Thursday, March 19, 2009

March 19 2009: The Global Rage

Jack Delano Headlines December 1940
Men and a woman reading headlines posted in window of Brockton Enterprise newspaper office on Christmas Eve, Brockton, Massachusetts

Ilargi: I’ll take a piece that just came in my mail, from today as our intro, since I need to go bottle some wine. I like to think Gerald Celente sees the world much in the same way I do.

One more thing: I was thinking today that the Troubled Assets Relief Program is more aptly named than I figured.

The Collapse of '09
by Gerald Celente

The "Panic of '08" will be followed by "The Collapse of '09." In 2008, when the world's largest financial firms and equity markets crumbled, Wall Street's woes preoccupied the media. In 2009, the focus will broaden to include a range of calamities that will leave no sector unscathed. Next in line is retail, which accounts for some 70 percent of consumer spending, 26 percent of which is holiday sales. After the numbers are tallied to reveal a dismal retail Christmas, more big chain bankruptcies will follow. Besides leaving masses unemployed, defunct retailers will leave behind thousands of empty stores. Who will rent them? Nobody!

Add to these empties commercial space vacated by defunct financial firms and an array of troubled businesses, from restaurants to architectural firms, to high tech operations, to offset printers, etc., etc. The inescapable result (that we predicted over a year ago and is only now being discussed in the business media) is a commercial real estate bust that will be costlier, wreak greater havoc and prove more intractable than the residential market decline. Because most people don't live and shop on Wall Street, the "Panic of '08" was viewed by Main Street as if from afar - even though many were losing money. But when commercial real estate crashes it will hit much closer to home. The depressive atmosphere of thinly shopped, half- vacant malls will strike emotional chords and all the senses.

In office buildings, vacant floors and empty cubicles will dampen the workday spirit of the still-employed; ever present reminders of laid- off friends and colleagues and of the fragility of employment. Abandoned, untended business and industrial parks will highlight the already mournful scene. In cities studded with soaring towers and new construction predicated on eternal economic growth, streets lined with "For Rent/For Sale" signs will complement stilled cranes and uncompleted buildings.

As retail and commercial real estate collapse, the credit card sector and all its interrelated processing and back office support businesses will suffer and be forced to scale back. Hordes of consumers who have been living off credit cards and racking up debt to the limit will lack the funds to service their debt... much less pay it off, and they will be forced to default. Given the nearly $3 trillion in consumer debt at risk (excluding auto and mortgage) an inevitable default snowball will add momentum to the in-progress Collapse of '09.

While we alone predicted the "Panic of '08" (and even took out the domain name "" on 7 November 2007), we are not alone in predicting a Depression. The "D" word is being uttered - in some cases by those who have the most to lose and whose best interests are not served by spreading gloom and doom. "The world and country are in a depression," said celebrity tycoon Donald Trump. He then later softened the blow, downgrading it to a "virtual depression."

"Virtual" to the few who will never have to worry where the next dollar will come from, it will be painfully real and hardly virtual to the multitudes who are and will be worrying. The virally proliferating Greatest Depression is the Trend of Trends for 2009. Even so, beware! Over the course of free-falling 2009, the word from most official sources will be "recession," and from the few mainstream trophy pessimists, "deep recession."

For example, the oft-quoted naysayer, Nouriel Roubini, New York University professor of economics, forecasts a two year recession ... not Depression. On the sunnier side of Wall Street, the Federal Reserve predicts the US economy will contract only through the middle of 2009 and pledged, "In any event, the Committee agreed to take whatever steps were necessary to support the recovery.'' What "steps?" The Bernanke Two-Step? Adjust interest rates or print more money? Neither stopped the credit crisis from worsening, the real estate market from tanking or the stock markets from crashing.

It was Fed finagling, Washington deregulation and Wall Street's compulsive gambling that created the crisis. To trust or to seriously consider pronouncements, analyses and predictions made by any of these sources is an exercise in willful self-deception. Yet, with pensions, IRAs, 401ks, stocks and mutual funds evaporating, many of those most affected deny reality and take hope that forecasts made by proven incompetents will miraculously restore their losses.

Throughout the many years leading up to what we term the "Greatest Depression," The Trends Research Institute provided copious data and Globalnomic analysis to support our forecasts of economic upheaval. In the past year alone, we have provided so much hard evidence (housings starts, home sales, foreclosures, bankruptcies, bank failures, unemployment figures, stock indices, leading economic indicators, retail sales, etc.) that further elaboration should be superfluous.

Those waiting to hear the "D" word from economic experts, talking heads and TV anchors before taking action will most certainly regret their indecisiveness. Absent from the economic scenarios ranging from second quarter recovery, deep recession and "virtual" depression are the multiplicity of social, environmental, health, political, emotional/psychological and geopolitical factors that point beyond just Depression. They point to The Decline and Fall of Empire America.

Well before Inauguration Day, Barack Obama was cast as the next Franklin Delano Roosevelt. If he follows in FDR's footsteps he could freeze deposits by declaring a "holiday" to stop a run on the banks. While FDIC insurance may cover deposits, even after banks reopen, withdrawal amounts may be restricted. (As the Argentine government did in 2001-2002.)

Author's Note: Suspicious of the soundness of the banking system, I requested to withdraw a substantial sum from our Key Bank account, leaving funds sufficient to cover ongoing business operations. First they tried to dissuade me, then they stonewalled me, and finally they turned openly hostile. I was forced to sign a series of documents, including one acknowledging that since I was carrying a large sum I could be the target of a robbery. To enhance that possibility, the teller slammed down the bag of cash on the counter and publicly announced the sum.

Despite repeated requests in the days preceding my withdrawal to get the cash in hundreds, they gave it to me in twenties, making for a bag five times the size and more robber-friendly. When I complained to the bank manager who had processed the request, the response amounted to "take it or leave it." This will not be an isolated event. If you attempt to withdraw a large chunk of money from your account, negotiate the details in advance and anticipate possible hassle and obstruction.

We've heard similar accounts from clients and Trends Journal subscribers who, over the past several months, tried to close out mutual funds, 401ks and assorted sinking equities. They were dissuaded, cajoled, belittled and arm-twisted by brokers desperate to keep their accounts. Many caved in under the pressure, didn't close them and lost most of what they had.

So, we leave you with a Greatest Depression consideration: How safe is your money? How sound is your bank? At the end of November, Citigroup, once America's largest bank, was on the rocks. Fifty-two thousand employees were laid off. In just three days its stock lost more than half its value. Rumors swirled that Citi was so desperate they were looking to sell or split up the company.

Is your money deposited in a local bank whose reputation you can bank on? Are you with a teetering giant or a poorly-managed regional? If either of the latter, it would be in your best interest to assess the risks. Take some out if you think there is risk; take it all out if you think there's high risk. You may consider spreading it around and even banking abroad...after all, this is the Global Age.


Gerald Celente

Fed in Bond-Buying Binge to Spur Growth
The Federal Reserve ramped up its effort to revive the economy, declaring it would buy as much as $300 billion of long-term U.S. Treasury securities in the next few months and hundreds of billions of dollars more in mortgage-backed securities. The Fed had already cut its benchmark interest-rate target to near zero. Unable to go lower, the central bank now is essentially printing money to raise the supply of credit and thus push down the longer-term rates paid by families and companies on mortgages and other key loans. The impact was immediately felt. Prices on Treasury debt soared, pushing the yield on 10-year Treasury notes down to 2.53% from above 3% the day before -- the largest one-day drop since the aftermath of the 1987 market crash.

The rate on a 30-year fixed-rate mortgage for credit-worthy borrowers fell to about 4.75%. But the value of the dollar sank, a reminder of the risk the Fed is running by printing money to give the economy a jolt. The show of force follows months of internal debate. Fed Chairman Ben Bernanke had argued for staying focused on lending to troubled parts of the financial markets instead of buying long-term government bonds, an unorthodox step taken recently by the Bank of England. But Fed officials decided they had to do more as the economy deteriorated. Wednesday's move highlighted the central bank's ability to move aggressively on the financial crisis without approval from Congress. That flexibility is important at a time of growing political hostility toward devoting more taxpayer money to bailouts.

As expected, the Fed policy-making committee voted unanimously to hold its target for the federal-funds rate, at which banks lend to each other overnight, between zero and 0.25%. "The Fed is living up to its commitment to do everything in its power to deal with the crisis," said Deutsche Bank economist Peter Hooper. "Monetary policy is not going to get us out of this mess by itself. But this is effective life support....keeping things from getting a lot worse." All told, the Fed will pump as much as an extra $1.15 trillion into the economy via bond purchases. The Fed will buy as much as $300 billion in long-term Treasurys in the next six months. It will increase the ceiling on purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to $1.25 trillion, up from $500 billion. The Fed also is doubling potential purchases of their debt, to $200 billion.

US dollar plunges in fallout from Fed Treasury plans
Dollar extends losses after biggest slide since 1985

The dollar fell for a second straight session on Thursday and the euro soared above $1.37, as investors feared the Federal Reserve's Treasury bond purchases would end up debasing the world's reserve currency. The Fed said on Wednesday it will purchase $300 billion of long-dated Treasuries over the next six months, its first large-scale buying of government debt since the early 1960s. It also said it will increase mortgage-backed debt purchases in a bid to rescue the economy, sending the dollar to its worst one-day loss since at least 1985 and sparking the biggest slide in U.S. benchmark Treasury bond yields since the 1987 stock market crash. This raised fears that an expansion of the Fed's balance sheet -- which has doubled in size in the past six months -- would lead to oversupply of the world's main reserve currency.

"They are really cranking up the printing press, and that's hurt the dollar," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Connecticut. "The knee-jerk reaction is still to sell dollars, and that will probably see the euro rise into the $1.40s," he said.
The euro rose as high as $1.3737 , its best level since early January, and was last up 1.1 percent at $1.3650. On Wednesday, its 3.8 percent rise against the greenback marked its best day since its 1999 launch, according to Reuters data. The dollar fell 1.5 percent to 94.45 yen after shedding nearly 3 percent a day ago, while sterling was at $1.4524, up 1.3 percent. The dollar index .DXY, which measures the greenback against a basket of six major currencies, slipped 1.3 percent after a 3 percent plunge on Wednesday, its biggest one-day drop in about of a quarter of a century, according to Reuters data.

The Fed's move also seemed to reduce widespread fear in financial markets, undermining the safe-haven bid that has supported the dollar over recent months. Currencies seen as more risky just days ago given the deteriorating global economy rose smartly on Thursday, among them the Australian dollar, Norwegian crown, Brazilian real and the Mexican peso. "Fear seems to have gone out the window," Wilkinson said. Some strategists said that view is probably too optimistic and predicted a more sober outlook on the U.S. and world economies once the post-Fed dust settles. Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York, said the worries about Japan's economy would soon lead to renewed yen selling.

The euro, he said, also looked vulnerable above $1.40. "Europe still has a lot of skeletons in the closet," particularly a severe recession in east Europe that is likely to get worse before it gets better, he said. Indeed, UBS strategists said the bank opened a long dollar trade against the euro at $1.37 and the yen at 94.00 on Thursday, adding that they expect bond yields around the world to follow U.S. yields lower in the coming weeks. The Fed's move, along with earlier moves by central banks in Britain, Switzerland and Japan, may also force the European Central Bank to cut interest rates further toward zero and move toward its own extraordinary measures to boost growth. "The last thing the ECB wants to see the euro above $1.40, let alone $1.50," said Bank of New York-Mellon senior currency strategist Michael Woolfolk.

Call for IMF gold sale to aid Africa
The International Monetary Fund should be allowed to sell some of its gold reserves to cushion Africa from the global economic crisis, African countries will argue at next month’s Group of 20 summit. Meles Zenawi, Ethiopia’s prime minister, representing the continent, said the sell-off could raise between $5bn (€3.8bn, £3.6bn) and $15bn to be channelled through the IMF, World Bank and other multilateral institutions. Africa needed short-term increases in development assistance of between $30bn and $50bn to offset declining trade and investment. The availability of such funds was a matter of life and death, Mr Meles said in an interview with the Financial Times.

“We are seeking a much smaller stimulus package than is being spent bailing out the small and medium-sized banks in the west,” Mr Meles said. In countries such as Britain, he added, the worst likely consequence for individuals in the downturn is the loss of employment. “The worst that can happen in Africa is that people who were getting some food would cease to get it and instead of being unemployed would die,” he said. African economies are facing a looming balance of payments crisis as income from commodities, foreign investment, remittances and aid shrink simultaneously. Mr Meles said there was a risk that fragile recent gains would be washed away, conflicts would reignite and more states would fail.

“Africa was beginning to stand up and now it is being knocked down again by this crisis, which is not of Africa’s making. That is one of the biggest tragedies,” he said.
In the past, African gold producers have opposed the idea of the IMF selling off its reserves because of its likely impact on world prices. “Gold prices are doing well now so a slight correction to mobilise resources for Africa would not be that difficult,” Mr Meles argued. More funds for the continent could be sourced if other developed countries join Europe in supporting a recapitalisation of the IMF with hundreds of billions of dollars of additional funds, he said.

In the longer term, Africans would have to rethink all their “development strategies” and “find ways of doing well in an environment that is less permissive”. Ethiopia has resisted western pressure to open up its economy faster and privatise its banks, a position Mr Meles suggested had proved “prudent” in light of global events. “One of the problems at the moment is that the situation is so volatile,” he added. “It keeps changing every week. It destabilises everything, including one’s thinking. If we knew where the bottom was we could start thinking as to how to get out of it.”

IMF Predicts Global Economic Contraction for 2009
The global economy could shrink as much as 1 percent this year, the International Monetary Fund said, adding its voice to a chorus of economists predicting the first worldwide contraction since World War II. As most wealthy nations suffer under deep recessions and a financial crisis driving down growth across the globe, the IMF slashed its forecast for 2009 to a contraction of between 0.5 percent and 1 percent. That is down from a January prediction of 0.5 percent growth. "Global economic activity is falling -- with advanced economies registering their sharpest declines in the post-war era -- notwithstanding forceful policy efforts," the IMF said in a staff report made public on Thursday, March 19.
In a critical report ahead of next month's Group of 20 summit of the world's major economies, the international financial watchdog painted a depressing picture of the state of the global economy and said the government response has been too little and come too late. The report warned that many governments had not spent enough public funds to stimulate demand and were responding increasingly with protectionist measures that will further drive down global trade. US and European efforts to stabilize the financial sector at the heart of the crisis "still lack coherence and credibility," while deflation was becoming an increasing risk in richer nations, the report said.
The IMF predicted a small recovery in 2010 to growth of 1.5 percent to 2.5 percent -- a level that is still considered a global recession by IMF standards. Whether even that forecast will hold up was placed squarely at the feet of government efforts to end the financial turmoil. "In the event of further delays in implementing comprehensive policies to stabilize financial conditions, the recession will be deeper and more prolonged," according to the report, which was presented to G20 finance ministers meeting on the outskirts of London last week. Leaders of the G20, a bloc that includes wealthy and emerging economies, will hold an emergency summit in London on April 2 to coordinate their efforts to halt the economic slide.
Cracks have emerged between the United States and Europe over whether the gathering should focus on short-term stimulus or broader financial regulation to stop future crises. The IMF slashed its growth predictions by at least 1 percent for all regions compared to its January forecast. The United States, the world's largest economy, will shrink 2.6 percent over 2009 and is unlikely to return to positive growth until the third quarter of 2010, the IMF said. European countries that have adopted the euro will contract 3.2 percent this year and Japan's economic output will tumble 5.8 percent, wiping out the country's gains made over the last four years.
Emerging and developing countries will still post modest growth of 1.5 to 2.5 percent this year and recover to between 3.5 percent and 4.5 percent in 2010. The report warned that ending the financial crisis was a "necessary condition" for the global economy's recovery. The IMF said Europe should be more aggressive in adopting fiscal stimulus measures, especially for 2010 when the recession is expected to continue. Most European countries had fallen well below the public spending level -- 2 percent of economic output -- that has been advocated by the IMF.

House votes to recoup bonuses from bailed-out firms
Moving with unusual speed, the Democratic-controlled U.S. House of Representatives on Thursday passed legislation to recoup most of the $165 million in retention bonuses paid to American International Group Inc employees. Responding quickly to public outrage over the bonuses after the giant insurer received government bailouts of up to $180 billion, the House voted 328-93 to approve a 90 percent tax on bonuses for some executives at companies getting federal aid. The tax would apply to executives with incomes over $250,000 who worked for companies that got at least $5 billion in government aid. That could ensnare others getting federal help, such as mortgage financing company Fannie Mae.

"The whole idea that they should be rewarded millions of dollars is repugnant to everything that decent people believe in," said Representative Charlie Rangel, the Democratic chairman of the tax-writing Ways and Means Committee. Fury over the bonuses at AIG and other large companies that have received federal bailout money threatens to undermine President Barack Obama's efforts to solve the financial crisis and pull the economy out of a deep recession. The Senate is expected to consider a different plan to recoup the bonuses, potentially a 70 percent excise tax.
But some Republicans are pushing for hearings before drafting and voting on legislation, raising questions about whether legislation will pass quickly. "Until we have hearings and we understand all this, we are not going to know what kind of fix to implement," Senate Republican Whip Jon Kyl told reporters.

AIG Chief Executive Edward Liddy told Congress on Wednesday he has asked employees to give back at least half of their retention bonuses and that some had already given back their entire bonuses. But he said the payouts were necessary to retain top employees with specialized knowledge to dispose of $2.7 trillion in complex securities that ended up dragging the insurer to the brink of collapse last year. Angry House Republicans blamed Democrats who control Congress and the White House, accusing them of allowing the bonuses to be paid in the first place. Some questioned whether the legislation approved would survive court challenges.

In House, Anger Over A.I.G. Bonuses Turns Partisan
Democrats and Republicans tried to outdo one another in voicing anger and indignation on Thursday as the House debated a bill to punish executives of the American International Group who got big bonuses while the federal government was bailing out their foundering company. “The people have said ‘no,’ ” Representative Earl Pomeroy, Democrat of North Dakota, shouted on the House floor. “In fact, they said ‘hell no, and give us our money back.’ ” “Have the recipients of these checks no shame at all?” Mr. Pomeroy continued. Summing up his personal view of the so-far anonymous A.I.G. executives, he said: “You are disgraces, professional losers. And by the way, give us our money back.”

Republicans were not to be outdone in expressing disgust, and they had a collective “I told you so” message for Democrats. Representative Ed Royce of California, for instance, said he would vote for the bill on the floor, but he proudly recalled that last fall he had voted against the Troubled Assets Relief Program, the bailout plan that is the source of mounting public fury. Other Republicans signaled that they would vote “no” and would line up instead behind a countermeasure that Representative John A. Boehner of Ohio, the minority leader, said would recover the taxpayers’ money much faster.

Representative Judy Biggert, Republican of Illinois, said that while virtually everyone agrees that the A.I.G. executives should not be getting bonuses for failing, it would be a mistake for the House to rush through a piece of legislation. If that happened, she said, there could be regrets later, as there are now over the TARP bill, “made public in the dead of night, just hours before the vote.” The bill being debated on Thursday, which would need a two-thirds majority vote to pass because it was being considered under a suspension of House rules, was offered by Representative Charles B. Rangel, the New York Democrat who heads the House Ways and Means Committee. It would take 90 percent of the A.I.G. bonuses back in federal taxes. It would apply to bonuses paid since Jan. 1 by A.I.G. or any other company accepting more than $5 billion in bailout money.

“This is not going to happen again,” Mr. Rangel said. “The light is flashing and letting them know that America won’t take it.” But Mr. Boehner was disdainful of Mr. Rangel’s proposal, calling it “a sham” and urging adoption of a bill to get back the bonus money at once. The $165 million in bonuses has spawned rage in part because it was paid to executives in the very unit of A.I.G. that arguably turned a stable, prosperous insurance company into a dice-rolling financial firm in search of quick profits. The Democrats have a 254-to-178 advantage in the House. Assuming that every member votes, 288 “yes” votes would be required to pass either Mr. Rangel’s or Mr. Boehner’s proposal.

The Republicans said their measure would get back all of the bonus money, not just most of it. And they said it would do so within two weeks, as opposed to the year or so that the Democrats’ bill would take — assuming, that is, that the A.I.G. executives filed honest tax returns.What’s more, Republicans asserted, the Democrats are mostly responsible for the A.I.G. bonus debacle, since Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee, inserted language in President Obama’s economic stimulus package — not to be confused with the TARP legislation, passed in the waning days of the Bush administration, by the old Congress — to exempt bonuses granted by contract before Feb. 11 from general restrictions on bonus payments.

Mr. Dodd has said the Treasury Department insisted on the exemption in final negotiations on the stimulus legislation. Republicans have been calling the provision a “dark of night” or “dead of night” deed, as Ms. Biggert did. Some Republicans have also been offering reminders that not one of them in the House voted for President Obama’s stimulus program. Of course, it is not uncommon for complicated legislation to go through Congress with sections that escape detailed initial scrutiny. And when the lawmakers considered President Obama’s economic stimulus package they no doubt recalled that, on the day last fall when the TARP legislation initially stalled in the House, the stock market plunged.

