleagues that the bank “would never lose a penny,” according to an executive who spoke to him. In mid-September 2007, Mr. Prince convened the meeting in the small library outside his office to gauge Citigroup’s exposure.

Mr. Maheras assured the group, which included Mr. Rubin and Mr. Bushnell, that Citigroup’s C.D.O. position was safe. Mr. Prince had never questioned the ballooning portfolio before this because no one, including Mr. Maheras and Mr. Bushnell, had warned him. But as the subprime market plunged further, Citigroup’s position became more dire — even though the firm held onto the belief that its C.D.O.’s were safe. On Oct. 1, it warned investors that it would write off $1.3 billion in subprime mortgage-related assets. But of the $43 billion in C.D.O.’s it had on its books, it wrote off only about $95 million, according to a person briefed on the situation. Soon, however, C.D.O. prices began to collapse. Credit-rating agencies downgraded C.D.O.’s, threatening Citigroup’s stockpile. A week later, Merrill Lynch aggressively marked down similar securities, forcing other banks to face reality.

By early November, Citigroup’s anticipated write-downs ballooned to $8 billion to $11 billion. Mr. Barker and Mr. Maheras lost their jobs, as Mr. Bushnell did later on. And on Nov. 4, Mr. Prince told the board that he, too, would resign. Although Mr. Prince received no severance, he walked away with Citigroup stock valued then at $68 million — along with a cash bonus of about $12.5 million for 2007. Mr. Prince was replaced last December by Vikram S. Pandit, a former money manager and investment banker whom Mr. Rubin had earlier recruited in a senior role. Since becoming chief executive, Mr. Pandit has been scrambling to put out fires and repair Citigroup’s deficient risk-management systems. Earlier this year, Federal Reserve examiners quietly presented the bank with a scathing review of its risk-management practices, according to people briefed on the situation. Citigroup executives responded with a 25-page single-spaced memo outlining a sweeping overhaul of the bank’s risk management.

In May, Brian Leach, Citigroup’s new chief risk officer, told analysts that his bank had greatly improved oversight and installed several new risk managers. He said he wanted to ensure “that Citi takes the lessons learned from recent events and makes critical enhancements to its risk management frameworks. A change in culture is required at Citi.” Meanwhile, regulators have criticized the banking industry as a whole for relying on outsiders — in particular the ratings agencies — to help them gauge the risk of their investments. “There is really no excuse for institutions that specialize in credit risk assessment, like large commercial banks, to rely solely on credit ratings in assessing credit risk,” John C. Dugan, the head of the Office of the Comptroller of the Currency, the chief federal bank regulator, said in a speech earlier this year.

But he noted that what caused the largest problem for some banks was that they retained dangerously big positions in certain securities — like C.D.O.’s — rather than selling them off to other investors. “What most differentiated the companies sustaining the biggest losses from the rest was their willingness to hold exceptionally large positions on their balance sheets which, in turn, led to exceptionally large losses,” he said. Mr. Dugan did not mention any specific bank by name, but Citigroup is the largest player in the C.D.O. business of any bank the comptroller regulates. For his part, Mr. Pandit faces the twin challenge of rebuilding investor confidence while trying to fix the company’s myriad problems. Citigroup has suffered four consecutive quarters of multibillion-dollar losses as it has written down billions of dollars of the mortgage-related assets it held on its books.

But investors worry there is still more to come, and some board members have raised doubts about Mr. Pandit’s leadership, according to people briefed on the situation. Citigroup still holds $20 billion of mortgage-linked securities on its books, the bulk of which have been marked down to between 21 cents and 41 cents on the dollar. It has billions of dollars of giant buyout and corporate loans. And it also faces a potential flood of losses on auto, mortgage and credit card loans as the global economy plunges into a recession. Also, hundreds of billions of dollars in dubious assets that Citigroup held off its balance sheet is now starting to be moved back onto its books, setting off yet another potential problem. The bank has already put more than $55 billion in assets back on its balance sheet. It now says an added $122 billion of assets related to credit cards and possibly billions of dollars of other assets will probably come back on the books.