While the House was debating, Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, was testifying before Senator Dodd’s banking panel. She told the senators that the idea of bailing out institutions considered “too big to fail” was unsatisfactory. Mr. Dodd agreed. One lesson to glean from the current crisis, he said, is that “no institution should ever be ‘too big to fail.’ ”

Americans Getting Jobless Benefits Reach 5.5 Million
The number of Americans collecting jobless benefits swelled to a record 5.47 million, indicating that former employees are unable to find new work as companies continue to cut costs. The number of people staying on benefit rolls jumped by 185,000 in the week ended March 7, the Labor Department said today in Washington. Initial jobless applications last week topped 600,000 for a seventh straight time, the worst performance since 1982, while the figure was less than forecast. Employers ranging from FedEx Corp. to Sunoco Inc. recently announced plans to trim payrolls, making it harder for the Obama administration to accomplish its goal of creating or saving 3.5 million jobs. Federal Reserve policy makers yesterday unveiled more than $1.1 trillion in additional initiatives to unclog credit and prevent the economy from sinking even more.

"We’re going to see some ugly numbers for a few more months," Julia Coronado, a senior economist at Barclays Capital Inc. in New York, said in an interview with Bloomberg Television. The jobless claims figures for this month mean the March employment report will be "every bit as bad" as the declines in excess of 650,000 in the past three months, she said. Treasuries advanced further after surging yesterday following the Fed’s announcement that it will start buying U.S. government debt. Benchmark 10-year note yields fell to 2.52 percent at 9:40 a.m. in New York from 2.54 percent late yesterday and 3.01 percent two days ago. The Standard & Poor’s 500 Stock Index gained 0.7 percent to 799.81. FedEx, the second-largest U.S. package-shipping company, said today profit dropped as air shipments decreased for a 13th consecutive quarter. The Memphis, Tennessee-based company said it would cut an unspecified number of jobs as it seeks to trim $1 billion from operating costs by next year.

First-time claims in the week ended March 14 fell by 12,000 to 646,000, lower than the 655,000 median forecast of 39 economists surveyed by Bloomberg News. Projections ranged from 635,000 to 690,000. Labor revised the prior week’s claims to 658,000 from an originally estimated 654,000. The four-week moving average of initial claims, a less volatile measure, rose to 654,750 from 651,000. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, climbed to 4.1 percent in the week ended March 7, the highest level since 1983. Twenty- eight states and territories reported an increase in new claims for that same period, led by Indiana, which saw an increase in firings at manufacturers including automakers, and Pennsylvania. Applications decreased in 25 states. "The labor market will continue to weaken and we expect to see a slow and steady march upward of initial claims," Maxwell Clarke, chief U.S. economist at IDEAglobal in New York, said before the report."

Accelerated pressure in continuing claims is likely to be seen from people unable to find employment amidst this sizeable contraction." Initial claims reflect weekly firings and tend to rise as job growth slows. The U.S. unemployment rate reached 8.1 percent in February, the highest level in more than a quarter century, Labor said on March 6. Employers eliminated 651,000 positions, the third straight month that losses surpassed 600,000 and the first time that has happened since records began in 1939. Economists surveyed by Bloomberg News earlier this month predicted the U.S. jobless rate will climb to 9.4 percent this year and remain elevated through at least 2011. At the same time, the country’s economy will shrink 2.5 percent in this year, the weakest performance since 1946. The global slowdown is resulting in job cuts for U.S. businesses. Caterpillar, the world’s largest maker of construction equipment, said this week it will cut 2,365 workers at five U.S. plants as demand for construction equipment weakens. The company has said it may post its first quarterly loss in 16 years and sales may drop 22 percent for the year.

U.S. Leading Economic Indicators Index Falls 0.4%
The index of leading U.S. economic indicators fell in February for the third time in five months, reflecting the worsening conditions that spurred the Federal Reserve to say yesterday it will buy Treasury securities. The Conference Board’s gauge dropped 0.4 percent, less than forecast, after increasing 0.1 percent in January, according to the New York-based group’s report today. The index points to the direction of the economy over the next three to six months. A credit freeze at the center of the worst financial crisis in seven decades, the highest unemployment rate since 1983, and slumps in manufacturing and housing are forcing policy makers to accelerate efforts to stabilize the economy. The Fed yesterday left its main interest rate within a record-low range and said it will buy $300 billion in Treasuries, plus more mortgage and agency debt, in a bid to end the recession.

"The economy is still in the tank, but the downward momentum is slowing," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, who accurately forecast the drop in the index. The Fed’s actions yesterday "will support a recovery later this year," he said. The index was forecast to decline 0.6 percent, according to the median of 60 economists in a Bloomberg News survey, after an originally reported increase of 0.4 percent the prior month. Estimates ranged from a decline of 1.1 percent to no change. Four of the 10 indicators in today’s report subtracted from the index, led by a jump in weekly jobless claims. Treasuries rose, adding to a 4.2 percent surge yesterday following the Fed’s announcement. Benchmark 10-year notes yielded 2.51 percent as of 10:53 a.m. in New York, down 3 basis points from yesterday. The Standard & Poor’s 500 Stock Index fell 0.2 percent to 792.84.

Fed policy makers, who kept the benchmark interest rate in the range of zero to 0.25 percent, said the central bank will also buy up to an additional $750 billion of agency mortgage- backed securities and expand the Term Asset-Backed Securities Loan Facility to include other financial assets. "The near term economic outlook is weak," the Fed said in a statement in Washington yesterday. Still, policy measures "will contribute to a gradual resumption of sustainable economic growth," the Fed said. Chairman Ben S. Bernanke said in an interview broadcast March 16 on CBS Corp.’s "60 Minutes" that the biggest risk to an economic recovery is a shortage of "political will." Should the government succeed in calming financial markets, he said, the recession will probably end this year.

Seven of the 10 indicators for the gauge are known ahead of time: stock prices, jobless claims, building permits, consumer expectations, the yield curve, factory hours and supplier delivery times. The Conference Board estimates new orders for consumer goods, bookings for capital goods and the money supply adjusted for inflation. A 0.28 percentage point drag came from the stock market and the labor market subtracted 0.3 percentage point from the leading index. The confidence component took away 0.21 percentage point. A shorter factory workweek took away 0.13 percentage point. Initial claims for jobless benefits surged last month and through the week ended March 7, topping 600,000 each week. Today the Labor Department said the number of Americans collecting jobless benefits swelled to a record 5.47 million in the first week of March, indicating that former employees are unable to find new work as companies continue to cut costs.

The Standard & Poor’s 500 Index fell 7 percent in February from the prior month. Faster supplier deliveries, new orders for consumer goods and bookings for capital equipment were positive influences on the leading index. Still, companies continued to struggle last month, with industrial production falling 1.4 percent, the fourth consecutive decline, while factory capacity in use slumped to 70.9 percent, matching the lowest level on record. Nucor Corp., the largest U.S. steelmaker by market value, revised its first-quarter forecast from a profit to a loss because of lower-than-expected demand. "The economy has fallen off a cliff, and there is no visibility as to the timing of the recovery," Chief Executive Officer Dan DiMicco said in a March 17 statement.

Manufacturing in the Philadelphia region shrank in March for the 15th time in the last 16 months as orders and employment weakened, the Federal Reserve Bank of Philadelphia’s general economic index showed today. The index improved to minus 35 in March from minus 41.3 a month earlier, the bank said. Negative numbers signal contraction. In the February leading indicators report, money supply adjusted for inflation, which has the biggest weighting in the index, added 0.03 percentage point to the index. The Conference Board’s measure of coincident indicators, a gauge of current economic activity, fell 0.4 percent, after decreasing 0.6 percent the prior month. The index tracks payrolls, incomes, sales and production. The gauge of lagging indicators also dropped 0.4 percent following a 0.3 percent decline in the prior month. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

Uproar Over Geithner's Role in Bonuses Could Vex Rescue
The furor over $165 million in bonus payments to employees of American International Group Inc. has ensnared Treasury Secretary Timothy Geithner, adding to his list of woes and potentially complicating the administration's efforts to contain the financial crisis. Lawmakers in both parties Wednesday questioned why Mr. Geithner didn't do more to derail the bonus payments and two Republicans called on him to resign. The uproar comes on top of a skeptical reception to Mr. Geithner's plan to ameliorate the financial crisis and concern about his slowness in building a team. From the outset, Mr. Geithner's tenure was clouded by questions about his failure to pay personal taxes. Now, seven weeks into the job, he also finds himself pilloried by late-night comics. On Wednesday, President Barack Obama expressed confidence in Mr. Geithner, saying the Treasury secretary is dealing with more crises early on than any of his predecessors, perhaps with the exception of the first Treasury secretary, Alexander Hamilton.

"He is making all the right moves in terms of playing a bad hand," the president said. Mr. Obama took ultimate responsibility for the bonus flap, saying "the buck stops with me." The missteps threaten to complicate Mr. Geithner's ability to fix the financial crisis. Already, lawmakers are seeking to impose even tougher restrictions on firms receiving bailout aid, something Treasury officials worry will further damp participation in programs aimed at restoring the financial system's health. Mr. Geithner has been operating with a skeleton crew of advisers. Despite that handicap, he has launched a new bank-bailout plan, including "stress tests" for the nation's largest banks, rolled out an effort to assist troubled homeowners and a plan to boost the availability of consumer loans. He didn't stop the AIG bonus payments, but he did slash or nix hundreds of millions of dollars in additional payments.

Critics say Mr. Geithner stumbled badly on AIG, endangering the president's broader agenda. "The President cannot afford to lose the public's confidence that his administration is a careful steward of the public's money," Robert Reich, a former labor secretary under President Clinton, wrote on his blog. The public "may balk at other ambitious undertakings such as health care or education or the environment," he wrote. Mr. Geithner was one of the original architects of the AIG rescue while president of the Federal Reserve Bank of New York. The New York Fed has had primary oversight of the firm and has been involved in numerous revisions of the bailout, which now includes a loan of $173 billion. Administration officials say they didn't have enough time to deal with bonuses before AIG was required to pay them March 15. They say Mr. Geithner learned of the payments on March 10 -- just a few days after the Treasury loaned another $30 billion to AIG.

Mr. Geithner asked Edward Liddy, AIG's chief executive officer, to determine whether the bonuses could be canceled and had government lawyers look into it as well. Both Mr. Liddy and the government agreed they were contractual obligations. Mr. Geithner ultimately decided there was nothing he could do to stop the bonuses, but demanded Mr. Liddy cancel or curtail additional payouts. The administration is now trying to recoup the $165 million through other avenues. Republicans, in particular, are offering up tough criticism of Treasury. House Minority Leader John Boehner (R., Ohio) said the secretary is on "thin ice." "It was Treasury's responsibility to watch how these funds were used," said Senate Minority Leader Mitch McConnell of Kentucky in a statement. "Obviously, they fell asleep on the job." Mr. Geithner, along with the Obama administration, is trying to govern at a moment of crisis and is reliant on support from both Congress and the public. Mr. Obama has already said his administration will likely ask for additional money beyond the $700 billion Congress approved last fall.

Treasury Secretary Facing a Defining Moment
All three of President Obama’s top economic advisers were on message when they appeared Sunday on separate television talk shows. Treasury Secretary Timothy F. Geithner, they said, had concluded, based on lawyers’ advice, that he could not stop the $165 million in bonuses that the American International Group was even then doling out to hundreds of employees. But when Mr. Geithner and other officials met at the White House that night, the president’s political advisers — who had agreed to the day’s message — decided the growing outcry left Mr. Obama no choice but to publicly second-guess his Treasury secretary. The next morning on camera, the president said he had directed Mr. Geithner to find a legal way "to block these bonuses and make the American taxpayers whole."

Thus began perhaps the worst week in a string of bad weeks for the Treasury secretary. The mixed messages on A.I.G. gave further ammunition to critics who had begun questioning Mr. Geithner’s credibility as the administration’s point man on the economy, an essential commodity if he is to help restore consumer confidence. Fair or not, questions about why Mr. Geithner did not know sooner about the A.I.G. bonuses and act to stop them threaten to overwhelm his achievements and undermine Mr. Obama’s overall economic agenda. The controversy comes as Mr. Geithner is about to announce details of the restructured bank rescue program, and it clouds prospects for more rescue funds that the administration is all but certain to need.

The once-heralded Wall Street credentials of Mr. Geithner, formerly the president of the Federal Reserve Bank of New York, were already marred by false starts in revamping the Bush administration’s bank rescue program, even as his perceived closeness to financiers and unease with populist politics left Main Street skeptical. On Wednesday, a junior Republican in Congress and some traders on Wall Street went so far as to call for him to quit or be fired. The Republican leader of the House, Representative John A. Boehner of Ohio, told a conservative talk-radio host that the secretary is "on thin ice." But Mr. Geithner’s boss, the president, interjected a vote of "complete confidence."

"Tim Geithner didn’t draft these contracts with A.I.G.," Mr. Obama told reporters on the White House lawn as he left for California on Wednesday. "There has never been a secretary of the Treasury, except maybe Alexander Hamilton right after the Revolutionary War, who’s had to deal with the multiplicity of issues that Secretary Geithner is having to deal with — all at the same time." "He is making all the right moves in terms of playing a bad hand," the president continued. "And what we need to be doing is making sure that we are providing him the support that he needs." Mr. Geithner is shouldering more crises on his slight frame than most Treasury secretaries ever have. And he is doing so without the usual complement of Treasury assistants because of administration delays in vetting potential nominees — a consequence in part of its efforts to avoid embarrassments like the disclosures of Mr. Geithner’s past tax lapses, which nearly doomed his nomination.

Since before his confirmation in late January, Mr. Geithner has juggled a crushing workload: overhauling the Bush administration’s discredited financial bailout program; helping with Mr. Obama’s nearly $800 billion economic stimulus plan; and managing the government effort to salvage the auto industry. Mr. Geithner is now fashioning a new federal regulatory structure for the financial industry to replace the one that failed. He has developed a housing program that aims to avert up to nine million more foreclosures, and programs for getting credit flowing to small businesses and consumers as well as the major financial giants. At 47, the same age as the president, Mr. Geithner works out at 5:30 a.m., gets to his desk by 6:30 and leaves 15 hours later.

On Tuesday last week, as he prepared for a meeting in London of the finance ministers of the Group of 20 nations, Mr. Geithner learned that A.I.G. by Sunday would send out the bonuses to employees at its financial products unit, which developed the risky derivatives now blamed for the global credit crisis. With few senior political appointees on hand, the word came from one of the numerous career civil servants who keep the Treasury functioning through changes of administration, according to an official. Mr. Geithner consulted lawyers. They told him the government could not override the contracts that the insurance conglomerate had signed in early 2008, when its financial products unit already was fast losing money. On Wednesday evening, Mr. Geithner called A.I.G.’s government-appointed chief executive, Edward M. Liddy, and demanded that he renegotiate payments. The next morning, Mr. Geithner informed White House advisers. Later that day a senior adviser, David Axelrod, informed the president.

On Friday, Mr. Liddy said he could not block the bonuses; he did agree to reduce future executive bonuses set for July 15 and Sept. 15. With Mr. Geithner in London, Treasury officials tried to manage the potential criticism by leaking word to selected news media on Saturday. On Sunday, the economic advisers went on TV. The A.I.G. tempest has been especially explosive for Mr. Geithner because, as president of the New York Fed, he was the one administration official who had been involved in the Bush-era bailouts. Once A.I.G. was under the Fed’s control, its executive compensation plans hardly came up, according to officials. For all the furor, "ultimately we will all be judged by whether we get out of this economic mess," said Senator Charles E. Schumer, Democrat of New York, "and Tim, with his intelligence, experience and dedication is the best guy to get us out."

IMF Criticizes Geithner’s Plan as 'Lacking Details'
U.S. Treasury Secretary Timothy Geithner’s plan to fix the financial system lacks "essential details," the International Monetary Fund said in criticism of its largest shareholder. The IMF, in a report released today, said "more specifics will be needed to calm frayed market sentiment." The Standard & Poor’s 500 Index, which has gained in six of the past seven days, is still down 8.7 percent since Geithner outlined his financial stabilization effort on Feb. 10. The rebuke from the international lender adds to calls for the Obama administration to announce programs soon to thaw credit markets and help banks rid their balance sheets of illiquid assets. IMF Managing Director Dominique Strauss-Kahn warned U.S. lawmakers earlier this week that greater urgency was needed in bolstering the financial system.

"Critical details concerning the valuation of distressed assets remain unclear," the IMF said in the report, prepared for a meeting earlier this month of finance ministers from the Group of 20 nations. "The plan also does not address how severely undercapitalized or insolvent banks will be resolved or clarify the role of the vehicle that will hold the government’s preferred shares." Geithner said in an interview March 14 with Bloomberg Television that he soon would announce details of his plans to help banks clean up the non-performing assets that are clogging the financial system. "We’re going to move quickly to lay out a new financing program to deal with these legacy assets," Geithner said at the G-20 talks in Horsham, England. "We have and expect to see a lot of support for this program" among potential buyers of the assets, he said.

Geithner’s program has three main elements: injecting fresh government capital into some of the country’s biggest financial institutions; establishing a public-private partnership to handle as much as $1 trillion of banks’ bad assets; and starting a credit facility with the Federal Reserve of as much as $1 trillion to promote lending to consumers and businesses. In updated forecasts, the Washington-based IMF said the global economy will shrink by as much as 1 percent this year -- the first time the world’s gross domestic product has contracted in 60 years. The fund also took aim at the European Central Bank, urging it to take more action to support growth. "Some central banks, notably the ECB, have some room for further cuts, which they should use," the report said.

The IMF said that central banks should use "unconventional measures" to unlock credit markets. Central bank purchases of commercial paper and asset-backed securities would be "considerably more effective at alleviating credit constraints than purchasing highly liquid Treasuries," the fund said. Yesterday the Fed pledged to buy as much as $300 billion of Treasuries and stepped up purchases of mortgage bonds. The IMF is forecasting that the U.S. economy will decline 2.6 percent this year, with a 3.2 percent contraction in the euro area and a 5.8 percent decline in Japan’s GDP. Growth will remain zero in all three economies in 2010, the fund said. "Turning around global growth will depend critically on more concerted policy actions to stabilize financial conditions as well as sustained strong policy support to bolster demand," the IMF report said.

The Real AIG Conspiracy
It may seem odd, but the public outrage against $135 million in AIG bonuses is a godsend to Wall Street, AIG scoundrels included. How can the media be so preoccupied with the discovery that there is self-serving greed to be found in the financial sector? Every TV channel and every newspaper in the country, from right to left, have made these bonuses the lead story over the past two days. What is wrong with this picture? Is there not something over-inflated about the outrage led most vociferously by Senator Charles Schumer and Rep. Barney Frank, the two leading shills for the bank giveaways over the past year? And does Pres. Obama perhaps find it convenient that finally, at long last, he has been able to criticize something that he believes Wall Street has done wrong? Even the Wall Street Journal has gotten into the act.

The government’s takeover of AIG, it pointed out, "uses the firm as a conduit to bail out other institutions." So much more greed is involved than just that of AIG employees. The firm owed much more to other players – abroad as well as on Wall Street – than the assets it had. That is what drove it to insolvency. And popular opposition has been rising to how Obama and  McCain could have banded together to support the bailout that, in retrospect, amounts to trillions and trillions of dollars thrown down the drain. Not really down the drain at all, of course – but given to financial speculators on the winning "smart" side of AIG’s bad financial gambles. "The Washington crowd wants to focus on bonuses because it aims public anger on private actors," the Journal accused in a March 17 editorial.

But instead of explaining that the shift is away from Wall Street grabbers of a thousand times the amount of bonuses being contested, it blames its usual all-purpose bete noire: Congress. Where the right and left differ is just whom the public should be directing its anger at! Here’s the problem with all the hoopla over the $135 million in AIG bonuses: This sum is only less than 0.1 per cent – one thousandth – of the $183 BILLION that the U.S. Treasury gave to AIG as a "pass-through" to its counterparties. This sum, over a thousand times the magnitude of the bonuses on which public attention is conveniently being focused by Wall Street promoters, did not stay with AIG. For over six months, the public media and Congressmen have been trying to find out just where this money DID go. Bloomberg brought a lawsuit to find out. Only to be met with a wall of silence.

Until finally, on Sunday night, March 15, the government finally released the details. They were indeed highly embarrassing. The largest recipient turned out to be just what earlier financial reports had rumored: Paulson’s own firm, Goldman Sachs, headed the list. It was owed $13 billion in counterparty claims. Here’s the picture that’s emerging. Last September, Treasury Secretary Paulson, from Goldman Sachs, drew up a terse 3-page memo outlining his bailout proposal. The plan specified that whatever he and other Treasury officials did (thus including his subordinates, also from Goldman Sachs), could not be challenged legally or undone, much less prosecuted. This condition enraged Congress, which rejected the bailout in its first incarnation.

It now looks as if  Paulson had good reason to put in a fatal legal clause blocking any clawback of funds given by the Treasury to AIG’s counterparties. This is where public outrage should be focused. Instead, the leading Congressional shepherds of the bailout legislation – along with Obama, who came out in his final, Friday night presidential debate with McCain strongly in favor of the bailout in  Paulson’s awful "short" version – have been highlighting the AIG executives receiving bonuses, not the company’s counterparties. There are two questions that one always must ask when a political operation is being launched. First, qui bono --  who benefits? And second, why now? In my experience, timing almost always is the key to figuring out the dynamics at work.

Regarding qui bono, what does Sen. Schumer, Rep. Frank, Pres. Obama and other Wall Street sponsors gain from this public outcry? For starters, it depicts them as hard taskmasters of the banking and financial sector, not its lobbyists scurrying to execute one giveaway after another. So the AIG kerfuffle has muddied the water about where their political loyalties really lie. It enables them to strike a misleading pose – and hence to pose as "honest brokers" next time they dishonestly give away the next few trillion dollars to their major sponsors and campaign contributors. Regarding the timing, I think I have answered that above. The uproar about AIG bonuses has effectively distracted attention from the AIG counterparties who received the $183 billion in Treasury giveaways. The "final" sum to be given to its counterparties has been rumored to be $250 billion, do Sen. Schumer, Rep. Frank and Pres. Obama still have a lot more work to do for Wall Street in the coming year or so.

To succeed in this work – while mitigating the public outrage already rising against the bad bailouts – they need to strike precisely the pose that they’re striking now. It is an exercise in deception. The moral should be: The larger the crocodile tears shed over giving bonuses to AIG  individuals (who seem to be largely on the healthy, bona fide insurance side of AIG’s business, not its hedge-fund Ponzi-scheme racket), the more they will distract public attention from the $180 billion giveaway, and the better they can position themselves to give away yet more government money (Treasury bonds and Federal Reserve deposits) to their favorite financial charities.

Let’s go after the REAL money given to AIG – the $183 billion! I realize that this has already been paid out, and we can’t get it back from the counterparties who knew that Alan Greenspan and George Bush and Hank Paulson were steering the U.S. economy off a real estate cliff, a derivatives cliff and a balance-of-payments cliff all wrapped up into one by betting against collateralized debt obligations (CDOs) and insuring these casino bets with AIG. That money has been siphoned off from the Treasury fair and square, by putting their own proxies in the key government slots, the better  to serve them.

So let’s go after them altogether. Sen. Schumer said to the AIG bonus recipients that the I.R.S. can go after them and get the money back one way or another. And it can indeed go after the $183-billion bailout recipients. All it has to do is re-instate the estate tax and raise the marginal income and wealth-tax rates to the (already reduced) Clinton-era levels. The money can be recovered. And that’s just what Mr. Schumer, Mr. Frank and others don’t want to see the public discussing. That’s why they’ve diverted attention onto this trivia. It’s the time-honored way to get people not to talk about the big picture and what’s really important.

Dodd's Amendment at Crux of Bonus Issue
A provision in President Barack Obama's stimulus law might have forestalled payment of $165 million in bonuses to employees of American International Group Inc., but was altered before final passage at the request of the Obama administration, Senate Banking Committee Chairman Christopher Dodd said Wednesday night. Mr. Dodd, a Connecticut Democrat, introduced a provision into the stimulus that capped executive pay, among other things. But the final language specifically excluded bonuses included in contracts signed before the bill's passage -- a broad category that included the AIG bonuses. At the time, few objected to that move, which was designed to ensure the measure was constitutional.

"I did not want to make any changes to my original Senate-passed amendment but I did so at the request of Administration officials, who gave us no indication that this was in any way related to AIG," Mr. Dodd said in a statement. "Let me be clear -- I was completely unaware of these AIG bonuses until I learned of them last week."
After the recent furor relating to the AIG payments, lawmakers returned to make a forensic examination of the provision seeking to assign blame for what some called a secret agreement to spare the tottering insurance giant, which has received more than $170 billion in federal aid. The provision and its genesis consumed Capital Hill Wednesday. "The president goes out and says this is not acceptable and then some backroom deal gets cut to let these things get paid out anyway," said Sen. Ron Wyden, (D., Ore.), author of an earlier, alternative pay amendment, told the Associated Press.

The Obama administration had not tried to hide its concern about the moves to clamp down on executive compensation. Both Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers lobbied Mr. Dodd to make changes. Administration officials said the Treasury didn't suggest any language or say how the amendment should be changed. They said they noted legal issues that could likely lead to challenges, but was the end of their involvement. The official said Mr. Dodd and Congress made the final changes on their own. At issue were competing provisions in the stimulus bill that capped executive compensation for recipients of bailout funds. One, drafted by Sens. Wyden and Olympia J. Snowe (R, Maine), would have capped bonuses at $100,000, retroactive to 2008. Companies awarding bonuses above that level would face the choice of returning those funds to the Treasury or having them taxed at 35%. Another, by Mr. Dodd, slapped sharp limits on all compensation of top employees, including bonuses.

Both amendments passed the Senate easily, but during House and Senate negotiations, the Wyden-Snowe amendment dropped out of the bill with little fanfare. Lawmakers and the administration raised constitutional objections, since it would have taxed 2008 income retroactively. Its authors argued that because companies were given a choice whether to return the bonuses or face a tax, the measure was not actually taxing past income but would "tax" a company's future decision -- made with full knowledge of the consequences. After the retention bonuses at AIG came to light this weekend, the Wyden-Snowe efforts were hailed as tragic heroism, with Republicans and the media demanding to know who was responsible for its backroom execution.

Mr. Dodd was criticized for his role in the matter, a problem considering his already difficult re-election run next year. Mr. Dodd is the top all-time beneficiary of AIG campaign contributions, with a total of $280,000 in donations from the company's employees and fund-raising arm since 1990, according to campaign finance data collected by the nonpartisan Center for Responsive Politics. A Dodd spokesman had no immediate comment on the campaign contributions Wednesday. In an irony, Mr. Dodd managed to sharpen other language in the provision while acceding to the administration's request. That new language clarified that contracts existing before passage of the stimulus bill could be violated in the extraordinary circumstance of "national interest." That's the language the administration hopes now to use to claw back the AIG bonuses.

AIG chief: 'I need all the help I can get'
The head of the nation's most vilified corporation sat before irate lawmakers at a U.S. congressional hearing on Wednesday and was assured, "We don't intend to harass you." Then the harassment began. Edward Liddy, chairman and chief executive of insurer American International Group Inc, had the unenviable job of batting back questions from a congressional panel eager to express outrage at the company for paying $165 million in employee bonuses after getting up to $180 billion in government aid. "There's a tidal wave of rage throughout America right now and it's building up and it's expressing itself at this latest outrage, which is really just the tip of the iceberg," said Representative Gary Ackerman, a New York Democrat, mixing his metaphors.

Democrat Paul Hodes of New Hampshire, chimed in, "You know, as far as the American people are concerned, I think AIG now stands for arrogance, incompetence and greed." The flap over the bonuses has lawmakers and President Barack Obama on the defensive for not including better safeguards in the bailout that saved AIG, and while Liddy found himself in the hot seat, there seemed to be plenty of blame to go around. Liddy -- being paid $1 a year to rescue the once mighty AIG -- took pains to appear neither arrogant, incompetent nor greedy, politely shaking hands with protesters before taking his seat and calmly answering lawmakers' questions. "Six months ago, I came out of retirement to help my country," said the 63-year-old Liddy. "At the federal government's request, I have had the duty, honor and extraordinary challenge of serving as chairman and chief executive officer," Liddy said.

Liddy said the "cold realities of competition" compelled the insurer to pay $165 million in bonuses. But he also made it clear he understood AIG must clean up its act -- setting off a wave of nods from the assembled lawmakers. "We are acutely aware not only that we must be good stewards of the public funds ... but that the patience of America's taxpayers is wearing thin," Liddy said. Liddy announced he had asked employees who received more than $100,000 in bonuses to repay at least half and he said some had already offered to give back their entire bonus. The hearing lasted several hours with Liddy fending off and fielding a variety of often hostile questions. Liddy said he was confident AIG could be rescued, but that the company had been "disgraced" and its name so muddied it would eventually have to be changed.

Shortly before Liddy arrived, Republican Representative Ed Royce said Congress itself should have known better. "I voted against the bailout of AIG, and I wrote an editorial at the time, 'Bailout Plan could Mutate Into a Gravy Train of Tax Money,'" Royce said. "Well it has." Ackerman, who said future congressional inquiries into the AIG mess could resemble the "waterboarding" interrogation techniques recently disavowed by the Obama administration, urged Liddy to cooperate and said he was there to help the beleaguered executive. "I need all the help I can get," Liddy conceded. Ackerman then gave a helpful tip: "Pay the $165 million (in bonuses) back."

AIG reinvents the trader’s option
If there is one thing everyone should have learnt about Wall Street by now, it is that the financial contract a trader takes the most care to hedge properly – and to ensure is profitable in the long term as well as the short term – is his or her own employment contract. Tim Geithner, the benighted Treasury secretary, forgot this point when he approved the doling out of $30bn more in US government support to AIG at the start of this month. Hence he is now struggling to survive the Washington maelstrom. Mr Geithner has excuses for this oversight, since he was trying to save the rest of the financial system at the same time, and has few senior officials in place to help.

Still, as a Wall Street figure – I count him as such because he used to work within a stone’s throw of the Street of Shame at the New York Federal Reserve – he ought to have known better than to overlook $165m in "retention bonuses" AIG has paid to those who made it fail. From the letters written by Mr Geithner and Edward Liddy, chief executive of AIG, since the affair became a public scandal, one can imagine the tone of the conversation the two men had last week when Mr Liddy told Mr Geithner that he was sending out the cheques. On one end of the phone was Mr Geithner, stunned to be blind-sided once again by tricksy traders. On the other end was Mr Liddy, irritated at being second-guessed by politicians, regulators and Andrew Cuomo, attorney-general of New York.

My sympathies are with Mr Liddy, who is being paid only $1 a year and is not responsible for the debacle at AIG. He is doing his best to sort out all the mess, while public servants with megaphones bellow into his ear and Chuck Grassley, a Republican senator, suggests bone-headedly that AIG traders should atone by committing suicide. That said, his reasons for paying the bonuses share the characteristic of being internally logical yet ludicrous when one takes a step back to consider the context. The first reason is that AIG had to pay the bonuses to 370 employees in its financial products (aka derivatives and funny stuff) division because it foolishly agreed last year to fix this element of their pay for two years. As Mr Liddy put it to Mr Geithner: "Honouring contractual commitments is at the heart of what we do in the insurance business." Yes, contracts are important and should be abrogated only under rare circumstances. But be serious. Mr Liddy is there only because AIG could not honour its contracts without going bankrupt. Furthermore, the credit default swaps that failed were written by the same people who want their own contracts followed.

He knows about AIG’s inability to meet its obligations, since he detailed the costs this week. The government in effect ripped up some of AIG’s flawed CDS contracts and paid out its counterparties at par. This act alone required it to hand $5.6bn to Goldman Sachs, $6.9bn to Société Générale and $2.8bn to Deutsche Bank. Mr Liddy’s second point is that AIG is better off retaining the traders who wrote the disastrous CDS contracts because only they know them well enough to keep them safely hedged while winding them down. Some are so complex and bespoke that an outsider could be stumped. A lot of people, including politicians who do not care much one way or the other about the truth of the matter, dismiss this as more self-serving Wall Street claptrap. Personally, I think the appalling thing is that Mr Liddy could well be correct. Consider the implications. We are by now familiar with the trader’s option – that an employee of an investment bank has an incentive to take big risks to make money. If his trading strategy works he gets a bonus but if it fails, the bank (and ultimately the taxpayer) pays.

In recent years, a lot of traders, including those at AIG, exploited this by coming up with derivatives that were very profitable in the short term but had expensive long-term risks embedded in them. That allowed the traders to enjoy several years of large bonuses before the bill for their recklessness fell due. Now, the ever-ingenious AIG traders have come up with a derivative of the trader’s option. Call it the trader’s option squared. They had an incentive not only to sell financial contracts that paid out a lot of money immediately in return for assuming a long-term liability, but also to make these contracts very complicated and opaque. This allowed them to charge big fees (which brought big bonuses) and it also made them irreplaceable at the institution that employed them. If you are the only one who can understand your own handiwork, it puts you in an enviable bargaining position.

Wall Street banks used to believe it was in their financial interest to keep the credit derivatives market as an over-the-counter, high-margin, complex business. It turns out to have been a financial disaster for everyone involved except – surprise, surprise – derivatives traders. For the taxpayer to be forced to pay additional bonuses to the wreakers of havoc is, of course, a travesty, an outrage, an insult, etc. You can take your pick of the insults being bandied around Washington and flung at Mr Geithner, whose authority is trading in a low band. But for the financial institutions involved in credit derivatives, it is worse than that. To be taken for such a ride by their employees is a humiliation, one that has been in the making since the old Wall Street partnerships went public in the 1980s (in Goldman’s case 1998). If this does not compel them to change the way they pay people, I doubt whether anything will.

Goldman's share of AIG bailout money draws fire
American International Group funneled over $90 billion of taxpayer bailout funds to various U.S. and European banks, but the biggest beneficiary was politically connected Goldman Sachs Group Inc. Suspicions of potential conflicts of interest and favoritism have been fueled by $12.9 billion AIG paid to Goldman Sachs -- where then-Treasury Secretary Henry Paulson had previously worked as chief executive -- in the months after the insurer was rescued by the government last September. Goldman, for its part, has insisted it did not need the bailout money because it was "always fully collateralized and hedged." Long Wall Street's largest investment bank before it recently became a bank holding company, Goldman answered a series of questions from Reuters about the bailout funds. "We can say that our notional exposure to AIG is a fraction of what it was at the time of the September bailout," Goldman spokesman Michael DuVally said.

Asked why Goldman Sachs took $12.9 billion of taxpayer money if it was collateralized and hedged on its AIG positions, DuVally said it was because AIG was not allowed to fail, so Goldman did not get money from hedges that would have paid out if the insurer had collapsed. And, he said, under the terms of its contracts with AIG, Goldman was entitled to collateral. DuVally also said the bank does extensive due diligence on all its counterparties. How much Goldman and other counterparties received from AIG has been just one of several flashpoints over the taxpayer rescue of what was once the world's largest insurer. AIG has also infuriated politicians -- including U.S. President Barack Obama -- with its plan to pay $165 million in bonuses to employees at the unit at the heart of its problems. Still, the payments to counterparties like Goldman Sachs dwarfed the bonuses, and some experts contend that these companies should have been made to share some of the losses resulting from the giant insurance firm's near collapse.

"People see that the guys that ruined AIG are getting paid more money, and that creates outrage," said Porter Stansberry, managing director of Stansberry & Associates Investment Research. "If you want to be outraged, be outraged that the counterparties got paid out full value." Goldman was not the only large bank with exposure to AIG. The list of counterparties that AIG disclosed on Sunday included others that got large sums. Goldman was followed by Societe Generale with $11.9 billion, Deutsche Bank with $11.8 billion and Barclays PLC with $8.5 billion. Moreover, the AIG disclosures are still incomplete in that they do not include payments to the banks since December 31. "We are looking at a small piece of it right here. So what is the total exposure? That's the question. And then the issue is, well, if that was wiped out what would it do to Goldman's capital?" said Campbell Harvey, a finance professor at Duke University.

"It is obvious that firms underestimated the counterparty risk. That was their mistake," Harvey said. "Yet they are getting bailouts of U.S. taxpayer money. Why should we pay for their mistake?" In an editorial on Tuesday, the Wall Street Journal pointed to Goldman's claim that "all of its AIG bets were adequately hedged and that it needed no 'bailout.'" "Why take $13 billion then? This needless cover-up is one reason Americans are getting angrier as they wonder if Washington is lying to them about these bailouts," the Journal said. The bailout has stirred resentment not just in the U.S. Congress, but on Wall Street, where investors have speculated that Goldman and its connections helped it get a better deal.

In recent years, many former Goldman executives have moved into government. Paulson left Goldman in 2006 as chief executive. The chairman of the New York Federal Reserve is former Goldman Chairman Steve Friedman. "The person that should be subpoenaed is Hank Paulson. How do you go from running Goldman Sachs in '05 and '06 and making all of these bets with AIG's financial products unit and then end up in the government guaranteeing those bets and not have a conflict of interest?" Stansberry asked. DuVally said Goldman Sachs was not party to any discussions about the bailout of AIG.

AIG Firestorm Has Democrats Growing Edgy on Geithner, Obama Economic Team
Congressional Democrats are growing increasingly nervous about the ability of Treasury Secretary Timothy Geithner and the Obama administration’s economic team to manage the crisis and effectively convey a coherent policy. On the same day that President Barack Obama expressed "complete confidence" in Geithner, some Democratic lawmakers said the administration’s handling of the bonuses paid by American International Group Inc. was the latest in a series of missteps that have plagued Geithner and other top officials since the presidential inauguration. "The economic team has got to get its act together," said Senator Ron Wyden, an Oregon Democrat. "I want the team to begin to get to dealing with these issues in a coordinated way."

The administration has "to accept some responsibility for where this thing is now," said Senator James Webb, a Virginia Democrat. Asked whether his confidence in Geithner has been undermined, Webb said, "I just don’t have a comment on that." Webb, 63, said the administration bears some blame for not knowing about or preventing the payout of bonuses at the insurer, which is now 80 percent owned by the government after receiving $173 billion in federal bailout funds. Even Geithner defenders such as Representative Bill Pascrell of New Jersey said the secretary must accept some responsibility for the issue. Another supporter, Senator Richard Durbin of Illinois, the No. 2 Democratic leader in the chamber, said the outrage was fueled by the growing pressure on Geithner to turn around the economy. "He took over the job, it’s his watch," Pascrell said.

Last night, Senate Banking Committee Chairman Christopher Dodd added to the criticism, saying he weakened a provision dealing with executive pay in last month’s stimulus legislation at the request of the Obama administration. The Connecticut Democrat had proposed restrictions on executive compensation at companies that received money from the government’s financial-rescue fund. It was changed as the legislation was negotiated between the House and Senate. "I did not want to make any changes to my original Senate- passed amendment but I did so at the request of administration officials," Dodd said in an e-mailed statement. He said there was no indication that the change was related to AIG, and he didn’t name the officials. His spokeswoman Kate Szostak said the changes were added during negotiations with the Treasury Department. An administration official said staffers pointed out the original language could be legally challenged. The administration didn’t insist on the change, the official said, speaking on condition of anonymity.

Several lawmakers said yesterday they were concerned the outrage over AIG would undermine public support for the Obama administration’s response to the worst financial crisis since the Great Depression. The bonus decision "may jeopardize our ability to get the majority of this Congress to support further largess, to provide funds, to prevent a recession, depression or meltdown," Representative Paul Kanjorski, a Pennsylvania Democrat who heads the capital markets subcommittee, said as the AIG chairman, Edward Liddy, testified before his panel yesterday. The Democrats spoke as public anger over AIG’s actions continued to boil over. Liddy, who was appointed to his post after the government’s first bailout of the New York-based insurer last year, testified at the Capitol yesterday that the bonuses were "distasteful." He told lawmakers he has asked employees who received payments of $100,000 or more to return half the money.

New York-based AIG paid $165 million in executive bonuses after taking taxpayer-funded bailouts. AIG also budgeted $57 million in "retention" pay to employees who had left the company, according to a March 2 filing to the Securities and Exchange Commission. Since the payouts were disclosed March 15, congressional Republicans have seized on the issue, questioning Treasury’s failure to head off the bonus payments. Florida Republican Representative Connie Mack and California Republican Representative Darrell Issa both called on Geithner to resign yesterday. Mack described Geithner’s performance as a "disaster." Obama, 47, made clear yesterday he still has confidence in his Treasury secretary. "'He is making all the right moves in terms of playing a bad hand," Obama told reporters at the White House yesterday. "I have complete confidence in Tim Geithner and my entire economic team."

The administration’s response to the AIG bonuses was the latest slip-up for the Obama White House, which has struggled to develop a consistent message on the economy. Geithner may be more vulnerable than other administration officials to the fallout from the bonus furor because, in his previous job, he was the government’s top New York-based financial official. As president of the New York Federal Reserve Bank from 2003 to early 2009, Geithner worked with Treasury Secretary Henry Paulson and Fed Chairman Ben S. Bernanke from the start of credit crisis. He helped arrange both the takeover of Bear Stearns Cos. by JPMorgan Chase & Co. last March and the government rescue of AIG in September. On Feb. 10, a speech by Geithner on a plan to repair the banking system disappointed investors, sending the Dow Jones Industrial Average down almost 400 points. The Senate vote in favor of his nomination was 60-34, the closest margin for a Treasury secretary since the end of World War II, after it was disclosed he underpaid some income taxes.