Even though Citigroup executives insist that the bank can ride out its current difficulties, and that the repatriated assets pose no threat, investors have their doubts. Because analysts do not have a complete grip on the quality of those assets, they are warning that Citigroup may have to set aside billions of dollars to guard against losses. In fact, some analysts say they believe that the $25 billion that the federal government invested in Citigroup this fall might not be enough to stabilize it. Others say the fact that such huge amounts have yet to steady the bank is a reflection of the severe damage caused by Citigroup’s appetites. “They pushed to get earnings, but in doing so, they took on more risk than they probably should have if they are going to be, in the end, a bank subject to regulatory controls,” said Roy Smith, a professor at the Stern School of Business at New York University. “Safe and soundness has to be no less important than growth and profits but that was subordinated by these guys.”


rumor said...

That CNBC video is a nice piece of work. Now, everyone at that table is fearful, but you have to ask yourself, what is each person afraid of. On one side of the table you have people committed to the status quo. They are fearful of lasting, fundamental change. On the other side you have one man who has accepted that lasting, fundamental changes have already occurred.

He's afraid that no one else will believe it.

Nick said...


I am a daily reader from the US. I have actually been reading your blog since it launched from its roots at The Oil Drum. I finally just contributed some money for the first time, but I also wanted to thank you for your work. I appreciate it everyday. I think you have a deep insight into the dynamics of this unfolding mess. Although I'm sure the team you have assembled will do a fine job and will bring their own unique gifts, I will miss your particular insights and look forward to your future contributions.

Be Well!!


el pollo said...


It is my impression that the Federal Government will shovel the money over to their Banksta buds until the international bond market says, "No mas." At that point it's either destroy the USD or let the whole stinking heap collapse including the FDIC. Is that a valid synopsis?

As to funding, I think the site needs a goal with a big, red rising thermometer and recognition awards such as Ranger and Pioneer.

I will miss your daily missives. They have been like grabbing a porcupine. However, I resent the fact that English is your third language and you write better than I.

Ilargi said...

Thanks for the kind words Nick,

I more often than not ask myself what is so hard about understanding it. And I don't say that because I'm so full of me. I think it's more that we have grown up believing that it's all some high-priest unattainable-but-for-the chosen-few sort of matter. It's the kind of shit that works: brazillions of dollars can be pick-pocketed without so much as a squeak, simply because people fear there's some magical insight needed that only 25 years of Goldman servitude can provide. Naaah.....

And do think about my $0.50 cents a day proposal. I won't be gone altogether, don't worry.

Ilargi said...


Hendry is a fresh breath of air. the other folks at the table apparently know him, but do't' know quite what to make of him. he has more money than them and knows Rogers and Buffett personally, plus he's made 40% while all the rest is losing.

Still, no, they don't get the dead people assessment.

Ilargi said...


At that point it's either destroy the USD or let the whole stinking heap collapse including the FDIC. Is that a valid synopsis?

I think maybe they're trying to squeeze a bit more validity out of Geithner and Obama. I don't see a valid USD collapse for now, these things need time and credibility. It looks more probable that the standard of living within the US will be brought down much more than we think. Which begs the question what Obama will pay his highway repairmen.

As to funding, I think the site needs a goal with a big, red rising thermometer and recognition awards such as Ranger and Pioneer.

Yeah, that would be good, If someone has the code for a good one, do let me know.

I will miss your daily missives. They have been like grabbing a porcupine.

That's how writing them often feels too. I think that Stoneleigh is a good writer, and there may be some surprises soon from others.

And hey, I'll be in the background, don't worry, and I have more time to write this way, and plenty to say.

Anonymous said...

"But I still have hope they'll let them all go in freefall." ... Ilargi, you are as kind and gentle as the Death Valley sun at noon

rototillerman said...

I, too, have been following the blog since the first round-up on TOD:Canada. About two months ago I got crisis fatigue: I switched from reading each and every article to reading Ilargi's summary, and selected articles. At the time I remember thinking, how the hell do Ilargi and Stoneleigh do this? Day after day? New page up at 2:30-3pm 7 days a week? Remember, this is on top of their preparational work, too. No amount of mere money can compensate adequately, really, though I try to donate at least once a month. And I'm still tired, so tired. Like many, I live in two worlds: the world of families that vacation in Mexico, co-workers who buy cars and houses on credit and have more and more babies, arguing passionately on the playground with parents from my kids' school about the illegality of bail-outs, and on and on... and the other world of choosing where to deploy resources for a range of scenarios from total crash to grinding crush, of keeping bees alive, of trying to save a barn from collapse, of frost-proofing the water system at the farm, ordering garden carts and tools and seeds, trying my hand at making artisan bread and pickles and hard cider, trying to generate some sense of community in our social circles. But I keep coming back to read, too. Thanks for what you do.

ric said...