Geithner, 47, said in a letter to lawmakers March 17 that the government would recover the money by requiring it be repaid from company operations and deducting the amount from the next $30 billion in aid being provided to the insurer. He also said the government would accelerate the restructuring of AIG. Many of the Democrats who matter most on economic policy came out to express their support for Geithner. Senate Finance Committee Chairman Max Baucus and House Financial Services Committee Chairman Barney Frank both said they fully support the Treasury secretary. House Speaker Nancy Pelosi has full confidence in the Treasury secretary, said her spokesman, Brendan Daly. Senate Majority Leader Harry Reid does as well, his spokesman said. "We have all inherited the most severe economic crisis in generations, and that includes Secretary Geithner," Reid spokesman Jim Manley said. "He has been handed incredibly difficult circumstances and is taking the right steps, along with Congress, to get our economy back on track. We look forward to continue working with him toward that important goal."

Many of Geithner’s defenders say he doesn’t deserve blame for the situation. The Federal Reserve is overseeing AIG’s rescue and the terms of the bailout program were set by the Bush administration last fall, Pascrell said. Still, Pascrell said, the secretary shouldn’t brush aside responsibility by, for instance, stating that AIG’s bonuses were put in place last April, before he took the reins at Treasury. "He can’t simply go back and say, 'Well, it was done in April when I wasn’t here,’" Pascrell said. "We know you weren’t here, but the fact is you took over the job, you know what you are getting yourself into." Durbin said the criticism of Geithner reflects expectations the economy can turn around soon. "He is under fire now because the economy is in such horrible shape," Durbin said. "People are looking for results, and maybe unrealistically looking for quick results." One measure of that pressure is reflected in the betting that Geithner will wind up leaving the job by the end of the year. Futures trading on, an online exchange based in Dublin, indicated yesterday that bettors see a 35 percent chance Geithner will leave office by Dec. 31, up from a 24.9 percent chance the day before, and a record high for a contract that started trading Feb. 23. A week ago, traders saw a 22 percent chance Geithner would be forced out.

Treasury officials explicitly allowed AIG bonuses
Executives could get up to 3.5 times their base salary without approval, records of a $40-billion November deal show. It also let the firm set aside as much money for 2008 bonuses as it did in 2006.

In frantically rushing to the rescue of American International Group Inc. last fall, Treasury Department officials negotiated a $40-billion deal that explicitly allowed the company to set aside tens of millions of dollars for executive bonuses and richly reward individual senior executives without restrictions or any concern that the government might interfere. Now, the legal agreement and other deals that came before it are making it difficult, if not impossible, to quench the political outrage over last week's $165 million in payments to wealthy executives at a company that exists only because of taxpayer bailouts. Treasury officials said Wednesday that they were trying to work out new limits on executive compensation at companies taking federal assistance, but those rules will not necessarily do anything to limit bonuses and compensation deals that were grandfathered in under the early bailout rules -- no matter how high the political heat is turned.

Although the Obama administration has maintained that Treasury Secretary Timothy F. Geithner did not learn of the bonuses until this month, it has carefully avoided disclosing how long the agency itself was in the dark. White House spokesman Robert Gibbs said he could not detail when administration officials below Geithner learned of the existence of the AIG commitments. But the record shows that on Nov. 25, Treasury Department officials signed a securities agreement to provide $40 billion to AIG in exchange for preferred stock and rights to buy common stock. In that 586-page document, the agency explicitly allowed AIG to pay individual executives as much as 3.5 times their base salary without any approval. The agreement also allowed AIG to set aside as much money for such bonuses for 2008 as it had in 2006, a year when the insurance giant was raking in vast amounts of profit from a financial bubble that would later maim the world economy.

Compensation experts say those amounts were very generous, even for a healthy company. "It is an outrage at a couple of levels," said Richard Ferlauto, director of corporate governance and pension investments for the American Federation of State, County and Municipal Employees. "It is a huge amount of money. The bonuses are too pervasive. And a retention bonus means people stay. Some of these people took the money and left." Almost certainly those limits were put in place because they were needed to satisfy executive compensation agreements that were made before AIG got into financial trouble by mid-2008, said one official knowledgeable about the restrictions. Some senior Treasury officials must have been aware that large executive bonus payments were looming, said the official, who spoke on condition of anonymity because he was not authorized to make a public statement.

The deal cut by Treasury could mean there will be more of the same. The AIG transaction allows a bonus pool for this year that would be as big as the pool for 2007, when it was still profitable. "None of this made any sense," the official said. "Didn't anybody think of requiring the company to be profitable before shoveling this money out the door?" The Nov. 25 agreement contained a wide range of other restrictions covering such matters as golden parachutes, stock repurchases, dividend payments, severance payments, lobbying and other general expenses. Undoing these legal deals will be difficult, as was demonstrated Wednesday by the problems facing Sen. Christopher J. Dodd ( D-Conn.), who watered down restrictions in legislation at the behest of the Treasury Department in February. Those restrictions were contained in the economic stimulus bill and would have limited bonuses to one-third of base pay, both in the future and retroactively.

But Dodd, chairman of the Senate Banking Committee, said Wednesday that Treasury officials approached him in February and asked that he take out the retroactive provision. A Treasury official, speaking on condition of anonymity, acknowledged that staffers in the department told Dodd that the government would be sued if it tried to break a legal deal. Dodd said he acceded to the department's request, which made the limits on bonuses prospective only. What's more, the prospective rules will not begin until the Treasury Department issues its formal rule that will implement the legislation. Treasury officials are now working on that rule. In addition to the $40-billion assistance to AIG, the department has agreed to provide an additional $30 billion, but a formal securities contract has not been reached. Geithner is trying to include new language in that agreement that would recover the $165 million in bonuses that have been paid out so far. But that may require some kind of voluntary agreement not only by AIG but by the executives.

On Wednesday, officials were scrambling to explain how they let the bonuses get paid in the first place. "I don't believe anyone had any idea, I certainly didn't, that a month and a half later from February we would be sitting here talking about AIG and the bonuses that they are receiving for their retentions, these $165 million," Dodd said in a televised interview. "So that was never a part of the consideration." Dan Pedrotty, director of investments at the AFL-CIO, said hourly auto workers were being forced to give up their contract rights, while top AIG executives are holding on to multimillion-dollar bonuses. "This company would not be in existence were it not for the American taxpayers," Pedrotty said. "So it really doesn't pass the laugh test."

Dodd Blames Obama's Administration for Allowing Bonuses in Stimulus Bill
Senate Banking Committee Chairman Christopher Dodd said the Obama administration asked him to insert a provision in last month’s $787 billion economic- stimulus legislation that had the effect of authorizing American International Group Inc.’s bonuses. Dodd, a Connecticut Democrat, said yesterday he agreed to modify restrictions on executive pay at companies receiving taxpayer assistance to exempt bonuses already agreed upon in contracts. He said he did so without realizing the change would benefit AIG, whose recent $165 million payment to employees has sparked a public furor. Dodd said he had wanted to limit executive compensation at companies that got money from the government’s financial-rescue fund. AIG has received $173 billion in bailout money. His provision was changed as the stimulus legislation was negotiated between the House and Senate.

"I did not want to make any changes to my original Senate-passed amendment" to the stimulus bill, "but I did so at the request of administration officials, who gave us no indication that this was in any way related to AIG," Dodd said in a statement released last night. "Let me be clear -- I was completely unaware of these AIG bonuses until I learned of them last week." He didn’t name the administration officials who made the request. An administration official said last night that representatives of President Barack Obama didn’t insist on the change, though they did contend that the language in Dodd’s amendment could be legally challenged because it would apply retroactively to bonus agreements. The official spoke on the condition of anonymity. That provision in the stimulus bill may undercut complaints by congressional Democrats about the AIG bonuses because most of them voted for the legislation. No Republicans in the House and only three in the Senate supported the stimulus measure.

The new law, approved by Congress Feb. 13 and signed into law by Obama the next week, effectively authorized bonus arrangements at companies receiving taxpayer bailouts as long as they were in place before Feb. 11. The AIG bonuses qualified under that provision. Obama and many lawmakers who voted for the legislation, such as Senator Charles Schumer, a New York Democrat, and Senate Finance Committee Chairman Max Baucus, a Montana Democrat, are demanding AIG employees surrender their bonuses. Schumer yesterday sent a letter to AIG Chief Executive Officer Edward Liddy warning him to return bonuses or face confiscatory taxes on them. The letter was signed by Senate Majority leader Harry Reid, a Nevada Democrat, and seven other senators. Brian Fallon, a spokesman for Schumer, said the senator "supported a provision on the Senate floor that would have prevented these types of bonuses, but he was not on the conference committee that negotiated the final language."

A House vote is planned for today on a bill to impose a 90 percent tax on executive bonuses paid by AIG and other companies getting more than $5 billion in federal bailout funds. "I expect it to pass in overwhelmingly bipartisan fashion," House Majority Leader Steny Hoyer, a Maryland Democrat, told reporters yesterday in Washington. Republicans seized on the provision in the stimulus bill to paint Democrats as hypocrites. "The fact is that the bill the president signed, which protected the AIG bonuses and others, was written behind closed doors by Democratic leaders of the House and Senate," Iowa Senator Charles Grassley said in a statement.

Dodd said the provision was written to give the Treasury Department enough discretion to reclaim bonuses as necessary. "Fortunately, we wrote this amendment in a way that allows the Treasury Department to go back and review these bonus contracts and seek to recover the money for taxpayers," he said. Treasury Secretary Timothy Geithner told lawmakers in a letter this week that department lawyers believe it would be "legally difficult" to prevent AIG from paying bonuses. Other Democrats who voted for the stimulus bill have ramped up criticism of AIG’s bonuses, including Massachusetts Representative Barney Frank, the chairman of the House Financial Services Committee, who told reporters, "I think the time has come to exercise our ownership rights."

Fannie Mae chiefs in line for huge bonuses
Fannie Mae will pay its top executives retention bonuses of up to $611,000, the state-controlled mortgage lender and guarantor revealed yesterday amid the furore over compensation at AIG. Meanwhile, a New York judge ordered Bank of America to disclose the recipients of $3.6 million-worth of bonuses handed out to bankers at Merrill Lynch, the investment bank bought by BoA last September. In a filing with the Securities and Exchange Commission, Fannie Mae said that it would pay Michael Williams, its chief operating officer, $611,000 this year to induce him to remain at the company, on top of his salary of $676,000. Three executive vice-presidents at the company will receive between $470,000 and $517,000 each.

Fannie Mae was taken into Government conservatorship last September along with Freddie Mac, another giant mortgage lender, after making losses of $108 billion last year, mainly on defaulting home loans. The companies have been promised as much as $200 billion in funding by the Government so that they can keep lending to American homebuyers. Their activities are overseen by the Federal Housing Finance Agency. There was outcry this week after AIG revealed that it would pay $165 million in retention bonuses to 400 staff, despite having received more than $170 million in support from the Government. Freddie Mac operates a similar staff retention plan to that of Fannie Mae but is not expected to disclose the amounts paid to its executives until the end of April.

Andrew Cuomo, the New York Attorney General, is investigating the bonus payments at AIG and at Merrill Lynch, where he suspects BoA shareholders were misled about the payments, which were paid in December, a month early and weeks before the investment bank unveiled a surprise $15.8 billion fourth-quarter loss. The Attorney General suspects that some of the bankers who received early multi-million dollar bonuses may have been prompted to report larger than usual losses on their trading books as a result, to the detriment of shareholders. Shareholders were not informed of the bonuses as part of the announcements made during the takeover of Merrill Lynch by BoA. BoA had argued that the names of the recipients should remain private and declined to hand them over to Mr Cuomo. But following weeks of legal argument, Supreme Court Justice Bernard Fried decided last night that BoA had not justified its desire to keep the names private for competition reasons. BoA said that it would comply with Justice Fried's order and could provide the names to Mr Cuomo as early as Thursay.

Bank of America ordered to reveal Merrill Lynch employees' bonus details
Bank of America will have to disclose the identities of Merrill Lynch employees who received $3.6bn in bonuses late last year after a ruling by a state judge on Wednesday in an investigation brought by Andrew Cuomo, New York’s attorney-general. The ruling is a victory for Mr Cuomo, who is investigating the payout of bonuses at Merrill Lynch in December, days before the investment bank was acquired by BofA and a month before bonuses are normally dispensed. At the time of the payments, Merrill was in the process of racking up record losses of $27.5bn (£19.2bn) for the year. The setbacks prompted Ken Lewis, BofA’s chief executive, to ask for $20bn in taxpayer funds to complete the transaction.

Mr Cuomo described the decision, by Justice Bernard Fried, as "a victory for taxpayers" that would "lift the shroud of secrecy surrounding the $3.6bn in bonuses Merrill Lynch rushed out in December". As part of its investigation, prosecutors from Mr Cuomo’s office have taken depositions from John Thain, former chief executive of Merrill Lynch, and Mr Lewis. Prosecutors have also questioned subordinates of both men, as well as John Finnegan, chief executive of Chubb, who served on Merrill’s board of directors until Merrill was acquired by BofA on January 1. Mr Cuomo’s investigation, launched two months ago after the disclosure of the early bonus payments by the Financial Times, has been slowed down by BofA’s belief that disclosure of bonus payments to specific individuals would be a violation of privacy.

Last month Mr Thain declined to discuss individual bonus payments with prosecutors after his lawyer indicated BofA would take legal action against him for any disclosures. BofA allowed Mr Thain to co-operate only after Justice Fried ruled that any discussion of bonuses would remain confidential until the matter was resolved. Justice Fried ruled that under the Martin Act, a New York law that allows the state’s attorney-general wide discretion in conducting investigations, BofA had no legal standing to resist Mr Cuomo’s request for bonus information. A BofA spokesman said: "We will of course comply with the order of the court and turn over the information requested. We will continue to co-operate with the attorney-general’s investigation." This week Mr Cuomo also launched an investigation into the payment of $165m in bonuses at AIG.

Bailed-Out Citi Plans $10 Million CEO Office
Citigroup, which has received $45 billion in taxpayer bailout money, plans to spend $10 million on new offices at its Park Avenue headquarters for CEO Vikram Pandit and his deputies, according to Bloomberg News. A Citi source confirmed the renovation plans to ABC News, which were first reported by Bloomberg. The source added that the renovation is part of an overall effort to cut costs by consolidating offices. Last month, Pandit testified before Congress about the way his company is using taxpayer dollars received through the Troubled Asset Relief Program. "The American people are right to expect that we use TARP funds responsibly, quickly and transparently to help American families, businesses and communities," he said.

Earlier this year, Citigroup reversed a decision to buy a $50 million corporate jet under pressure from the government. The Citi source likened the $10 million in office renovations to refinancing a home: You need to put money down so you can save money over time. Permits for the renovations were filed in September 2008, according to the source. "This office space consolidation is part of a global effort to create greater operating efficiencies and generate millions of dollars in savings in the years ahead," Citi told ABC News in a statement. "Through this project, senior executives in our corporate headquarters are moving from two floors to smaller, simpler offices on a single floor."

"These changes, combined with greater use of shared work spaces and alternative work arrangements, will double the overall occupancy rate on the remaining floor," the company added. "In addition, based on estimates made when the project was initiated, we expect to generate savings in the next few years well in excess of the project costs compared to our current utilization of headquarters executive space." Bloomberg reported that the company plans to spend at least $3.2 million for basic construction, such as wall removal, plumbing and fire safety, but that the overall cost would be at least three times as high.

Earlier this year CNBC reported that then Merrill Lynch CEO John Thain spent more than $1 million to redecorate his office. The redecoration, which took place in early 2007, became a symbol of corporate extravagance ahead of the financial crisis that has taken over the world economy. Thain was forced to sell Merrill Lynch to Bank of America in a frantic deal in September 2008. While he was originally expected to stay on as an employee, Bank of America CEO Ken Lewis fired Thain in January 2009, soon after news of the renovations became public. In a subsequent interview on CNBC, Thain said in hindsight the office renovations were a "mistake."

Thain's purchases went well beyond what an average office space would cost and were reported to have included an $87,000 area rug for Thain's conference room and another area rug for $44,000; a $25,000 mahogany pedestal table; a $68,000 19th-century credenza for Thain's office; a $15,000 sofa; four pairs of curtains for $28,000; a pair of guest chairs for $87,000; a George IV Desk for $18,000; six wall sconces for $2,700; six chairs in his private dining room for $37,000; a mirror in his private dining room for $5,000; a chandelier in the private dining room for $13,000; fabric for a Roman shade for $11,000; a custom coffee table for $16,000; something called a "commode on legs" for $35,000; Regency chairs for $24,000; 40 yards of fabric for wall panels for $5,000 and a parchment waste can for $1,400.

According to Bloomberg, plans for Citi's renovations on file with the city specify the installation of at least one Sub-Zero Inc. refrigerator and icemaker, "premium grade" millwork and a Madico Inc. "Safety Shield 800" blast-proof window film. The project includes 17 private offices, each with space for administrative assistants, two conference rooms and open areas with "soft seating."

Naked Short Sales Hint Fraud in Bringing Down Lehman
The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts. As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year’s peak of 567,518 failed trades on July 30. The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days. "We had another word for this in Brooklyn," said Harvey Pitt, a former SEC chairman. "The word was 'fraud.'"

While the commission’s Enforcement Complaint Center received about 5,000 complaints about naked short-selling from January 2007 to June 2008, none led to enforcement actions, according to a report filed yesterday by David Kotz, the agency’s inspector general. The way the SEC processes complaints hinders its ability to respond, the report said. Twice last year, hundreds of thousands of failed trades coincided with widespread rumors about Lehman Brothers. Speculation that the company was being acquired at a discount and later that it was losing two trading partners both proved untrue. After the 158-year-old investment bank collapsed in bankruptcy on Sept. 15, listing $613 billion in debt, former Chief Executive Officer Richard Fuld told a congressional panel on Oct. 6 that naked short sellers had midwifed his firm’s demise. Members of the House Committee on Government Oversight and Reform weren’t buying that explanation. "If you haven’t discovered your role, you’re the villain today," U.S. Representative John Mica, a Florida Republican, told Fuld.

Yet the trading pattern that emerges from 2008 SEC data shows naked shorts contributed to the fall of both Lehman Brothers and Bear Stearns Cos., which was acquired by JPMorgan Chase & Co. in May. "Abusive short selling amounts to gasoline on the fire for distressed stocks and distressed markets," said U.S. Senator Ted Kaufman, a Delaware Democrat and one of the sponsors of a bill that would make the SEC restore the uptick rule. The regulation required traders to wait for a price increase in the stock they wanted to bet against; it prevented so-called bear raids, in which successive short sales forced prices down. Reinstating the rule would end the pattern of fails-to- deliver revealed in the SEC data, Kaufman said. "These stories are deeply disturbing and make a compelling case that the SEC must act now to end abusive short selling -- which is exactly what our bill, if enacted, would do," the senator said in an e-mailed statement.

Short sellers arrange to borrow shares, then dispose of them in anticipation that they will fall. They later buy shares to replace those they borrowed, profiting if the price has dropped. Naked short sellers don’t borrow before trading -- a practice that becomes evident once the stock isn’t delivered. Such trades can generate unlimited sell orders, overwhelming buyers and driving down prices, said Susanne Trimbath, a trade- settlement expert and president of STP Advisory Services, an Omaha, Nebraska-based consulting firm. The SEC last year started a probe into what it called "possible market manipulation" and banned short sales in financial stocks as the number of fails-to-deliver climbed.

The daily average value of fails-to-deliver surged to $7.4 billion in 2007 from $838.5 million in 1995, according to a study by Trimbath, who examined data from the annual reports of the National Securities Clearing Corp., a subsidiary of the Depository Trust & Clearing Corp. Trade failures rose for Bear Stearns as well last year. They peaked at 1.2 million shares on March 17, the day after JPMorgan announced it would buy the investment bank for $2 a share. That was more than triple the prior-year peak of 364,171 on Sept. 25. Fuld said naked short selling -- coupled with "unsubstantiated rumors" -- played a role in the demise of both his bank and Bear Stearns. "The naked shorts and rumor mongers succeeded in bringing down Bear Stearns," Fuld said in prepared testimony to Congress in October. "And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers."

Failed trades correlate with drops in share value -- enough to account for 30 to 70 percent of the declines in Bear Stearns, Lehman and other stocks last year, Trimbath said. While the correlation doesn’t prove that naked shorting caused the lower prices, it’s "a good first indicator of a statistical relationship between two variables," she said. Failing to deliver is like "issuing new stock in a company without its permission," Trimbath said. "You increase the number of shares circulating in the market, and that devalues a stock. The same thing happens to a currency when a government prints more of it." Trimbath attributes the almost ninefold growth in the value of failed trades from 1995 to 2007 to a rise in naked short sales. "You can’t have millions of shares fail to deliver and say, 'Oops, my dog ate my certificates,’" she said.