Reports from Washington say the White House is unaware of any government talks with Citigroup. It also declined comment on whether President Bush would back a government rescue of Citigroup.
Citigroup: Government Now Said To Have Cold Feet (CNBC)

Paulson and the Bush administration have collapsed in a way inconceivable to the American imagination. Everyone I talked to seems to be walking around in a stunned daze, unable to understand what is happening in the news--and trying to put a good face on it. "It's terrible, but things will work out."

Collectively, America and it's citizens remind me of Lord Hidetora in Kurosawa's RAN as he stumbles out of his burning castle, driven insane by his failure.
Hidetora flees castle

After the USSR fell, Orlov describes old Russians wandering about holding pictures of dead leaders, unable to cope with changes. The trauma here is going to be extraordinary. Even Republicans I meet are talking about Obama with hope he can do something. Culturally, we don't have stories or conceptions to help us understand complete systemic failure. Even our religion is triumphant.

Anonymous said...

This is j:

I wanted to ask whether any checks mailed to you can be in US dollars, as I would like to make a donation.

TAE has been my first introduction to reading any 'blog' on the web (I have dial up, so I don't surf, and probably wouldn't have the time to, anyway) and I have found it very educational. I, like rototillerman, read the commentary but skim the articles. However, I do make a point of looking over input from the readers - a diverse and interesting group of people!

I'm also still very grateful to Stoneleigh's gracious response to a query of mine a while back. So thank you to both of you.


Stoneleigh said...


Living with a foot in two worlds pretty much sums it up. I have a full time job in the energy sector where I hear all the time about a wonderful new future based on smart power grids. Needless to say, it won't work out that way. I'm working towards getting at least some renewable generation up, running and grid connected before everything hits the fan, but financing is going to be a bigger and bigger obstacle.

At the same time, we have a farm and are expanding our preparations with such things as a heated greenhouse to extend our very short growing season. There are animals to look after, chores to do, food to grow, skills to learn and soon lots of snow to shovel. It's a busy life, but rewarding in its own way.

TAE is Ilargi's full time job, and he probably puts in about 80 hours a week (in exchange for less than $5000 a year). The site has always been run primarily as a public service, because we wanted to warn as many people as possible while there was still time for them to do something about their situation. We won't be able to do that forever though.

Stoneleigh said...


Checks in US dollars are fine, and thank you, we appreciate it very much.

Sandblaster said...

I'll gladly throw some lucre your way Wednesday, when we next get paid, and as often as I can thereafter. Your work is deeply appreciated.

In the meantime, I'd like to share this local news snippet about the crowds gleaning a farm field. I shudder to think the worst hasn't even begun.

PLATTEVILLE (AP) - A second day of a field gleaning Sunday at a Platteville area farm has been cancelled because an unexpected crowd of 40,000 people picked the farm clean a day before.

Chris Miller says she expected between 5,000 to 10,000 people to show up to collect free potatoes, carrots and leeks Saturday. Instead, cars snaked around cornfields and backed up nearly three miles. About 30 acres of the 600 acre farm about 37 miles north of Denver became a parking lot.

Some people also left their cars along two nearby Colorado highways to take the field with sacks, wagons and barrels to harvest the produce.

Miller says she opened her field to the free harvest after hearing reports of food being stolen from local churches.

Anonymous said...

I just donated too.

Thanks to you both for your public service.

bluebird said...

I too am appreciative of Ilargi and Stoneleigh efforts to produce the daily TAE. My spouse is grateful that our savings was not lost in the stock market like so many of our friends and family. I will be sending you another donation.

team10tim said...

Hey hey Ilargi,

I've been follow you and Stoneleigh since TOD and I started talking to my parents about energy and the economy in June of last year. Oil prices shot up, subprime made headlines and because I had already started a dialog I was able to persuade them to cash out their IRA at the beginning of this year. I've also managed to talk some, but not all, of my friends out buying houses and into saving.

But most importantly, because I warned them early my friends and family are ready to listen, while most folks are still whistling past the graveyard.

Thank you both!

knutty knitter said...

I feel a bit isolated waaaay down here but do appreciate the site even if I have had to brush up my economics from about 30 years back :)

I'm not sure if I can contribute but you never know and I will if possible.

viv in nz

Starcade said...

rumor: They're fearful of violence. You can take that in any number of ways...

el pollo: The dollar is toast -- the question is how much else (probably everything, but...) goes down with it.

scandia said...