On its Web site, the Federal Reserve Bank of New York lists several reasons for fails-to-deliver in securities trading besides naked shorting. They include misunderstandings between traders over details of transactions; computer glitches; and chain reactions, in which one failure to settle prevents delivery in a second trade. Failed trades in stocks that were easy to borrow, such as Lehman Brothers, constitute a "red flag," said Richard H. Baker, the president and CEO of the Washington-based Managed Funds Association, the hedge fund industry’s biggest lobbying group. "Suffice it to say that in a readily available stock that is traded frequently, there has to be an explanation to the appropriate regulator as to the circumstances surrounding the fail-to-deliver," said Baker, who served in the U.S. House of Representatives as a Republican from Louisiana from 1986 to February 2008. "If it’s a pattern and a practice, there are laws and regulations to deal with it," he said.

Lehman Brothers had 687.5 million shares in its float, the amount available for public trading. In float size, the investment bank ranked 131 out of 6,873 public companies -- or in the top 1.9 percent, according to data compiled by Bloomberg. While naked short sales resulting from errors aren’t illegal, using them to boost profits or manipulate share prices breaks exchange and SEC rules and violators are subject to penalties. If investigators determine that traders engaged in the practice to try to influence markets, the Department of Justice can file criminal charges. Market makers, who serve as go-betweens for buyers and sellers, are allowed to short stock without borrowing it first to maintain a constant flow of trading. Since July 2006, the regulatory arm of the New York Stock Exchange has fined at least four exchange members for naked shorting and violating other securities regulations. J.P. Morgan Securities Inc. paid the highest penalty, $400,000, as part of an agreement in which the firm neither admitted nor denied guilt, according to NYSE Regulation Inc.

In July 2007, the former American Stock Exchange, now NYSE Alternext, fined members Scott and Brian Arenstein and their companies $3.6 million and $1.2 million, respectively, for naked short selling. Amex ordered them to disgorge a combined $3.2 million in trading profits and suspended both from the exchange for five years. The brothers agreed to the fines and the suspension without admitting or denying liability, according a release from the exchange. Of about 5,000 e-mailed tips related to naked short-selling received by the SEC from January 2007 to June 2008, 123 were forwarded for further investigation, according to the report released yesterday by Kotz, the agency’s internal watchdog. None led to enforcement actions, the report said. Kotz, the commission’s inspector general, said the enforcement division "is reluctant to expend additional resources to investigate" complaints. He recommended in his report yesterday that the division step up analysis of tips, designating an office or person to provide oversight of complaints.

"Our audit disclosed that despite the tremendous amount of attention the practice of naked short selling has generated in recent years, Enforcement has brought very few enforcement actions based on conduct involving abusive or manipulative naked short selling," the report said. The enforcement division, in a response included in the report, said "a large number of the complaints provide no support for the allegations" and concurred with only one of the inspector general’s 11 recommendations. SEC Chairman Mary Schapiro, who took office in January, has vowed to reinvigorate the enforcement unit after it drew fire from lawmakers and investors for failing to follow up on tips that New York money manager Bernard Madoff’s business was a Ponzi scheme. She has "initiated a process that will help us more effectively identify valuable leads for potential enforcement action," John Nester, a commission spokesman, said in response to the Kotz report. Last September, the agency instituted the temporary ban on short sales of financial stock. It also has announced an investigation into "possible market manipulation in the securities of certain financial institutions."

Christopher Cox, who was SEC chairman last year; Erik Sirri, the commission’s director for market regulation; and James Brigagliano, its deputy director for trading and markets, didn’t respond to requests for interviews. John Heine, a spokesman, said the commission declined to comment for this story. "It has always puzzled me that the SEC didn’t take effective action to eliminate naked shorting and the fails-to- deliver associated with it," Pitt, who chaired the commission from August 2001 to February 2003, said in an e-mail. The agency began collecting data on failed trades that exceed 10,000 shares a day in 2004. "All the SEC need do is state that at the time of the short sale, the short seller must have (and must maintain through settlement) a legally enforceable right to deliver the stock at settlement," Pitt wrote. He is now the CEO of Kalorama Partners LLC, a Washington-based consulting firm. In August, he and some partners started, a Web-based service that locates stock to help sellers comply with short-selling rules.

Pitt began his legal career as an SEC staff attorney in 1968, and eventually became the commission’s general counsel. In 1978, he joined Fried Frank Harris Shriver & Jacobson LLP, where as a senior corporate partner he represented such clients as Bear Stearns and the New York Stock Exchange. President George W. Bush appointed him SEC chairman in 2001. The flip side of an uncompleted transaction resulting from undelivered stock is called a "fail-to-receive." SEC regulations state that brokers who haven’t received stock 13 days after purchase can execute a so-called buy-in. The broker on the selling side of the transaction must buy an equivalent number of shares and deliver them on behalf of the customer who didn’t. A 1986 study done by Irving Pollack, the SEC’s first director of enforcement in the 1970s, found the buy-in rules ineffective with regard to Nasdaq securities. The rules permit brokers to postpone deliveries "indefinitely," the study found. The effect on the market can be extreme, according to Cox, who left office on Jan. 20. He warned about it in a July article posted on the commission’s Web site.

When coupled with the propagation of rumors about the targeted company, selling shares without borrowing "can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions," he said in the article. "'Naked’ short selling can turbocharge these 'distort-and- short’ schemes," Cox wrote. "When traders spread false rumors and then take advantage of those rumors by short selling, there’s no question that it’s fraud," Pollack said in an interview. "It doesn’t matter whether the short sales are legal." On at least two occasions in 2008, fails-to-deliver for Lehman Brothers shares spiked just before speculation about the bank began circulating among traders, according to SEC data that Bloomberg analyzed. On June 30, someone started a rumor that Barclays Plc was ready to buy Lehman for 25 percent less than the day’s share price. The purchase didn’t materialize.

On the previous trading day, June 27, the number of shares sold without delivery jumped to 705,103 from 30,690 on June 26, a 23-fold increase. The day of the rumor, the amount reached 814,870 -- more than four times the daily average for 2008 to that point. The stock slumped 11 percent and, by the close of trading, was down 70 percent for the calendar year. "This rumor ranks up there with the moon is made of green cheese in terms of its validity," Richard Bove, who was then a Ladenburg Thalmann & Co. analyst, said in a July 1 report. Bove, now vice president and equity research analyst with Rochdale Securities in Lutz, Florida, said in an interview this month that the speculation reflected "an unrealistic view of Lehman’s portfolio value." The company’s assets had value, he said. During the first six days following the Barclays hearsay, the level of failed trades averaged 1.4 million. Then, on July 10, came rumors that SAC Capital Advisors LLC, a Stamford, Connecticut-based hedge fund, and Pacific Investment Management Co. of Newport Beach, California, had stopped trading with Lehman Brothers. Pimco and SAC denied the speculation. The bank’s share price dropped 27 percent over July 10-11.

Banks and insurers wrote down $969.3 billion last year -- and that gave legitimate traders plenty of reason to short their stocks, said William Fleckenstein, founder and president of Seattle-based Fleckenstein Capital, a short-only hedge fund. He closed the fund in December, saying he would open a new one that would buy equities too. "Financial stocks imploded because of the drunkenness with which executives buying questionable securities levered-up in obscene fashion," said Fleckenstein, who said his firm has always borrowed stock before selling it short. "Short sellers didn’t do this. The banks were reckless and they held bad assets. That’s the story." On May 21, David Einhorn, a hedge fund manager and chairman of New York-based Greenlight Capital Inc., announced he was shorting stock in Lehman Brothers and said he had "good reason to question the bank’s fair value calculations" for its mortgage securities and other rarely traded assets. Einhorn declined to comment for this story. Monica Everett, a spokeswoman who works for the Abernathy Macgregor Group, said Greenlight properly borrows shares before shorting them.

Even when they’re legitimate, short sales can depress share values in times of market crisis -- in effect turning the traders’ negative bets into self-fulfilling prophecies, says Pollack, the former SEC enforcement chief who is now a securities litigator with Fulbright & Jaworski in Washington. The SEC has been concerned about the issue since at least 1963, when Pollack and others at the commission wrote a study for Congress that recommended the "temporary banning of short selling, in all stocks or in a particular stock" during "times of general market distress." On Sept. 17, two days after Lehman Brothers filed for Chapter 11 bankruptcy, the number of failed trades climbed to 49.7 million, 23 percent of overall volume in the stock.

The next day, the SEC announced its ban on shorting financial companies in 2008. The number of protected stocks ultimately grew to about 1,000. On Sept. 19, the commission announced "a sweeping expansion" of its investigation into possible market manipulation. The ban, which lasted through Oct. 17, didn’t eliminate shorting, according to data from the SEC, the NYSE Arca exchange and Bloomberg. Throughout the period, short sales averaged 24.7 percent of the overall trading in Morgan Stanley, Merrill Lynch & Co. and Goldman Sachs Group Inc. on NYSE Arca. In 2008, short sales averaged 37.5 percent of the overall trading on the exchange in the three companies. To date, the commission hasn’t announced any findings of its investigation. Pollack, the former SEC regulator, wonders why. "This isn’t a trail of breadcrumbs; this audit trail is lit up like an airport runway," he said. "You can see it a mile off. Subpoena e-mails. Find out who spread false rumors and also shorted the stock and you’ve got your manipulators."

Bank of America, Citigroup shares soar after Fed moves
Shares of Bank of America Corp and Citigroup Inc powered to multiweek highs on Wednesday on optimism over government efforts to stimulate lending. Bank of America surged $1.40, or 22.3 percent, to $7.67, its highest close since Jan. 15. Citigroup jumped 22.7 percent, or 57 cents, at $3.08, its highest finish since Feb. 13. Trading volume for the two banks on Wednesday neared 2 billion shares. The stocks have tripled from multidecade lows less than a month ago. Citigroup shares bottomed at 97 cents on March 5, and Bank of America at $2.53 on Feb. 20. The broad KBW Bank Index rose 11.1 percent to its highest close since Feb. 9, after a surprise U.S. Federal Reserve move to buy up to $300 billion in government debt and more mortgage-related debt to help unlock credit markets.

"By expanding purchases to other asset classes, the Fed is trying to take pressure off the values of assets that banks hold on their balance sheet, particularly in the housing sector," said Mark Freeman at Westwood Management Corp in Dallas which invests $7.5 billion. "Banks are hesitant to lend because from a credit standpoint, their balance sheets are restrained." The Fed action is intended to make it easier for consumers and businesses to borrow and could spur greater activity and earnings at banks. "At the core of this problem remains the housing market, the liabilities the banks have with mortgages and the ability to stabilize prices," said Rick Meckler, president of LibertyView Capital Management in New York. "Like a lot of people, I'm open to creative ideas to help stabilize (it)."

Citigroup traded at $56.66 as recently as December 2006,while Bank of America hit $55.08 a month earlier. Bank shares were already on the upswing after the chief executives of Bank of America, Citigroup and JPMorgan Chase & Co said last week they were profitable in January and February. Bank of America and Citigroup each got federal bailouts that limited losses on troubled assets and split $90 billion of capital from the Treasury Department's Troubled Asset Relief Program (TARP). JPMorgan took $25 billion from TARP. Bank of America CEO Kenneth Lewis told the Charlotte Observer on Wednesday that Bank of America might be able to repay its TARP money late this year.

Meanwhile, the Financial Accounting Standards Board issued proposals Wednesday to help companies apply mark-to-market accounting rules. Critics of the rules say they have forced banks to write downs assets to artificially distressed levels, depleting capital. "Some of the accounting uncertainty may start to be lifted and that could alleviate some concerns with regard to capital adequacy," said Blake Howells, director of equity research, Becker Capital Management in Portland, Oregon. In the newspaper interview, Lewis also said Bank of America's Jan. 1 acquisition of Merrill Lynch will be a long-term success. Lewis said the bank will achieve 45 percent of its expected merger savings this year, adding that one-fourth of an expected 35,000 job cuts have been made.

Swaps Backfire on Hospitals Firing Workers to Pay Wall Street
South County Hospital Chief Financial Officer Thomas Breen thought he’d seen the worst of the credit market’s seizure when the interest rate on $52 million of its debt doubled to 12 percent a year ago. That was just the start. The Wakefield, Rhode Island, hospital has also been forced to give Merrill Lynch & Co. $12.7 million of collateral for an interest-rate swap that backfired. South County could have used those funds to counter a drop in state aid for treating uninsured patients, compensate for declining admissions or buy four years’ of orthopedic supplies. Instead, the facility is firing workers and cutting pay. "We’ve been working extraordinarily hard to try to find a way out of this," said Breen, who joined the hospital in 2007, a year after it bought the swap. "It’s threatening to the institution."

South County is one of at least 500 nonprofits that entered into the derivatives with Wall Street in an effort to cut costs, according to Moody’s Investors Service. Instead of being able to take advantage of the lowest interest rates since Dwight D. Eisenhower was president, tax-exempt groups are getting hit with a double whammy of rising borrowing costs and demands for collateral from financing tools they didn’t understand. While the federal government can borrow at near record low rates, the weekly Bond Buyer 20, which tracks yields on 20-year general obligation debt, rose to 5.03 percent as of March 12, from last year’s low of 4.52 percent in May and 4.03 percent in December 2006.

The swaps are failing because borrowers didn’t anticipate that the value of the contracts, which often mature in 30 years, would tumble as central banks cut rates. The Federal Reserve reduced its target rate for overnight lending between banks to near zero percent in December, from 5.25 percent in 2007. Swaps are agreements to exchange interest payments, usually a fixed payment for one that varies based on an index. Hospitals are losing on swaps that are a byproduct of so- called negotiated municipal debt sales, where state and local politicians and nonprofits decide in advance which banks will market the bonds instead of auctioning them to the underwriter who promises the lowest all-in borrowing cost to taxpayers. The South County swap, which was negotiated, not only contributed to a $1.5 million operating loss in the last quarter of 2008, it also failed to hedge against the higher weekly interest on the auction-rate bonds it was tied to when the market collapsed in February 2007. That resulted in a $1 million increase in quarterly interest expense.

"It’s another major headache," said John Nelson, a Moody’s analyst. About one-third of the nonprofits tracked by the New York-based credit rating company have had to put up collateral, Nelson said. South County’s costs are nowhere near the highest involving swaps. Vanderbilt University in Nashville, Tennessee, posted $190 million in collateral to banks on Feb. 28, according to Moody’s. The AA rated school sold $250 million in taxable notes in January in order to make the bank payment on $1.7 billion in swaps and replenish working capital, according to rating companies and financial reports it filed. "We’re comfortable with the strategy we had," said Betty Price, the chief financial officer at Vanderbilt. The school derives 64 percent of its revenue from the 600-bed Vanderbilt University Hospital as well as other medical facilities.

The University of Maryland Medical System in Baltimore gave its bankers $105.7 million in December. The Maryland medical system consists of eight hospitals in and around Baltimore with a total of 1,809 beds. The complex reported a net loss of $224.2 million in the six months ended Dec. 31 after it posted $105.7 million in collateral for its swaps, according to a financial report from the nonprofit. The system had $610.1 million in swaps with Bank of America and JPMorgan Chase, according to Moody’s. In a swap, parties agree to exchange interest payments, usually a fixed payment for one that varies based on an index. Borrowers may use the swaps to lower interest expenses or lock in rates for future bond sales. Swaps are private contracts, and the market for them isn’t regulated. In the municipal market, they are typically done in conjunction with negotiated bond offerings.

Last year, states, cities and nonprofits sold $391.5 billion in long-term bonds, according to Thomson Reuters. Of that total, 86 percent was negotiated and the rest was opened to competitive bids. As recently as 1970, municipalities made securities firms bid for the majority of sales. Underwriters have promoted negotiated deals, saying they can get the best prices for taxpayers by tailoring the debt to investor demand. Competitive sales saved issuers 17 to 48 basis points, "on average and all else equal," according to a study published in the Winter 2008 issue of the Municipal Finance Journal. A basis point is 0.01 percentage point. On $100 million of debt, the savings mean $1.7 million to $4.8 million less interest over the life of a 10-year security. Losses on swaps couldn’t come at a worse time for hospitals, said Caroline Steinberg, an analyst at the Washington-based American Hospital Association. The investment income the nonprofits use to subsidize their operations fell $831.5 million in the third quarter last year while more patients without insurance seek care as unemployment rises, she said.

The freeze in credit markets triggered by the meltdown of subprime mortgages in 2007 increased interest expenses at hospitals 15 percent in the third quarter, the American Hospital Association found. Of the 430 hospitals Thomson Reuters tracks, half posted operating losses in that period, according to a March 2 report. South County fired 20 people from its non-medical staff, cut top management pay by a combined $100,000 and sold securities from its endowment at a discount to raise cash for the Merrill Lynch payment, Breen said. The amount of collateral changes from week to week with interest indexes, Breen said. It reached a high of $12.7 million in December and totaled $8.9 million last week, he said. William Halldin, a spokesman for Merrill Lynch, which was acquired by Charlotte, North Carolina-based Bank of America Corp. last year, declined to comment.

"Most organizations don’t have that big of a cash pool that they can sustain that substantial a draw on their liquidity," said Johan Rosenberg, president of DerivActiv LLC, an Eden Prairie, Minnesota-based company that values and monitors swaps for borrowers. So-called collateral postings are a standard feature in contracts in the $400 trillion interest-rate swap market, Rosenberg said. Swaps are derivatives, or contracts whose value is tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather The amount of collateral depends on the value of the swap. When long-term market indexes fall, so does the value of fixed- rate swaps, which can trigger requirements to put up more cash, he said. Most swaps in the municipal market are pegged to the London interbank offered rate, or Libor. The 20-year index tied to Libor fell to a record low of 2.44 percent in December from 5.2 percent in June, according to Bloomberg data. Libor dropped as low as 1.08 percent on Jan. 14 and has since risen to 1.30 percent. Libor is used to calculate rates on $360 trillion of financial products worldwide, according to the Bank for International Settlements in Basel, Switzerland.

Nonprofits post more collateral than corporations because swaps in the municipal market stretch over 30 years while the agreements in the taxable market last fewer than 10, Rosenberg said. Cities and states that use swaps typically aren’t required to post collateral, he said. South County got into the swap when it agreed to pay an annual fixed rate of 3.52 percent to Merrill Lynch for 30 years after it sold $52 million in auction-rate securities, or debt with interest that resets at periodic bidding every 7, 28 or 35 days. The average rate for a comparable fixed-rate hospital bond at the time was 4.5 percent, according to Bloomberg data. The hospital gets 67 percent of one-month Libor from the bank to cover the cost of the auction-rate bonds, which reset weekly.

The $330 billion auction-rate market imploded a year ago when underwriters stopped stepping in as buyers of last resort as demand for the securities fell. Thousands of auctions failed, including those for South County, which resulted in rates on its bonds costing as much as 12 percent. The hospital, which is rated Baa3 with a "negative" outlook by Moody’s, hired New York-based Oppenheimer & Co. in an effort to restructure its debt, Breen said. Replacing the bonds would be even more expensive now. The average yield on 20-year fixed rate hospital bonds was 6.75 percent on March 17, up from 5.24 percent on May 22, according to Bloomberg data. "It’s one indignity on top of another," said Andy Majka, a partner at Skokie, Illinois-based Kaufman, Hall & Associates, a financial adviser to nonprofit hospitals. "That’s just been the story in the capital markets in the past 12 months; you think you get the bottom and another thing comes up."

Citigroup to Sell Credit Card-Backed Bonds for TALF
Citigroup Inc. plans to sell $3 billion in bonds backed by credit card payments eligible for the Federal Reserve’s program to jumpstart consumer lending. The AAA securities will mature in 2.97 years, and may price to yield 175 basis points more than the one-month London interbank offered rate, according to a person familiar with the transaction who declined to be identified because terms aren’t public.

Citigroup’s debt sale is the first offering backed by credit card payments announced for the Fed’s Term Asset-Backed Securities Loan Facility, or TALF. Earlier this week, the finance arms of Ford Motor Co. and Nissan Motor Co. announced plans to sell bonds backed by auto loans. Huntington Auto also is planning a sale. The Obama administration is counting on TALF to help end the credit crunch and recession by thawing the market for asset- backed securities so lenders can make new loans to consumers. Investors are shying away from credit card-backed debt as consumers fall behind on payments and unemployment rises.
Today is the deadline for investors to apply for the Fed loans for March.

Ford, Nissan Lead Automakers Selling Bonds for TALF
Ford Motor Co., the second-largest U.S. automaker, and Japan’s Nissan Motor Co. lead companies selling debt backed by auto loans in the first offerings eligible for a Federal Reserve program to unfreeze consumer lending. Ford’s finance unit plans to sell $2.95 billion of the bonds, the company said today. Nissan is selling a $1.3 billion package of securities, a person familiar with the transaction said yesterday. Huntington Auto is also planning a sale. The sales mark the debut of the Fed’s Term Asset-Backed Securities Loan Facility, or TALF. The Obama administration is counting on the plan to help end the credit crunch and recession, thawing the market for asset-backed securities so lenders can make new loans to consumers. The program, first announced in November, was hampered by delays as investors, dealers and issuers worked on details.