I drew comfort from Hendrie's admission that he sees dead people. I too have flashes as I walk about town, as if I see the future, empty buildings, litter, street lights that don't work etc...
Ilargi, I'm sure your Mother will be so happy to see you! Enjoy some time out! Here's hoping lots of money will be waiting for you when you get back.
Your encouragement, and Stoneleigh's too, to learn to think for oneself has been a priceless gift.

Todd in CA said...

Starcade: re: Rumor: The fear at the table was thick. I would guess they don't see far enough ahead to see the violence, not consciously yet, or in a real way, rather they are still shaken by what may be their first intimations that he may be right. I think it's a shaking of world view kind of thing. It's not just a commitment to the status quo, but an investment of body and spirit. A 'god doesn't exist' kind of moment, coming from one of god's own prophets. Which leaves them with the question; If what this guy says is true... then what?

Just my opinion, as I was struck by their reactions to him as well. Perhaps I'm just projecting.

BTW. Anyone:

I've watched "The Crash Course" and "Money as Debt" and those sorts of things, but still find a lot of this financial jargon unwieldy. Is there some sort of book or something which outlines the basics of economics and so on without too much of a bias to it, or too much of a specific case study approach?

Or a cheat sheet...

Thanks much.

P.S. My last tip was the 16th, but I've added it to the calendar on my computer as a recurring event. So as long as I still have electricity and money to pay the internet bills and so forth. :)

Thanks I and S.

jal said...

Ilargi has accepted my offer of help and I will gather info that they may want to use.

If anyone know how 2T dollars of T-bill can be used to buy products let me know.
My concern is that China and others will want to spend their t-bills to help their people and economy.
Therefore it will have an impact on the USA. What kind of inpact?

Greenpa said...

Ilargi, you sometimes wail that you can't understand why people can't understand. I think we have a cogent, if partial, answer here:

As somebody said; They're all mad but me, and thee. And thee's a mite peculiar.

Greenpa said...

Well, and looky here. Here's a nice, also partial, reason why the economic crash is not happening even faster-

Basically- inertia. And people like the lady in the photo- wailing that she's in dire straits- while living in utter luxury, so far as world standards go. Clueless about how much "down" is yet to come, and actually still in possession of substantial resources.

rachel said...

ilargi, travel well. Another MO in the mail.
I look forward to OC and the round-up gangs' take...although, I will miss your insight each day.

Stoneleigh said...


Like Ilargi, in some ways I would have expected financial collapse to have happened more quickly. Although I'm told that inertia is the wrong physical metaphor, that's how I think of the reason why it's taken this long. There are time lags in the system, where one thing fails and the effects spread outwards like ripples on a pond. Eventually one ends up with a chaotic situation, but it takes time to reach that point.

Financial collapse collapse is grounded in positive feedback, meaning that it begins slowly and picks up momentum until it begins to accelerate rapidly. I don't know if you would have read Stuart Staniford's wonderful piece at TOD nearly a year ago - Fermenting the Food Supply. He presented a great illustration of this from the point of view of the accelerating growth of biofuels and the resulting impact on global food supplies.

Financial contagion has the potential to unfold very rapidly at cascade points. As we are very aware of this potential for a rush for the exits, which can leave people completely stuck very quickly, we have tried to warn people well in advance. It is better to be early than even five minutes too late. This great unwinding is inevitable, and the safest place to be is one the sidelines in cash or cash equivalents (under your own control). Here's another great piece from TOD ANZ by aeldric - The Failure of Networked Systems. It also illustrates how financial collapse can unfold very rapidly - more rapidly than other systems.

Glennjeff said...

I've donated before and got you in mind for a donation in a week or so, you have not saved me any money but I do appreciate the accurate reporting, photos & cynical humour. Struggling to make ends meet ourselves a bit.

EBrown said...

I and S,
Thanks for your blog - your public service is well worth it to many people. I'll paypal another donation your way.

Stoneleigh said...

I wanted to say a big thank you to everyone who sent us donations. We appreciate it very much :)

MNlawyer said...

Christmas Fund Raiser Link in upper left hand corner does not appear to work. What is web address for making contributions?

Anonymous said...

This is an excellent rant:

Slate said...