"A number of people were concerned that some glitches might not have been ironed out this week" in time to meet the first deadline for investors to apply for the Fed loans, said Malcolm Dorris, a senior partner in the securitization group at law firm Dechert LLP in New York. "Getting a deal done in March is good for the program. We are still in the wait-and-see stage." Investors have shunned debt backed by consumer loans as unemployment climbed in the worst financial crisis since the Great Depression. Sales of the bonds plunged 40 percent last year to $106 billion, according to data compiled by Bloomberg, choking off funding to lenders. About $2.3 billion of debt backed by auto loans has been sold this year, compared with more than $9.6 billion in the same period of 2008, according to data from JPMorgan Chase & Co.

Fed Chairman Ben S. Bernanke and fellow policy makers are finishing up a two-day meeting of the Federal Open Market Committee in Washington, where they are deliberating how the central bank can further stimulate borrowing. The extra yield relative to benchmark interest rates that investors demand to own debt backed by consumer loans has soared amid concern that defaults will climb. Top-rated bonds backed by auto loans are trading at about 300 basis points more than the one-month London interbank offered rate compared with 65 basis points in January 2008, JPMorgan data show. One-month Libor, a borrowing benchmark, is currently 0.55 percent. A basis point is 0.01 percentage point.

The first phase of the TALF will finance the purchase of as much as $200 billion of AAA rated securities containing loans for autos, education, credit cards and small businesses. Officials eventually plan to include other assets, including commercial mortgage-backed securities. The Fed originally planned to start the TALF in February, then delayed the debut to ensure "all our legal and procedural steps had been taken," Bernanke said in congressional testimony Feb. 25. On March 3, the Fed and Treasury said applications for the first deals would be due in two weeks, with loans disbursed on March 25. The offerings don’t require investors to use the TALF. It remains to be seen how many actually take loans from the facility to purchase the debt. Ford rose 19 cents, or 8.3 percent, to $2.47 in composite trading on the New York Stock Exchange. Ford, which lost a record $14.7 billion last year, is the only U.S. automaker not receiving government aid. Its U.S. vehicle sales fell 48 percent in February, as overall auto sales in the country reached a 27-year low. Ford, which consumed $21.2 billion in cash in 2008, last month tapped a $10.1 billion line of credit, its final financial lifeline.

"Anything that helps Ford sell cars is a good thing and anything that improves liquidity at Ford Credit helps the situation at the parent," says auto analyst Shelly Lombard of Gimme Credit, a New York bond researcher. "But I can’t say it will prevent Ford from needing federal aid because a lot of that depends on auto sales in general. What would really help is an uptick in the economy." The Dearborn, Michigan-based automaker also is attempting to retire as much as $10.4 billion in debt, about 40 percent of its borrowings, in the largest debt restructuring it has ever undertaken. On March 9, Ford won concessions from the United Auto Workers that it says will save $500 million annually. "Our plan was, is and is going to be to thread the needle" of not taking federal aid, Executive Chairman Bill Ford said in a March 9 interview. "We are confident we can do that." The largest AAA portion of the Ford sale maturing in 1.99 years may price to yield between 215 basis points and 225 basis points more than benchmark interest rates, according to a person familiar with the transaction.

In Ford’s last public sale of auto-loan bonds in May 2008, similar top-rated securities priced to yield 142 basis points more than benchmark interest rates, Bloomberg data show. In June 2007, the automaker paid just 3 basis points, the data show. The sale "is part of our established 2009 funding plan, and that plan supports our mission to help sell Ford Motor Company vehicles," Ford Motor Credit Co. spokeswoman Margaret Mellott said in an e-mailed statement. The Ford sale is being managed by Goldman Sachs Group Inc., Royal Bank of Scotland Plc, Bank of America Corp., Deutsche Bank AG and JPMorgan, the person said. The largest top-rated portion of the sale for Tokyo-based Nissan maturing in 1.98 years may price to yield between about 185 basis points and 200 basis points more than benchmark interest rates, the person said yesterday. JPMorgan and Bank of America are underwriting the bonds. Barclays is managing the Huntington Auto sale, according to a person familiar with the transaction.

How is Your Pension Fund Doing?
With special thanks to one of our favorite sources, Jim Willie at Golden Jackass, here is a roundup of some of the latest articles. Ever wonder why your state and local pension funds are investing in large banks and housing bubbles while they insist that investing in local communities is a poor investment? Better yet, check out how much they paid in fees last year to the likes of AIG, Goldman Sachs, Bear Sterns, and Lehman Brothers. You will be shocked.

Kentucky pension plans’ funding gaps grow
Pension obligations pose risks for GM
Paying for retiree health care — at last
New Jersey’s Pension Funding is problem too large to ignore
Public pensions are weighing on taxpayers
Global pensions lose $5 trln in 2008 - study
Pension plans take a pounding
Hidden Pension Fiasco May Foment Another $1 Trillion Bailout
State Pension Funds $865 Billion Loss Means New Hires Get Less
US Companies Face $109 Billion Pension Tab in 2009
Down by $80 Billion, CalPERS Charts New Course for Investment Mix
Virginia’s Pension Fund Loses $13 Billion
Tough Choices for Colorado’s State Workers After $13 Billion Pension Fund Loss
Detroit’s Public Employee Pensions Lost More Than $2 Billion
72% of New York City Firefighters Who Retired Since 2004 Are Collecting Disability Pensions
Washington State’s Taxpayers Owe $5.9 Billion to Oldest Public Employee Pension Plans
New Mexico’s Public Pension Funds Need Increased Contributions After $5Billion in Losses
Tennessee’s Public Employee Pension System Lost $5 Billion in Past Six Months
US Corporate Pension Plans Lost $445 Billion in 2008
Pennsylvania Pension Funds Inform State Lawmakers of $28 Billion in Losses

Role and value of U.S. dollar set to fall: Asia think tanks
The role of the U.S. dollar as the key global currency will decline after the financial crisis, and its value may also weaken due to America's current account deficit, officials at some of Asia's top think tanks said. But Asia, which is heavily invested in U.S. assets, hopes any decline in the dollar will be gradual to avoid further shocks to financial systems, the officials said on Thursday. "The dollar's role will gradually be shifted," Zhang Yunling, director of Institute of Asian and Pacific Studies at Chinese Academy of Social Sciences, told a news conference in Tokyo after a meeting of Asian research groups. "China hopes to have a stable and gradual transition rather than a radical revolution," he added.

The dollar logged its biggest daily fall against a basket of currencies in more than two decades on Wednesday as the U.S. Federal Reserve said it would buy long-term Treasuries. The Fed move stirred worries that the U.S. would spew dollars into global markets, leading to an oversupply of the world's main reserve currency. Chalongphob Sussangkarn, a former Thai finance minister and now president of Thailand Development Research Institute, also expressed worries about any sharp fall in the dollar. "The U.S. deficit is so huge. This is why all countries, particularly East Asia, are concerned because we hold a lot of these assets. What happens if the U.S. dollar falls 40 percent? Many central bankers will be losing huge amounts of money." The officials also called on East Asian leaders attending next month's G20 summit in the UK to avoid competitive currency depreciation as a way to escape from the current crisis

Slaughtering sacred cows: it’s the turn of the unsecured creditors now
by Willem Buiter

Why are the unsecured creditors of banks and quasi-banks like AIG deemed too precious to take a hit or a haircut since Lehman Brothers went down? From the point of view of fairness they ought to have their heads on the block. It was they who funded the excessive leverage and risk-taking of banks and shadow banks.  From the point of view of minimizing moral hazard - incentives for future excessive risk taking - it is essential that they pay the price for their past bad lending and investment decisions. We are playing a repeated game. Reputation matters.
Three arguments for saving the unworthy hides of the unsecured creditors are commonly presented:
  • Unless the unsecured creditors are made whole, there will be a systemic financial collapse, with dramatic adverse consequences for the real economy.
  • If the unsecured creditors are forced to take a hit, no-one will ever lend to banks again or buy their debt.
  • The ultimate ‘beneficial owners’ of these securities - notably pensioners drawing their pensions from pension funds heavily invested in unsecured bank debt and owners of insurance policies with insurance companies holding unsecured bank debt - would suffer a large decline in financial wealth and disposable income that would cause them to cut back sharply on consumption. The resulting decline in aggregate demand would deepen and prolong the recession.

I believe all three arguments to be hogwash.

As regards the first argument - financial Armageddon - it may have escaped people’s notice that, with the exception of a few struggling survivors, the large border-crossing banks in the north-Atlantic region would be insolvent but for past, present and anticipated future government financial support. Insolvent financial institutions on opaque tax-payer underwritten life support should instead be put into administration; if they are systemically important, the desired results can be achieved through the special resolution regime (SRR) with prompt corrective action (PCA) that most countries in the region now have in place. A standard and desirable feature of such (proto-) insolvency procedures is the mandatory conversion of unsecured debt into equity and/or the write-down of (part of) the unsecured debt. The financial market cardiac arrest that followed Lehman’s demise was not evidence that unsecured creditors should be spared. Lehman’s insolvency and liquidation was the correct outcome, but the process was badly mishandled.

First, following the decision of the Fed and US Treasury to arrange for and underwrite the take-over of Bear Stearns by JPMorgan Chase, the market had been lulled into believing (I certainly did), that the US government had underwritten the entire balance sheet of the internationally visible US banking sector. Creating that belief, allowing people to act on it for six months. and then to say  ‘well, actually, we did not mean that’ would obviously rattle the nerves of many. Letting the unsecured creditors of other banks and non-bank financial institutions take a hit would not create the same surprise today, judging from the CDS rates for most banks and the default risk premia on bank bonds.

Second, there was no SRR for investment banks at the time of the Bear Stearns crisis.  Nor was there at the time of Lehman’s collapse, six months later. The only insolvency option was to put these institutions in Chapter 11 or Chapter 7. That problem no longer exists, because the category of free-standing investment bank to which Bearn Stearns and Lehman belonged no longer has any members. The last two surviving members, Goldman Sachs and Morgan Stanley, became bank holding companies, supervised by the Fed and with the SRR and PCA regime appropriate to such institutions, administered by the FDIC.

Third, even absent a SRR for investment banks, it is extraordinary that the SEC, the Fed and the US Treasury did not between them come up with a way to ring-fence the ‘financial infrastructure services’ provided by Lehman through its role as a custodial counterparty in tri-partite repos. Again, with all major banks now subject to an SRR with PCA, this issue ought not to arise again. I hope that for systemically important non-bank financial institutions, including insurance companies like AIG, there now also exists an SRR, which allows the government to take over the management of the company, with full powers to sell assets, spin off business units and ring-fence subsets of the assets and liabilities.

The Fed’s and US Treasury’s multi-stage bail-out of AIG provided a massive windfall to a particular class of unsecured creditors, owners of CDS written by AIG.  About $58 bn was paid out by government-bailed AIG to banks headquartered outside the US. While not all of that money necessarily represents a loss to AIG or to the US tax payer, it is surprising, to say the least, to have official US concern for the well-being of unsecured creditors of US institutions extend to foreign creditors. An admirable manifestation of internationalism. The global financial cardiac arrest that occurred in the second half of September 2008 (and which now has passed), was in my view due more to the sudden dawning of the realisation that most of the leading border-crossing banks headquartered in the north Atlantic region were insolvent (but for the tax payer’s past, present and future favours), that occurred when AIG had to be rescued.  The insurance that banks had bought against default on their bond investments, first from the monolines and then from AIG and similar shadow-banking sellers of shadow-insurance products, turned out to be pretty much worthless.

The fear that followed the markets’ realisation that the banking sector faced an insolvency rather than a liquidity problem did not abate when Treasury Secretary Paulson presented his first TARP proposal to the Congress. This consisted of three A4 sheets, which said: “I want $750 billion. I want it now. I will use these funds for good works, but I cannot tell you what these will be. Don’t ask any questions. And you cannot sue me.” This political blunder convinced many that the Treasury Secretary was out of his depth.  When the initial request was turned into a 300 page regular pork-laden Congressional document, the market breathed a sigh of relief.  But when Congress then turned down this proposal at the first time of asking, the markets realised that the Congress was childish and irresponsible. Cardiac arrest seems a reasonable response to this cumulation of bad and worse news. A repeat does not seem likely.  Major negative surprises about the health of key financial institutions are unlikely, because health perceptions are already so pessimistic. And compared to the Bush administration, the new administration is unlikely to be as accident-prone in its interactions with the Congress.

Unsecured creditors’ strike
As regards the second argument - if banks default on their unsecured debt, no-one will ever lend to them again - it ought to be unnecessary to point to the logical flaws and to the empirical evidence to the contrary. Unfortunately, I hear the argument sufficiently often, I feel it incumbent on me to debunk it here. First, when a borrower defaults on his outstanding debt, his ability to take on new debt and to service it improves.  The only reason not to rush in and offer him your shillings immediately is the possibility that the past default provides evidence that increases the perceived likelihood of a future default.  If the default was a pure ‘bad luck’ default, it would not do so. If the default is evidence of (unexpected) bad management by the borrower, new credit is less likely to be forthcoming.  If the default is perceived as ‘discretionary’, that is, a case of ‘can pay but won’t pay’, credit is likely to be cut off.

Second, even sovereign debt defaulters have not suffered dramatically for their transgressions. Serial sovereign defaulters like Argentina tend to be back in the market after as little as three years.  The Russian and Ukranian defaults of 1998 did not banish these countries to the Valley of the Financial Lepers for very long.  Carmen Reinhard and Kenneth Rogoff have written two wonderful historical studies of sovereign defaults on external debt and on internal debt.  I recommend both papers highly.
Even more relevant is the fact that, if the authorities adopt the good bank solution proposed by (among others) Paul Romer, Joseph Stiglitz, George Soros, Robert Hall and Susan Woodward and myself, it would be the legacy banks, stripped of their banking licenses and not engaging in any new lending or new investments, that would default on the unsecured debt.  The new good bank (with just the (insured) deposits and the good assets of the original bank on its balance sheet in the version of the good bank model proposed by Hall and Woodward), could, until emotions and moods have settled, have its new unsecured debt guaranteed by the government. 

Rational would-be new unsecured creditors of the new good bank would in any case not be deterred by the bad experience of the old unsecured creditors of the bad bank.  So there should be no problem attracting new unsecured creditors willing to lend to the banks. Finally, a modicum of discouragement of new unsecured creditors is desirable.  We don’t want to return to the reckless unsecured lending to banks of the past - lending that was highly instrumental in bringing us the crisis.  Greater lender caution and prudence and a higher interest rate on unsecured lending to banks will be a positive and desirable feature of the landscape banks will have to operate in during the years to come.

Pensioners won’t spend
Default on unsecured debt, whether it takes the form of a write-down or write-off or (partial) conversion into equity will, through the pension funds and insurance companies holding these instruments, affect the consumption decisions of pensioners who find themselves with seriously diminished pensions and insurance policy holders whose policies have diminished in value. I agree that this is what will happen. But what happens if instead the government bails out the unsecured creditors and makes the pensioners and insurance policy holders whole? The losses are still there and the government has to pay for them. Consider the case where the government funds the secured creditor bail-out by raising taxes immediately. Unless there are important distributional asymmetries in the incidence of the tax increase under the bail-out scenario and the incidence of the losses suffered by the pensioners and insurance policy holders under the no bail-out scenario, the negative effects on demand should be about the same. If the unsecured creditor bail-out is financed by cutting public spending on goods and services immediately, the negative effect on demand is likely to be greater under the bail-out scenario than under the no-bail out scenario.

If the government borrows to fund the unsecured creditor bail-out, the bail out will be less contractionary than the no-bail out scenario, unless there is Ricardian equivalence (debt neutrality) - something I consider empirically untenable - or there is financial crowding out through an adverse asset market response to larger deficits.  This could happen if the government has limited ‘fiscal spare capacity’ - its ability to commit itself credibly to future tax increases or public spending cuts is limited.  In that case the government could still achieve a more expansionary effect from the bail-out scenario than from the no-bail-out scenario, if it were to monetise the debt incurred as a result of the bail-out. Of course, this monetisation could only be temporary if inflation is to be avoided when the economy returns to full employment.
More importantly, the government could prevent a decline in aggregate demand under the no-bail out scenario by a conventional Keynesian demand stimulus (tax cut or public spending increase), financed either by borrowing or by printing money. Even a balanced-budget increase in public expenditure on goods and services would be expansionary given a strict Keynesian multiplier.

So the third argument, that not bailing out the unsecured creditors would lead to a contraction of aggregate demand, may well be true but does not represent an argument for bailing out the unsecured creditors. The superior aggregate demand effects from bailing out the unsecured creditors by borrowing or printing money, compared to a policy of not bailing out the unsecured creditors exists only if the policy of not bailing out the unsecured creditors is accompanied by the government not doing anything on the fiscal side. The same demand-supporting effect achieved with the deficit-financed bail-out, can be achieved equally well by not bailing out the unsecured creditors and implementing a deficit-financed expansionary fiscal measure.

I conclude there are no valid arguments against forcing the unsecured creditors of bank and other financial institutions to sink or swim on their own, without any financial support from the state. Fairness considerations and moral hazard certainly support putting the unsecured creditors at risk. They made their bed; now they should lie in it

EU Stands by Stimulus in Face of Deepening Recession
European Union leaders are likely to decline to pump more money into the stricken economy at a two-day summit starting today, bucking evidence of a deepening worldwide recession. The bloc’s 27 chiefs gathering in Brussels are set to stand by a planned 400 billion-euro ($525 billion) stimulus package while haggling over which infrastructure projects are eligible for the final 5 billion euros. "Significant additional fiscal stimulus does not seem to be on the cards in Europe," said Nick Kounis, chief European economist at Fortis Bank in Amsterdam. "Not many countries actually have much further room." Two weeks before meeting President Barack Obama at a Group of 20 crisis summit, European leaders including German Chancellor Angela Merkel and French President Nicolas Sarkozy have faced criticism from some economists for underestimating the deterioration in the economy, set to shrink for the first time since World War II.

Data in the past week showed industrial production in Germany posting its largest recorded drop in January and unemployment in Britain jumping at the fastest pace since at least 1971 in February. The second nationwide strike in seven weeks in France today disrupted services to protest to what unions call Sarkozy’s "inadequate response." Three times last week, Merkel rebuffed Obama’s March 11 call for "concerted action around the globe to jump-start the economy," comments that were echoed by Lawrence Summers, his top economic adviser, and Treasury Secretary Timothy Geithner. "It’s extraordinarily dangerous that trans-Atlantic conflict is being fanned and I’m grateful to the American president that he’s told me this is an artificial debate," Merkel said today in Berlin before heading to Brussels."

The EU economy will shrink 1.8 percent in 2009, the European Commission predicted in January. The outlook has darkened since then, with Germany’s Kiel-based IfW institute forecasting a 3.3 percent slide last week. Merkel played down concern that the euro region could be destabilized by rising indebtedness in countries like Spain, reeling from a downgrade in its credit rating by Standard & Poor’s in January. "At the moment we see no need for action," Merkel told reporters in Berlin yesterday. "We believe that the conditions are good for the euro region to remain stable." The summit starts at 4 p.m. today and ends around 1 p.m. tomorrow. Instead of pledging new money, EU leaders need to make good on prior promises to spend as much as 4 percent of gross domestic product on stimulus measures, European Commission President Jose Barroso said yesterday.

The inability to coordinate those national steps and the looming fight at the summit over infrastructure spending show the EU’s limitations, said Arnaldo Abruzzini, head of Eurochambres, which represents 19 million European businesses. "Member states have committed hundreds of billions for their own economies," Abruzzini said. "We’re still discussing 5 billion. It gives the idea that coordination at European level is very difficult. I doubt we’ll get something out of the summit." Germany plans a business boost equal to 3.4 percent of GDP, according to the Brookings Institution, a Washington-based research group. While that lags behind the U.S.’s 5.9 percent, Germany is spending more than the U.K.’s 1.5 percent, France’s 0.7 percent and Italy’s 0.3 percent. The emergency spending will balloon the EU-wide deficit to 4.4 percent of GDP in 2009 from 2 percent last year, the EU forecasts. Germany is leading the campaign against writing more uncovered checks, saying the bloc needs to refocus on fiscal rectitude once the economy gets back on track.

Under German pressure, EU governments on March 1 ruled out a broad-based bailout for ex-communist countries in eastern Europe, sending eastern European stocks to the lowest level in 5 1/2 years. EU leaders will consider increasing a 25 billion-euro ceiling on EU aid to countries that are having trouble paying their bills, after doling out 6.5 billion euros to Hungary and 3.1 billion euros to Latvia. The cap in aid, which covers countries not using the euro, was raised to 25 billion euros from 12 billion euros in December. A further boost would require unanimous agreement by the 27 governments. The EU will push for stricter oversight of the global financial industry, with a draft summit statement calling for the Group of 20 to commit to regulation of hedge funds and credit-rating companies. The EU will call for the monitoring of major banks by international regulatory "colleges" to be set up by the end of 2009, according to the document. That may signal a delay from the March 31 deadline the G-20 set in November.

ECB Under Pressure to Follow Fed, Economists Say
The European Central Bank is under increasing pressure to follow the U.S. Federal Reserve and start buying government or corporate debt to revive its economy, economists said. The ECB’s inaction is "becoming untenable, with every major central bank in the world actively fighting deflation risks through the purchase of government debt," said Jacques Cailloux, chief European economist at Royal Bank of Scotland Plc in London. "The pressure on the ECB to act sooner rather than later will not only come from other central banks in the world but also via the exchange rate." The euro yesterday rose the most against the dollar in almost nine years, surging more than four cents to $1.35, after the Fed said it will purchase as much as $300 billion of U.S. government bonds. While ECB President Jean-Claude Trichet argues his policy of loaning banks unlimited funds is sufficient for now, a stronger currency will squeeze European exporters already struggling with a collapse in global orders. That may push the 16-nation euro region deeper into recession.

"This is a form of monetary tightening that is difficult for the euro zone to countenance and the ECB will be frustrated that this has been thrust upon the currency union," said Geoffrey Yu, an analyst at UBS Ltd. in London. "Some tough choices are necessary for the ECB as current monetary policy is no longer sustainable in a recessionary environment." The ECB’s benchmark interest rate, at 1.5 percent, is the highest among the Group of Seven industrialized nations. The Fed and the Bank of Japan have lowered their key rates to close to zero and the Bank of England’s is at 0.5 percent. All three of those central banks have said they will purchase government bonds in an effort to reduce long-term interest rates and revive economic growth, a policy known as quantitative easing. European government bonds surged today, pushing yields down by the most since at least 1999, in anticipation of the ECB embarking on a bond-purchasing program, said Juergen Michels, chief euro-area economist at Citigroup Inc in London.

The yield on the 10-year bund, Europe’s benchmark government security, fell as much as 22 basis points. It was 17 points lower at 3.05 percent by 8:33 a.m. in London. "The markets expect that the ECB will be the next on the bloc," Michels said. Still, "bond prices will come down again once the market realizes that nothing is imminent." Trichet told France’s Europe 1 radio station yesterday that, while the ECB is studying some unconventional policies, "they won’t necessarily be the same as our counterparts." The ECB has so far focused on reviving bank lending rather than printing new money. The bank offers to lend financial institutions as much cash as they want at a fixed rate for durations of up to six months One option would be for the ECB to expand those measures and offer banks cash for even longer periods, said Julian Callow, an economist at Barclays Capital in London. If the Fed and other central banks succeed in reviving the U.S. and global economies, Europe would also reap some rewards, possibly mitigating the need for the ECB to implement new measures, said Thomas Mayer, chief European economist at Deutsche Bank AG in London.

"There is a hope at the ECB that the euro area will benefit from spillover effects from abroad," Mayer said. "That could help and release them from the need to do something more meaningful." The ECB is hemmed in by European Union rules that forbid it from buying bonds directly from governments and any decision to buy debt in the open market may spark a dispute over which country’s securities to purchase. "It is very unlikely that next week the ECB will follow the Fed and the Bank of England in deploying traditional quantitative easing measures," said Marco Annunziata, chief economist at UniCredit MIB in London. The ECB will instead probably cut its main rate by half a percentage point to 1 percent, "buying more time to figure out how to implement quantitative easing in the more complex euro-zone setup," Annunziata said. Still, the Fed’s move "puts ECB in a tight spot," said James Nixon, an economist at Societe Generale SA in London and a former ECB forecaster. "It will be very difficult for the ECB to resist this pressure."

Recession hammers UK public finances
The rapidly deteriorating state of Britain's public finances was underlined today as new figures showed the budget deficit for last month ballooned almost ten-fold. Figures from the Office for National Statistics revealed Britian's budget deficit climbed to £9bn in February compared with £1.1bn in the same month last year. The deficit is the biggest for February in 16 years and was higher than economists expected. The figures were hit across the board with tax income down 9.8pc, cash receipts from corporation tax down 11pc and income from VAT down 8.3pc. National insurance contributions were 4.9pc lower, although receipts from income tax rose 2.2pc. "The public finances are continuing to deteriorate at an alarming rate," said Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club.

"And as the economy continues to shrink, the outlook for public finances is bleak." Chancellor Alistair Darling is likely to be quizzed today by MPs over his borrowing projections, which economists reckon he will have to revise dramatically higher in next month's Budget. The drop in receipts was compounded as sharply rising unemployment drove Government spending higher in the month. The almost 1.4 million people claiming jobless benefits last month is the highest in at least a decade. A projection made by Mr Darling in November that the Budget deficit in the next financial year would peak at 8pc of gross domestic product may have to be revised upwards as the economy contracts further. "It is very clear that the Chancellor is going to have to substantially raise his public deficit projections in April's budget as he also takes a knife to the GDP forecasts, " said Howard Archer, chief UK economist at Global Insight. A separate measure which captures the amount of cash entering and leaving the Treasury showed a budget deficit of £4.4bn pounds, almost in line with the £4.5bn forecast by economists.

Britain will be only nation still in recession next year - IMF
The British economy is heading for its worst year since the Great Depression, according to the latest predictions from the International Monetary Fund (IMF). The fund shocked analysts during a briefing in which it was revealed that the UK will see its economy shrink by 3.8 per cent in 2009, and a further 0.2 per cent in 2010 – the only large economy predicted to still be in decline next year as well as this. Some believe that the scale of the downturn signals the UK moving from recession to depression. The IMF expects the global economy to contract by 0.6 per cent this year, with the most frightening situation developing in Japan, with a 5 per cent slump predicted there. The IMF had previously thought the world economy would fall by 0.5 per cent.

Behind the raw statistics are some grim economic realities. A downgrade of growth of these proportions means that the UK is set for a much sharper decline in its fortunes than in any of the previous recessions since the Second World War. It will mean an even worse rise in unemployment, widely expected to breach the two million barrier today before hitting more than 3 million this time next year. Property values, consumer spending and the public finances will all be badly affected. The revelations will prove acutely embarrassing to the Prime Minister as he prepares to host the G20 summit of the world's largest and fastest-growing economies in London on 2 April. Gordon Brown's ambitions to lead the world response to the economic crisis will be undermined if his own economy is demonstrating such feebleness in response to policy measures he and the Bank of England announced in recent months, in an effort to fix the banking system. The Prime Minister, say critics, will have presided over a "boom and bust" economy.

George Osborne, the shadow Chancellor, said: "These IMF forecasts show that Britain is set to have the longest recession of all the major economies. It is further evidence that Gordon Brown's economic model is fundamentally broken and his policies on the recession aren't working. Thanks to Labour the recession in Britain will be longer and deeper." Government sources accused the IMF of "moving the goalposts" and dramatically revising the forecasts it made in January. They said that what mattered at such a volatile time was the data on Britain's actual performance, and so far it had been affected less badly than the US, Germany, Japan and Italy. Officials said the IMF had made much larger reductions for 2009 for other countries, with Japan moving from minus 2 per cent to minus 5 per cent since January. For 2010, the downward revision for the UK since January was 0.4 per cent and for the US 1.4 per cent.

For 2009 and 2010, the UK's growth has been downgraded from minus 2.8 per cent and 0.2 per cent to minus 3.8 per cent and minus 0.2 per cent respectively. The UK seems to be suffering from a peculiarly nasty cocktail of factors. First is the size and weakness of the UK's banking system and a previous reliance on financial services. The credit crunch has thus restricted lending and seen more bank failures here than in some other nations. Second, and partially as a result of that, the UK's property boom has turned to bust more dramatically than in many other places, as the supply of home loan finance has evaporated. Third, the UK depends for about 17 per cent of its income on exports, which are being battered by the global collapse in demand.

All this has meant that Britain's manufacturing, construction and finance sectors have haemorrhaged jobs. Only the public sector is showing any signs of resilience.
The numbers will prove a problem to the Treasury as it prepares for the Budget next month. The public finances are already severely squeezed under the existing Treasury assumption of a contraction of about 1 per cent in the economy this year. Borrowing – forecast to peak at £118bn next year – will soar even higher. The IMF says the US economy will shrink by 2.6 per cent this year, compared with a January forecast of a 1.6 per cent contraction. The eurozone economy, dominated by Germany, is expected to contract by 3.2 per cent, down from January's forecast of a 2 per cent decline. In recent weeks the director general of the IMF, Dominique Strauss-Kahn, has called the slowdown the "Great Recession".

U.K. Mortgage Lending Drops to Lowest Since 2001 as Banks Withhold Money
U.K. mortgage lending fell to an eight-year low in February as the financial crisis prompted banks to withhold funds from the property market, the Council of Mortgage Lenders said. The gross value of loans fell to 9.9 billion pounds ($14.1 billion) from 11.7 billion pounds in January, the London-based group said today. The total is the lowest since February 2001 and down 60 percent from a year earlier. Prime Minister Gordon Brown’s government has taken control of four banks and urged them to raise lending as Britain succumbs to its worst economic contraction since at least 1980. U.K. residential mortgage-backed bond markets may stay shut for the rest of this year, according to the Bank of England’s contacts.

"There are now fewer active lenders in the market, but the government wants them to lend more," Michael Coogan, director general of the CML, said in a statement. "Until funding improves, the capacity of lenders to lend will remain constrained." Average asking prices for a home dropped 9 percent this month from a year earlier as buyers struggled to obtain loans, Rightmove Plc said on March 16. London’s rental home market was the worst regional performer in the U.K. for the three months ended Jan. 31 as a record number of properties were up for lease, a separate report showed today. The Bank of England bought 5 billion pounds of government bonds this week with newly created money in an effort to pump funds into the economy and spur credit provision.

Sarkozy Faces Protests in Strike on Economic Plan
About 65 percent of France’s high- speed trains and a third of scheduled flights from Paris’s Orly airport were canceled today as unions called for a general strike, the second in two months, to protest President Nicolas Sarkozy’s "inadequate" response to the economic slump. France’s eight unions say Sarkozy is not doing enough to counter rising unemployment and buoy purchasing power. The government expects the economy this year to shrink 1.5 percent. French companies shed the most jobs in 40 years in the fourth quarter as manufacturing slumped and employers braced for the worst recession since World War II. The unions promised a bigger show of force today than on Jan. 29, when more than a million people took to the streets, forcing Sarkozy to offer 2.6 billion euros ($3.5 billion) in tax cuts and aid to low-paid workers and the unemployed. The government, which expects the deficit to swell this year to 5.6 percent of gross domestic product, has said it’s not ready to spend more.

"If the turnout in the streets is bigger today than on January 29 then by not responding the government will be taking a major risk on the mood of the country," Bernard Thibault, general secretary of the Confederation Generale du Travail, the country’s second-largest union, said on France 2 Television. The mounting unrest in France comes amid job cuts and plant closures at companies including Sony France and Continental AG. While France has a history of street protests, the global financial crisis has sparked similar demonstrations and unrest in countries from China and Greece to Iceland. A law pushed through by Sarkozy in August 2007 that requires "minimum service" to be guaranteed by workers and companies, particularly in public transport, has limited the impact of the strike. The subway and bus service in Paris ran at close to normal today.

The law has curbed the ability of unions to bring the country to a standstill. In 1995, unions paralyzed France for three weeks as public transport ground to a halt.
About 78 percent of the French people said the strike today is "justified," according to a poll by Ifop for Paris Match magazine. That compares with 75 percent for the January protest. Workers are set to demonstrate this afternoon in cities and towns across France. Employees of companies including Electricite de France SA and Total SA are also likely to participate. Public schools were closed or operated with skeletal staff and government offices braced for poor employee attendance, with unions for teachers, hospital workers and other civil servants saying Sarkozy’s measures since a Feb. 18 meeting with unions, including tax cuts and benefits for jobseekers and low wages workers, don’t go far enough.

"The crisis needs a response on a totally different scale," the unions said in a statement. "The increase in job cuts, the use of partial unemployment contribute to amplifying the recession and put a heavy weight on purchasing power." The government says plans it has unveiled will rekindle the economy and limit job losses.
"The president has defined a response that is coherent and complete," Budget Minister Eric Woerth told parliament yesterday. Air France said it’s operating all its long-haul flights and "nearly all" of its short- and medium-haul flights out of the Charles de Gaulle airport, while canceling 30 percent of its flights at the Orly airport. Societe Nationale des Chemins de Fer Francais, or SNCF, France’s national railway, said at 7 a.m. local time today, up to 65 percent of high-speed TGV lines were disrupted and up to 70 percent of the Corail domestic trains canceled.

Eurostar and Thalys services to London and Brussels were running normally, SNCF said. Most overnight domestic and international trains were canceled. RATP, the Paris transport authority, said the city’s subway and bus service was close to normal, while between a quarter and 50 percent of trains were running on its A and B RER regional train lines. EDF’s power production from French nuclear plants will drop, according to Yves Ledoux of the Confederation Generale du Travail, or CGT, the biggest union at the utility. The Jan. 29 strike led to a drop in output of 14,000 megawatts. A strike at Total SA’s refineries in France cut production and disrupted deliveries of oil products, according to a union official. The union action comes after Europe’s third-largest oil company announced this month a plan to cut 555 refining and petrochemicals jobs in France.

"There are sites where output has dropped and products aren’t being shipped out," Charles Foulard of the CGT at Total, said in a telephone interview. Unions have called on strikers to lower output at French nuclear reactors to a level that would be "enough to curb EDF’s ability to export electricity and maybe even force it to import power," said Marie-Helene Gourdin, head of CFDT’s power and gas unit. French ports, including the largest at Marseille and Le Havre, halted operations last night in the run-up to the 24-hour action, according to workers’ unions and harbor authorities.

Iceland Central Bank Cuts Key Interest Rate to 17%
Iceland’s central bank cut the benchmark interest rate by 1 percentage point after the severest recession since World War II and a slump in consumer demand eased pressure on prices. Policy makers lowered the repo rate to 17 percent from a record, the Reykjavik-based bank said in an announcement on its Web site. The rate cut is the first since the island came under International Monetary Fund administration in November. "There was considerable uncertainty surrounding this decision," said Ingolfur Bender, head of economic research at Islandsbanki, the state-controlled unit of failed Glitnir Bank hf. "I expect rates will be lowered in smaller, more frequent steps to test the market in the future." The bank has scope to lower borrowing costs as the prospect of a 10.5 percent economic contraction this year squeezes inflation faster than expected, IMF Mission Chief Mark Flanagan said on March 13. Capital restrictions and a managed float of the krona have supported the currency’s 12 percent gain against the euro this year, also reducing price pressures.

"The crisis has led to a sharp drop in economic activity, the krona has stabilized and inflation appears to have peaked," Flanagan said last week. The failure of the country’s biggest banks slashed more than two thirds off the value of the krona last year, pushing price gains close to 20 percent and sending unemployment to a record high. The inflation rate fell to 17.6 percent in February, from a 19-year high of 18.6 percent the month earlier. The krona was little changed against the euro and traded at 152.86 as of 9:18 a.m. in Reykjavik. The central bank won’t be able to remove capital restrictions as long as global economic turmoil persists, Flanagan said last week. About 700 billion kronur ($6 billion) in foreign-held krona-denominated debt is at risk of being cashed in when capital flows are freed, according to Thorfinnur Omarsson, a spokesman at the Business Affairs Ministry.

Iceland got an IMF-led loan of $5.1 billion in November to help it rebuild the crippled economy, the fifth-richest per capita as recently as 2007. The government was forced to seize Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf within a week because they couldn’t get short-term funding. Acting central bank Governor Svein Harald Oeygard replaced David Oddsson last month after the interim Social-Democrat Left- Green coalition ousted the former prime minister who oversaw the privatization of the failed banks and became a target of street protests demanding the resignation of key policy makers in office during the island’s economic collapse.

China fears 80% drop in steel exports
China's steel product exports may tumble 80 percent this year as a global slump hurts demand, the China Iron and Steel Association said yesterday. This was much steeper than its previous forecast of 50 percent, the industry group said in a statement on its Website quoting a speech by its Secretary-General Shan Shanghua. A survey showed China's 28 largest steel exporters would ship only 299,100 tons this month and 129,600 tons in April, and China would probably become a net importer of steel products in March, it said. "The export situation is extremely severe," Shan warned.

Shipments slumped 52 percent in the first two months this year, after dropping 5.5 percent to 59.23 million tons in 2008. Sluggish exports had led to rising inventories after many mills restarted their once-closed capacities before the Spring Festival holiday in late January as they bet demand would rebound after the holiday. But demand stayed slack and the domestic benchmark price has fallen 14 percent since February, ending a short-lived recovery. Steel stocks had risen 38 percent to 6.7 million tons by late February in China's 20 major cities from January, Shan said. "A short-lived prosperity in steel demand, driven by heavy restocking by traders, no longer exists," he said.

On March 5, the domestic steel composite price declined to a low last seen in November, which was also the worst since 1994. "Market prices may keep falling by small degrees in the short term, but the downward room is limited as prices are already at a low level and demand would gradually recover," Everybright Securities analyst Ding Xianda wrote. China's 71 major mills posted an aggregate loss of 1.06 billion yuan (US$155 million) in January, much improved from December's loss of 29.1 billion yuan. But losses in February and March could extend from January, according to Shan.

China's factories get desperate as orders drop
Desperate for new customers, Chinese factories have been bombarding Josef Jelinek with e-mails everyday. One wants the British businessman to order a shipment of whirling toy helicopters. Another touts a multimedia gizmo called the V-disk. "They've been coming thick and heavy over the last few months. This never happened before," he said. Jelinek has no interest in toys or electronics. His main job is scouring China for lead pipes and other construction materials for a shopping mall project in Cairo. The blind, mass-mailing approach targeting him, however, highlights the growing anxiety among Chinese exporters as they near a crucial period -- the time when they get the bulk of their orders for the summer season and Christmas. The early signs are pointing to a bleak year. The phones aren't ringing. Web sites aren't getting clicks. Old customers aren't visiting plants.

Companies are already complaining that orders are sharply down. Industry experts say thousands of factories are idle or haven't even bothered to open since the Lunar New Year holiday ended in late January -- which usually marks the start of the busy season. Millions of migrant workers are jobless, especially here in southern Guangdong province -- one of the world's biggest manufacturing hubs and the source of one-third of China's exports. "Peak season is May to September. That's when this place is booming. I don't think it will be booming this year," said Rick Goodwin, the American chairman of Concept Holdings, a company that links up foreign buyers with Chinese suppliers. Goodwin said his firm deals with about 400 Chinese suppliers, making everything from T-shirts and hunting knives to ceramics and lapel pins. But after the Lunar New Year holiday, he said 15 percent to 20 percent of the factories closed or are in the process of folding and can't take orders. But Goodwin believed China's 4 trillion yuan ($586 billion) stimulus package would begin to kick in by the end of the year and provide a boost.

The e-mail Jelinek received about the V-disk -- a thumb drive-like gadget that can be used to store DVDs -- was sent by Ivan Lee, a salesman at SSA Digital Co. Ltd. in the city of Shenzhen, near Hong Kong. Lee said he was spending his days trolling the Internet looking for new customer leads with little success. "So far this year, our orders are down by 50 percent from last year," he said. Things were worse at the company that sent the e-mail about toy helicopters. "We've practically had no orders," said Sylvia Yu at the toymaker, Canton Trade International Co. in Guangzhou. Yu said the company had initially planned to rent a booth at next month's Canton Fair, the nation's biggest trade show -- an event many factories rely on to collect all their orders for the rest of the year. But Yu said her company decided not to go after several foreign customers said they weren't flying to China to attend.

Some Western buyers like Jelinek are benefiting from the downturn. In past years, he said he would send e-mails to 30 or 40 suppliers asking for bids, and most would never respond or they would reply once and never again. Business was good and factories could ignore small orders. "In the past three or four months, things have really changed. They started being super keen," said Jelinek, who works for Inecko H.K. Ltd. and is based in Guangzhou, the capital of Guangdong. "The percentage rate of replies has shot up by 90 percent." Suppliers that in the past have ignored him are now sending him e-mails about price cuts. Another businessman who has found a silver lining in the economic woes is Frank Carroll, an Irishman who sells chairs, coffee tables and other furniture he designs and has made in China. A little more than a year ago, Carroll was worried that he would have trouble finding factories that had time to do his orders. Now, he said manufacturers have told him that they would be closed if it weren't for his business. "The factory that makes my chairs used to need 55 days to complete my order. Now they said they can do it in 15 days," he said.

Last year, there was much talk about a wave of factory closures in Guangdong, especially in the province's heavily industrialized southern region, the Pearl River Delta. Estimates of the bankruptcies have varied wildly, and officials have been reluctant to provide figures. Last week, the provincial governor, Huang Huahua, told reporters that 4,900 factories collapsed or relocated last year, including about 2,400 that were foreign invested. This was slightly more than the year before, he said, without providing a figure. Danny Lau Tat-pong, chairman of the Hong Kong Small and Medium Enterprises Association, estimated that since the holiday, about 3,000 Hong Kong-invested factories were closed or idle while waiting for orders. He made the estimate by surveying his association's membership and collecting information from trade groups involved in the plastics, metals and other industries. Lau said the government's numbers don't reflect the severity of the situation because many factories have closed but they're still in the middle of the arduous process of shutting down a plant. He reckons that about 2,000 to 3,000 factories began the process in the third and fourth quarters of last year. "When you close a business, it takes six months to three years. You have to go through different departments," he said. "More factories and businesses will close. More people will lose their jobs."