Bailout of Citi, gee imagine that. As for the image of feet planted squarely in two worlds, what a great analogy. I didn't discover theoildrum until March and TAE until last month, which is clearly my loss. Thankfully, I at least pulled my meager IRA out a couple of months ago because I could only see the DOW dropping to 5,000 (now 2,500 seems more reasonable). But anyway, since learning about PO and now even more so with the financial crisis I see unfolding, I can't help but see the walking dead around me. I fall into the category of young (26), recently out of college, and not wealthy. So I've had no time to accumulate assets to make preparations. I feel quite behind and sometimes wonder if other people who have had time to make more preparations see me as one of the walking dead.

Thanks for the P90x suggestion. I can tell already that this workout is going to kill me. My wife thinks I'm twisted for wanting to workout so I can have the strength to work a farm (she's your typical pollyanna, which also makes preparations difficult!).

Ilargi said...

"MNlawyer said...
Christmas Fund Raiser Link in upper left hand corner does not appear to work. What is web address for making contributions?"

Sorry for that. The link is fixed now.

Ilargi said...


Being young and fit is one of the best preparations available. Being 'aware' alone in a relationship is not. The nuclear family concept is not healthy in itself. Community will become much more important than it is now, and fast.

Do try to acquire practical skills while you can, i.e. ASAP.

My good friend Sharon Astyk, who is much more advanced than me in this sort of thing, had some recommendations recently that I will certainly try to follow:

"Reader’s Digest has an excellent series of how-to books that cover a wide range of skills including _The Complete Do-It Yourself Manual_ (which a builder friend noted would allow you to pretty much build a house from scratch with), _Practical Encyclopedia of Crafts_ and _Skills and Tools_. I’m also partial to Gene Logsdon’s _Practical Skills_ book."

Sharon's site is a treasure chest full of information, here's the link: Sharon Astyk.

Stoneleigh said...


Don't worry, if P90X didn't kill me, you'll be fine. You're much younger than I am, and almost certainly fitter to start than I was. I wasn't exactly the obvious candidate for an extreme fitness program when I started, but I've been at it for 11 months now and it's made an enormous difference. I'm still a work-in-progress, but I can already do many things I've never been able to do before, and had never dreamed I'd be able to do. I still can't do plyometric (jumping) push ups, but Rome wasn't built in a day.

You might want to get hold of some protein powder for making milk shakes, as that helps you to build muscle. This is the one I like, at the best price I've been able to find (much less than in local stores). It's a Canadian site though, so you might prefer to find a US one if that's where you are.

bluemarble said...

S and I,

Thanks and hope your travels go well Ilargi.

I have been cramming financial info for the past 3 months and
I'm still not sure how to deal with my TIAA CREF. (This is the retirement organization for teachers and public sector researchers.) The only option I have that guarantees the principal is to put it in traditional annuity.

I understand you and others are urging cash/cash equivalents under your control and we are doing this as much as possible. What to do with these “retirement” funds that are attached to my institution?

rumor said...



Forrest said...

I have found some peace through preparations (recently formed neighborly relationships are uplifting).

But my Mortgage and it's foggy future still keep me awake at night. I imagine it is the same for many here and I'm wondering how you all see the future of your dwelling (I know some have explained their plans).

It is too late to sell. What are your strategies for dealing with this? Ride it out and move on?

Any thoughts are appreciated.

-I too have been reading since the sites' inception and will contribute shortly. Thanks for all the effort - I've got small children and your help has given us a fighting chance.

Anonymous said...

from anonymous paulsonist

Ilargi and Stoneleigh,
thanks for your work, most appreciated.
I have learned much by visiting your blog,
though I cannot quite grasp the monetary
and energy-rational implications of sustained deflation.

My previous madness of gravitational paulsonism should be depaularized, as it can be read in several different ways, and isnt about the Paulson as much as you would think.

here is my short story about gravity, which makes even less sense, and is too long, and also encodes somehow the gravitational need to make profit.

this thing isnt actually about economy as such,
as it makes no economic sense to reason as if gravity exists.

The law of gravity is nonsense,
no such law exists.
If I think I float, and you think I float,
then it happens.

This material contains several profound logical errors of various complexity
that I have been unable or unwilling to nullify, as well as several omissions,
it does not contain E8 symetry or any higher dimensional configurations,
no strings, and does not describe any particle physics, newtonian mechanics,
contains no usable substance of actual economic theory,
or any of the expected centrifugal forces
acting on bodies of gravitational capital,
so it remains unsuitable for most purposes,
and is mostly illegible and totally inexplicable.

you may propagate, modulate, reshape or delete at your convenience.


"who controls the past controls the future
who controls the present controls the past"

five-dimensional econometric biophysics of quantum-gravity

wild conjectures on Gravitational Capitalism
of which the dominant form should be described as
Gravitational Corporatism

All capital is subject to a gravitational field
that attracts all other capital, in five-space.

Futhermore, the valuation of capital in the present
is subject to a gravitational field
projected by the valuation of capital
that exists in the future, which should be obvious.

All tradable capital substance has more than one possible value,
not all these values can be contained at once in fluctuating monetary proportions.

All economic transactions require energy,
and must therefore yield a suffient
net energy-rational operation.

All of you should be familiar with the laws of thermodynamics,
I barely comprehend them myself.

All markets can move either up or down.

relative to what?
in which space do they move up or down in?
by which invisible force are they moved?

All one dollar bills have a discreet memetic value
that is entangled with the same percieved value
of all other one dollar bills.

where is this value contained?
how is it transmitted?

These things move in the space of proportioned values,
which apparently exists in conjectured five-space,
and perhaps exists in the collective human mind,
the proportioned gravitational continuum of markets,
where capital exists in five-dimensional holographic symbols
encoding fluctuating utilitarian probability functions
expressable in inprecise discrete values at any one time.

the monetary phenomenon of inflation may not be exclusively caused
by an increase of the money supply relative to the ammount of tradable goods,
velocity of currency being constant,
all growing economies must experience some inflation,
even before increasing the money supply,
( though we can only measure this growth by counting money )
as every single possible transaction must consume some energy,
which must be purchased with the money that already exists in circulation,
thereby slightly decreasing the purchasing power of said money,
or its net-energy ratio in any transaction.

Is this correct, or would it change the velocity of money?
or the effective ammount of available goods?
or could this cause deflation instead?
The ammount of transactions would need to include
the purchase of energy neccesary to perform the transactions.

So we have inflation, and now deflation,
which is completely different, but also related
to the fundamental nature of currency,
because it seems all currency ultimately leaks,
perhaps all capital leaks, and all markets leak,
since all possible economic transactions
require the additional consumption of energy,
and energy in the markets is attainable only through money.

Therefore, the net of economic transactions in the market
must provide a profit, and have a sufficiently positive energy-ratio,
or the market will de-energize and increase in entropy, and fall apart,
as it always costs energy to run systems and stabilize structures.

Natural markets, all systems of logical interchange
that exist between all lifeforms,
and have a low entropy, or state of disorder,
in their local system, take time,
since all non-entangled information propagation
remains bound to lightspeed,
and all information propagation relying
on compounding quantum wave-function collapse in the observer.

Actually, natural markets of lifeforms then constitute time,
perhaps all life is collectively five-dimensional,
conveniently contained within or without higher membranes,
and said life may consist of using power,
willfull energy, to decrease local entropy,
then accounting for the individual and collective profits over time.

The gravitational continuum of biophysical entropy
consists of the irreversible temporal momentum of life,
life being things that definitely collapse wave-functions,
and which must consistently interchance energy of the present
with entropy of the future, and also interchange entropy of the present
with energy of the past.

Since the markets already fully occupy the four-dimensional space-time continuum,
the physical structure of the things traded in the market do not alter
their properties in four-space when their value changes, but in five-space.

The human will does not exist in four-space,
all capital, usable energy and matter,
and information pertaining to collective utilitarian proportioned values,
which is useable by the will to proportionately decrease future entropy,
can only exist in five-space, accounting for
previously decreased entropy in the past,
all symbols exist verifiably only in five-space.

Human capital is per defintion memetic,
as it exists only in the entangled medium of
valued exchange between the entropy of human minds,
which have mostly four dimensional market perceptions.

The substance and expression of human desires in the markets
is not composed of four dimensional perceptions. but five,
as it contains tradable substance of uncertain entangled value
which can go up or down, that is fluctuating
in a five-dimensional quantized memetic continuum
of possible entropies, which is the collective market
of the projected holographic human will.

this modified scene from nineteen-eighty-four illustrates
the difficulty in valuating invisible things

How many swaps am I holding up, Winston?

and if the Paulson says
there are not four swaps, but five,
then how many?

The swaps cannot be seen,
and paulson says five, so there are probably just four,
and yet five, or even three, or all at once, or none at all.

These variations are then in quantum superposition,
both four and five at once, if any, accounting notwithstanding,
only collapsing into a definite value when agreed upon by all observers,
when the transaction is actually made.

Only the disciplined mind can see reality,
it takes an effort of the will,
an act of self-destruction.

However, I am holding up the weight of more than four swaps,
capital being subject to gravity, and since paulson says,
the gravitational force on these swaps extends beyond four-space,
even if I myself observe there are but four,
particularly through the gravito-memetic mechanisms
of coherent accounting and compound interest.

Precisely because capital is subject
to a gravitational field that attracts all other capital,
in five-space, it willfully bends with compounding interests
the proportioned future continuum of markets,
generated by both biophysical energy and utility functions
and the gradually irreversible dissemination
of property-rights by law.

It is mostly this force of proportioned valuation or rather,
sudden lack of upwards gravitational pull on present capital from future capital,
that is now causing the market to fall into higher entropy and lesser value,
as the expected proportioned gains from future interests,
which have increased upwards capital momentum for centuries,
are no longer present,
this is further compounded with fear and expectations of fear,
being that there is no perception of a future market continuum
of higher value and lesser entropy.

When investors and participants in the present market
percieve the valuation of capital in the future market to be stable or increasing,
the quantized gravitational pull on capital valuation can exert an upwards momentum
of sufficient compounding force to overcome natural entropic decay
of these market systems, providing there is a critical net energy-ratio,
and providing the biosphere can yield constantly increasing economic output,
or constant efficiency gains in production can be attained.

As capital from the present is gravitationally attracted by that of the future,
and all markets in the future now exist in higher entropy, with lower value,
perhaps now percieved in all possible futures,
a negative energy vacuum is present in five-space,
pulling the markets into the void of highest entropy and lowest value,
destroying system cohesion and increasing disorder,
smaller pieces being sucked into the Paulsons singularity,
which has an increasing critical mass of attractive gravitational capital,
drawing in any loose capital that is caught in the gravimetric shears.

And so markets move up and down,
but mostly down until at least mid-century,
what with the deflationary depression,
biosphere-destabilization, resource depletion,
energy crises, food crises, theres no way they could go up.

There is the invisible operator,
which must by neccesity of the will
move in five directions at once,
seeking profits, and causing peculiar gravity between capital.

The invisble hand is the five-dimensional
collective human expression of the will to future,
which is a will to capital power, profit,
as all life is a will to power.
But some hands are larger, and pull more forcefully from further.

Swaps, together with all human economic endeavours,
exist only in five-space, the domain of the invisible hand.
The value of any tradable substance, mostly expressed in money,
exists only dynamically entangled in five-space,
its four-space configuration cannot encode all its possible values.

The problem with some swaps and other derivatives is precisely
that none of their percieved five-space configurations
will yield their currently overvalued market price when they are transacted,
they are suspended in mid-air, being artificially held up,
which looks like a total waste of energy,
as they will have to come down sometime.

Have you seen this? have you heard about this?

The tradable values of human minds exist only collectively,
in the proportioned gravitational continuum of five-space,
together with the same entangled values of all other minds in the market.

Capital and markets exist in the human mind,
in proportioned value, and are subject to gravity,
as all organisms are subject
to a gravito-biological field of uncertain configuration,
which may allow the haphazard construction of a five-dimensional
quantized gravity theory of econometric biophysics.

The quantum wave-form fluctuations of the past,
as well as those of the future,
can exist only in the collapsed state of the present perceptive mind,
which must have perceptions of these forms before and after they come to pass,
generating a very interesting form of compounding retro-active
quantum wave-function collapses in perceived entropies.

And so markets move up and down.

Lifeforms that exist and have perceptions,
must be movable and must have a past,
and so must be able to percieve their past,
as no wave-functions can be logically collapsed into perceptions
so as to preclude the thermodynamic and entropic possibility of that past,
and so they must consume energy in the present to decrease their entropy in the future,
and the entropy of the local universe in the past,
as the degree of possible past movement in the local system
must be retroactively reduced,
so as to allow sufficiently positive energy-rational biophysical interactions
to continue existing in the future, and the past,
by increasingly retroactively decreasing entropy and postponing entropic decay
of the universe and by extension themselves as long as possible,
simply because it remains profitable to do so within the market logic.

And thus, the local universe seems to expand,
for some reason that may have something to do
with the unfortunate executive decision to peg radiometric decay
of the weak nuclear force to the speed of light,
neccesitating local bending of five-space into little bubbles
where wave-function collapses
are cumulatively remembered for purposes of profitable existence
in conjunction with gravitationally moved time-dilated things,
to prevent accounting errors.

All life counts, but humans count more often.

And so, growth of the planetary economy,
and accelerating increase in the cumulative
perceptions of the human population,
especially in the propagation of symbols,
may actually alter, and likely decrease,
the lifespan of the universe, in several ways.

For example, by using for our convenience
the observable cosmic redshift acceleration,
in conjunction with several other factors,
it may be possible to calculate the exact time
when markets and perceptions on this planet began,
and to calculate precisely when they will end,
thereby observing this, proactively and retroactively collapsing
the values of all wave-functions that will lead to it,
and annihilating all gradations of free-will
that would cause this perceptions un-event in the future, or the past,
and making it so, inevitably, that the calculated value will be true,
providing there are no other observers
within the event horizon of the local universe.

And so it would be possible for us to observe
the beginnings of life, thereby simultaneously
creating that life on this planet ourselves,
retroactively, forming a convenient causality paradox,
as long as no other perspectives can observe it.

"God does not play dice with the universe"

a quote by Einstein, which was later corrected.

"God does not only play dice,
he throws them where they cannot be seen"

"Compound interest is the most powerful force in the universe"

Because this quote of Albert Einstein
cannot be logically disproven,
we must therefore conclude that
the purpose of all life is to make profit.

where are my profits?

Anonymous said...

well, never mind.
but gravity is fun,
dont you agree?

EBrown said...

I just watched the video of Hugh Hendry from CNBC. I noticed two things about the panel. One was the mood of the panelists shifted about half way through when they tried to make a "bounce is coming" counter argument to Hendry's position and he shot them down. I thought the feel they projected from then on was significantly more dejected than the previous few minutes. Hendry's dooomerism was quite contagious on the set there at CNBC. The other panelists stayed resolutly more positive than Hendry, but looked like it took some effort on their part. The second point I noted was during the initial counter to Hendry's short schpiel about how bad things could get the camera stayed on him and he looked down, and had a bit of sad smile on his face. I sure could identify with being in that position of saying how bad I thought things are going get and having a rosy vision of the future tossed back. Now that he's made money while the vast majority of everyone else has lost money he's gained some credibility. Ugh - at one point he sounded like he was about ready to say he wished he was wrong (I have said as much since I would rather look the fool than live through the hardship that is coming).

Chaos said...

I rarely if ever contribute to online sites, but I did this time, without hesitation. As you guys point out, its hard to put a value on the quality of writing and collection of information, but TAE is unbelievable. Thanks from a recent reader...

Anonymous said...

Thank you for your insighful blog, Stoneleigh and Ilargi. Your work is highly appreciated. I discovered your site a few months ago via Sharon Astyk's blog. I'll be sending a donation shortly.


Anonymous said...

Sachs and the Citi....ha ha ha ha! Thanks for that one!

el pollo said...

I would donate, but like the good books says, "When you donate, do not let your right hand knoweth what your left had doeth." Or something like that. Boy - does that screw up one's typing. Makes Paypal difficult. And they don't accept mastodon knuckles as currency either, yet they claim to give reasonable online exchanges.

Actually, I have been donating right along every 30-60 days, but I am sort of embarrassed to admit it.

Potato said...

I have only been reading the site for a couple of months (after stumbling upon a link on Garth Turner's RE blog) but I hardly miss a day now. Thank you for all the great information and insight. I have made a donation, not the biggest I'm sure, but I will send more as time goes on. Thanks again.

CrystalRadio said...

What ho ilargi, have a good time and all the best for the season. Will send a small cheque which could be more but Steven Lewis and a couple others stand in the wings.(I don't like pay pal, as not only are they a pain to use but take a cut while causing that pain, so Scrooge them).

I will try to go easy on OC and in that regard will anticipate your return.

CrystalRadio said...

Oops should check this stuff better, that was Stephen Lewis above.

Anonymous said...

First hour lurker, I wanted to thank you for your work. I appreciate it everyday. Will miss your style. Me quite penniless right now, pretty much into frugal already. But a big XXL thank you for a brilliant job done :-) Enki

Karl said...

Hugh Hendry did a good one hour programme for Channel 4 in the UK a few weeks ago. A bit toned down to his normal comments when interviewed on CNBC, but the unmistakable message that things have changed did get through.

I have to say if I had any money to worry about Hugh is the person I would trust with it!

Interestingly the UK chair on CNBC (Guy ...?) has seemed to get increasingly frustrated when he appears on the channel. Thanks for bringing the clip to our attention as I normally only manage to catch the very early UK programming.