Ghosts of a faded gilded age haunt a 19th-century Chinese banking hub
It was a time of new wealth, a gilded age in which entire families came into fortunes overnight. To move the money, businessmen here in this city in northern China opened banks, the first in the nation's history. Soon branches sprang up across the country, and they began making loans. Money flowed this way and that. Then, as quickly as it started, the entire system crumbled. The banks shut down and the city fell into ruin. So went the history of China's first banking capital, which bloomed here in dusty Shanxi Province in the mid-19th century, during the Qing dynasty. With the global economy now reeling from the banking crisis that began in the United States, and as the explosive economic growth of China begins to slow, the rise and fall of Pingyao could be read by some as a cautionary tale.

But the present-day financial crisis has reinforced the sense of nostalgia surrounding Pingyao, which with its 33-feet-tall Ming dynasty walls is one of the best-preserved medieval towns in the country. "The banks tell a history of Chinese financial development, like how China started to transform from feudalism to capitalism," said Ruan Yisan, a retired professor from the architecture department of Tongji University in Shanghai who has been instrumental in the restoration of Pingyao. "The staffs of the banks were trained to be objective and highly responsible to the accounting of the banks. Now, corruption is common and people don't place much value in moral qualities."

Today, the old center of Pingyao is a place of 40,000 people crammed into narrow alleyways and courtyard homes hidden behind decrepit wooden doors. The surrounding countryside is a dry patchwork of millet and corn fields covered with the fine yellow silt found across the Loess Plateau, one of the most erosion-prone places on earth. At Pingyao's height, 22 banks here thrived on the flourishing trade in Shanxi Province, as silk and tea moved north to Mongolia and Russia from southern China, and wool went south. Compared with the excesses of today, scholars say, the early days of banking were a time of solid business ethics. There were no toxic mortgages, no opaque financial instruments. Trust among businessmen was so strong that the banks were able to start a system of remittances, credit and check writing, the first of its kind in China. Currency was in silver ingots.

Yet, some of the banks' practices might raise eyebrows today. Still visible in the two-story courtyards of the defunct banks here are opium dens and mah-jongg tables, as well as rooms where prostitutes hired by the banks plied their trade to win over potential customers. When the banking system collapsed before the Communist Revolution in 1949, it was not because of greed or incompetence on the part of the bankers, Mr. Ruan and other scholars say. More important, they say, was the overthrow of the Qing dynasty in 1911 and the country's subsequent descent into warring chaos, as well as growing competition from well-financed foreign banks allowed to do business in China. Pingyao's plunge into poverty left the town frozen in time.

The local government had no money to modernize. So the Ming-era walls remained standing even as ancient walls in other Chinese cities, including the ramparts around Beijing, were torn down by the Communists. Within the walls here, families continued living in old courtyards some within the once thriving banks. (Imagine the headquarters of Lehman Brothers converted into a commune.) "The older people of the town were sad and upset," said Yao Minlin, 48, a native of Pingyao who led a couple of foreign visitors through the alleyways one recent afternoon. "They didn't want to see the banks close because then they would no longer have income. Everyone here depended on the banks merchants, guards, restaurateurs."

Prodded by preservationists like Mr. Ruan, local officials began restoring parts of Pingyao in the 1980s, giving the town a second life as a tourist attraction. The first bank in China, called Rishengchang, or Sunrise Over Prosperity, is now a museum in the town center, as are four other banks. So great is the mystique around the banks that Chinese leaders have made pilgrimages here from Beijing. Framed photographs in Rishengchang show visits by Hu Jintao, the current Chinese president; Jiang Zemin, his predecessor; and Zhu Rongji, the former prime minister. Their visits were more relaxed than that of Emperor Guangxu, who slept in one of Pingyao's banks while fleeing invading European and Japanese troops in 1900.

To the people of Pingyao, today's leaders can learn from the old ways of doing business. "Until the end of the Qing dynasty, Pingyao's banks had confidence, trust and good manners," said Li Yuerong, an aide to the manager of the museum in Rishengchang, which receives about 2,000 visitors a day. "This has a lot of benefits for management and financial development." Ms. Li pointed out that the first manager of Rishengchang, Lei Ltai, was 53 when he started working at the bank. These days, she said, powerful businesspeople lack the wisdom of age. "They want to become rich very fast," she said. "They can't go step by step. They're in a hurry." It is a myth, of course, that business dealings of that era were free of deceit and theft.

The cold, dark rooms of the old banks show the paranoia that grew as piles of silver accumulated. The treasuries of the banks were vertical pits dug beneath raised platform beds. Sleeping mats covered the pits. Two or three bank employees would sit or sleep atop the mats around the clock, said Mr. Yao, who has a relative who once worked as a clerk at Rishengchang. Fear gave birth to Chinese versions of Wells Fargo companies that protected the silver as it was transported from one city to another. The guards were trained in martial arts and armed with halberds, maces and battle axes. Today, on weekends a master still teaches kung fu to children on the grounds of one of the old martial arts schools. The memories of former glory linger in other buildings. At a temple one afternoon, crowds of local residents clutching incense sticks bowed in front of an altar to the god of wealth. The families of Pingyao know all too well this old saying, "Wealth does not last for more than three generations."

A time for muscle-flexing
The room is stuffy on a sunny spring afternoon, and many of those packed into it must have regretted bringing their coats. The lucky ones have taken the few seats available. The rest are crammed shoulder-to-shoulder in this hotel-room office, listening intently to an hour-and-a-half rant on the threat of American imperialism and how the global economic crisis will result in growing confrontation between China and the West. Sitting in front of a large portrait of a young Mao Zedong, Zhang Hongliang knows how to play to his nationalist, liberal-despising audience. His rambling discourse ranges from adulation of Mao to scorn of America (it has neither history nor culture), to warning of a “white terror” if rightists (liberals) prevail. The economic crisis is entirely the West’s fault, and as it deepens the West will turn on China. Now is the time to build an aircraft-carrier. A war with America would be “lose-lose”, but China should not be afraid of it.

China’s “leftists” are becoming more active as the global economy sputters. Mr Zhang belongs to an extreme fringe that pines for Maoist egalitarianism, state ownership and the certainty that America is an enemy. His seminar was organised by Maoflag, one of a clutch of like-minded websites in China whose nationalist, pro-communist rhetoric is suffused with a sense of their country as victim, yearning for revenge. Frequenters of these forums took heart from a flurry of spontaneous celebrations around the country in December to mark Mao’s 115th birthday. The government preferred to play it down. Few would suggest that radical Maoists are poised to make a comeback. But their nationalism has a broad appeal. As China surveys the world, with the West in financial turmoil and its leaders seemingly desperate for cash-rich China to come to its aid, it sees strategic opportunities. Even before the financial crisis began to hit the country late last year, nationalism had been boiling up.

It was evident in public responses to the turmoil in Tibet in March, the West’s support for the Dalai Lama, and China’s sporting triumph at the Olympic games in Beijing in August. Now a battered West presents a gratifying target for pent-up contempt. Even the normally cautious government is beginning to flex a little muscle on the world stage. For most of the past two decades (flare-ups with Taiwan in 1995-96 and with America in 2001 excepted) China has played a cautious game internationally. Its approach was summed up in the pithy four-character phrases into which Chinese policymakers love to distil their thinking. The late Deng Xiaoping came up with a string of them: China should keep a low profile, not take the lead, watch developments patiently and keep its capabilities hidden. Now the global economic crisis and the West’s obvious weakness are causing officials to think again.

In public Chinese leaders still try to reassure. During a visit to Europe in late January and early February, China’s prime minister, Wen Jiabao, stressed that China’s development was no threat to anyone. It would be, he said at Cambridge University (an event better remembered for the shoe lobbed in his direction by a protesting German student), a peaceful and co-operative great power. Some sensitive Western diplomats pricked up their ears at the phrase “great power”, but it is one Mr Wen has used to describe China since well before the current crisis. In deference to foreign feelings, an English text released by the government news agency, Xinhua, used the word “country” instead. On the issue of Tibet, however, China has been digging in its heels. Having conceded a little to Western opinion last year by holding three rounds of talks with representatives of the Dalai Lama in the wake of the unrest in March, China has lost interest. A massive security clampdown has been imposed on the Tibetan plateau to prevent any protests during this month’s 50th anniversary of the uprising that caused the Dalai Lama to flee into exile in India. Foreign journalists (despite pleas for access) have been shut out altogether.

In late February China gave a warm welcome to America’s secretary of state, Hillary Clinton. It had reason to feel proud. Here was an important American official clearly looking for China’s help. Mrs Clinton—who once boasted how strongly she had emphasised human rights during a visit to Beijing in 1995—was now suggesting that China’s bad record should not get in the way of co-operation on the financial crisis and global warming. Mr Zhang at the Maoflag seminar certainly enjoyed her new, soft tone. Two weeks after Mrs Clinton’s departure, Chinese boats (according to the Pentagon) harassed an unarmed American ship, the Impeccable, in the South China Sea. The ship was a mere 75 miles (120km) off China’s coast and was probably on the lookout for Chinese submarines. But much as China objects, the American navy frequently deploys in international waters off China to monitor military activities. In this case Chinese responded more aggressively than usual, surrounding the American ship and trying to stop it from withdrawing. America later sent a guided-missile destroyer to protect the Impeccable.

China clearly does not want to push this too far, mindful perhaps of the huge crisis in relations that occurred in 2001 when a Chinese fighter jet crashed into an American spyplane, forcing it to land at a Chinese airbase. The American crew was held for 11 days. This time China’s response was to send a fishery patrol ship (hardly a match for a destroyer) to the area. But Shi Yinhong of Renmin University says the latest incident is a sign of new robustness in China’s dealing with the West. Though China may be unwilling to give America more than a cautious poke, it is a different story with Europe. Its abrupt decision to cancel a summit with the European Union scheduled for last December showed that, even amid the global crisis, it was prepared to deliver a powerful snub to leaders of its biggest trading partner. The reason was a meeting between France’s president, Nicolas Sarkozy, and the Dalai Lama (France then held the EU presidency). The EU and China have agreed to reschedule their summit for later this year, but Mr Sarkozy is not yet forgiven. Wen Jiabao, the prime minister, avoided France during his recent European tour. “I looked at a map of Europe on the plane. My trip goes around France,” he said.

Deng’s advice on avoiding taking the lead has by no means been jettisoned. China has reacted coolly to suggestions that a solution to the world’s economic problems lies essentially in the hands of two powers, China and America—what some call the G2. Fred Bergsten, of the Peterson Institute for International Economics, raised the idea in an article in Foreign Affairs last July. China, he argued, was continuing to act “like a small country with little impact on the global system at large and therefore little responsibility for it”. Even well before the current crisis, China had been posing an increasing challenge to international rules and institutions, Mr Bergsten said: blocking progress in the Doha round of global trade talks, aiding foreign countries without regard to human rights or the environment and resisting adoption of a flexible exchange-rate policy. Better, he suggested, that China and America work together as a G2 “to provide joint leadership of the global economic system”.

The head of the World Bank, Robert Zoellick, and its chief economist, Justin Yifu Lin, warmed to the G2 idea in an article in the Washington Post on March 6th. Though they did not repeat Mr Bergsten’s criticism of Chinese “recalcitrance”, they said that “without a strong G2, the G20 will disappoint”. But some Chinese officials see a trap. Liaowang, a magazine published by Xinhua, said Chinese scholars believed the idea “would do harm rather than good”. America would never cede control of the world order, and in any case China would never seek to exert hegemony. China certainly delights in the notion that its global power is growing. As one Western diplomat put it, the meeting between President Barack Obama and his Chinese counterpart, Hu Jintao, in the margins of the G20 summit in London on April 2nd will be far more important than the G20 meeting itself. China stole the limelight at the last G20 summit by announcing a 4 trillion yuan ($565 billion) stimulus package just before it. Rumours continue to circulate that it has another up its sleeve. That would please everyone.

But China is not (yet, anyway) seeking to knock America off its perch. It is pushing for a greater say for itself and other developing countries in the IMF, over which the Americans, in effect, wield a veto. But it is not demanding a veto of its own. At a press conference on March 13th Mr Wen avoided saying whether China would give more funding to the IMF to strengthen its ability to deal with the financial crisis. How much China gives, diplomats believe, will depend on how much of a say it gets. An article in the official China Daily newspaper on March 17th quoted an influential Chinese economist, Yu Yongding, as saying China should not give much to the IMF—not least because certain countries on the IMF’s rescue list, particularly some from Europe, had an “anti-China mentality”.

Some Chinese scholars and commentators have been circulating more radical visions of how China should use the current crisis to boost its strategic influence. A recent article in Economic Reference, a journal published by a government think-tank, said the crisis would severely weaken the economic, political, military and diplomatic power of developed countries. This would create an “historic opportunity” for China to strengthen its position. China should export capital to South-East Asian countries to strengthen their economies. By so doing, it would help prevent political turmoil and win strategic influence in the region.

In America, the article suggested, China should buy up businesses in order to acquire sophisticated know-how. If the American government balks at this, “the Chinese government absolutely can use its American dollar savings as a bargaining chip to force the American government to agree to China’s acquisitions.” Diplomats say threats have even been heard from lower-ranking Chinese officials that China might sell off American Treasury bills if Washington angers China on Tibet; a meeting between Mr Obama and the Dalai Lama, for example, could be a tripwire. Few believe that China would actually risk such a self-damaging tactic, but the airing of views like this suggests that some officials are acquiring more swagger. China’s decision on March 18th to use anti-monopoly legislation to block Coca-Cola’s $2.4 billion bid for Huiyuan, a Chinese juice manufacturer, will be seen as evidence of this by some in America.

This self-assurance was on show, too, during a visit to Latin America by Vice-President Xi Jinping in February. During a meeting in Mexico with overseas Chinese, Mr Xi, who is widely believed to be the heir-apparent to President Hu Jintao, accused “well-fed foreigners with nothing better to do” of “pointing fingers” at China. His country, Mr Xi said, was not exporting revolution or poverty or hunger or “messing around” with other countries, “so what else is there to say?” Mr Xi’s more diplomatic colleagues thought this was an outburst too far; though nationalist websites exulted, the domestic media were banned from reporting his comments.

Chinese leaders have been at particular pains to avoid giving the impression that China is wavering in its commitment to market capitalism (albeit with a heavy admixture of government control). But China’s own economy is being battered by the turmoil. Officials estimate that some 20m migrant workers have lost their jobs as labour-intensive industries, churning out cheap products for export, put up their shutters. White-collar workers are beginning to suffer, too. Some are being laid off and many more having their bonuses and wages cut. China’s leaders still say the country can achieve 8% growth this year, down from 9% last year; the World Bank, forecasting growth of only 6.5%, still notes that China is “a relative bright spot in an otherwise gloomy global economy”. But the boom times are definitely over.

Throughout the crisis China’s leaders have railed against the dangers of protectionism, knowing that trade with the West is vital. Much to the chagrin of China’s online leftists, Mr Wen has repeatedly sung the praises of Adam Smith in speeches and meetings with journalists. In London he revealed to the Financial Times that he was carrying Smith’s “The Theory of Moral Sentiments” in his suitcase. As Mr Wen explains it, an important message of this book is that if the fruits of economic development are not shared by all, that is “morally unsound”, as well as a threat to social stability. This view resonates powerfully among the many Chinese who are embittered by the very uneven distribution of the fruits of China’s own rapid growth. Chinese leaders may be able to score points at home for standing up to their Western counterparts. But they know they are vulnerable to criticism that they are not doing enough to help Chinese victims of the economic slowdown. By emphasising this aspect of Smith’s philosophy, Mr Wen is trying to show he cares.

The government, however, does not want China to be roiled by the same debate that is plaguing Western governments over how to handle the crisis. This month’s annual session of the National People’s Congress, China’s parliament, was convened for only nine days instead of the usual two weeks. Although even the official media wanted more details of spending plans, the government-set agenda was strikingly sparse. The parliamentary chairman, Wu Bangguo, used the occasion to launch a lengthy tirade against Western-style democracy. “Leadership by the Party can only be strengthened and in no way weakened,” he told the delegates. For Mr Wu to get so worked up, serious voices must have been suggesting otherwise.

But few new details of the stimulus measures were revealed at the congress. The government airily said that details of a separate massive spending programme on health-care reform (850 billion yuan over three years) would be finalised only after the parliamentary session. In a cursory nod to public concern, it revealed that spending on welfare projects would be increased from 1% to 4% of the stimulus package (see chart). Spending on infrastructure would drop from 45% to 38%. But spending on environmental projects would also be cut from 9% to 5%. China’s commitment to greenness appears to be ebbing. The left does have some cause for celebration. State-owned enterprises (SOEs) will be huge beneficiaries of the stimulus spending (Maoflag’s supporters are still in uproar about the dismantling of many of China’s SOEs a decade ago). But liberal economists in China fret that state-owned banks and their SOE cronies will carve up the spoils, leaving small and medium private enterprises by the wayside. They also worry that reforms may stall.

The China Institute for Reform and Development, a prominent liberal think-tank, has just published a 171-page report entitled “The International Financial Crisis Challenges Reforms in China”. It describes the economic crisis as the biggest problem the country has faced in the 30-year history of its reform-and-opening policy (and it has faced some big ones, not least the Tiananmen protests of 1989, the Asian financial crisis of 1997-98 and the SOE restructuring which threw millions out of work). The report says that, without further market-oriented reforms, the stimulus package will not only fail to achieve its goal but will also store up long-term problems. In need of change, it says, are government controls on prices of water and power and government monopolies in industries such as telecoms, railways and aviation. It calls for faster financial reforms such as encouraging the development of non-state financial institutions, freeing controls on interest rates and allowing the yuan to float.

On March 13th, at the end of the parliamentary session, Mr Wen said that to counter the crisis China “would rather speed up reforms”. He said it should “give full play to market forces in allocating resources” and encourage the development of the private sector. It must also, he said, carry on with political reforms in order to “guarantee people’s freedom and rights”. But the economic crisis will not have increased officials’ appetite for change. Many will be all the more convinced that the government’s big role in the economy (not least its ownership of the banks) and the country’s one-party system (where else could a government announce such big spending plans without time-wasting debate?) are a help, not a hindrance.

It is more likely that, as the crisis deepens, the government will become increasingly cautious in its approach to domestic policy. But if protectionism grows in Western countries, Chinese nationalists will be all the more inclined to demand that their government stand up to them. A book published in China this month, “Unhappy China” (with an initial print-run of 70,000, says a publicist), aims to tap into what the authors believe is a widespread public feeling of disgruntlement with the West. One of the essays argues that the financial crisis could result in an envious West going to war with China to keep it down. Few are quite that gloomy. One of the book’s authors (speaking in a branch of Starbucks in a luxury mall) says the government worries about books like this because they fuel suspicions in the West that China is a threat. The publishers removed one part about India’s annexation of Sikkim in 1975 because they thought it might upset India. China would like to be number one, but it would still rather get there without making big enemies.

Saudi oil minister warns of 'catastrophic' energy crunch
Saudi Arabia's oil minister warned of a possible "catastrophic" energy supply crunch without prompt investment. "In years to come, if traditional energy supplies should prove inadequate because capital expenditure was curtailed due to unsustainable prices, unreliable indication of future demand or hopes for a substitute that oil cannot deliver, such a supply crunch would be catastrophic," Ali Al-Naimi said yesterday. The painful result would be felt sooner rather than later. It would effectively take the wheels off an already derailed economy." The world risked disaster by placing too much hope on untested alternative energy sources, Naimi told an OPEC conference of energy leaders. "We frankly court disaster if these supplemental resources on which such high hopes for energy security and sustainability are pinned do not fulfill their high expectations," he said.

Naimi said the world should not use low oil prices as a reason not to investment in the sources of future production, as to do so would only guarantee further shortages and soaring prices. The Organization of the Petroleum Exporting Countries, with Saudi Arabia taking a lead role, has made its biggest output cuts ever to haul oil prices back from a $100 drop. I have often described unsustainably low oil prices as carrying the seeds of future price spikes and volatility," Naimi said. "In a low price environment, the trend is often to focus on survival instead of expansion," he added. "If we place a low priority on preparing for the future, that lack of action can come back to haunt us through supply shortages and another round of high prices.

Naimi spoke out on "rhetoric" against the future of oil as an energy source and calls among leading energy consuming nations for greater independence from imports. "The situation is also complicated by other factors, such as political rhetoric calling for reduced dependence on oil for perceived reasons of environmental sustainability, or seeking independence from a particular region," he said. He pledged that the world's top oil exporter will sustain long term investment to ensure supplies despite the global economic problems. "... despite the current economic situation and other challenges to the energy sector, Saudi Arabia will stay the course with our long-term capital investments for oil and gas expansion and related programs to enhance world energy supplies."


bpmsu said...


Interested in your thoughts on Denninger's "Bernanke Inserts Gun In Mouth" ticker.

David said...

@ el gallinazo

I think this point is over emphasized. The arms superiority of the professional military over typical citizen armaments is vast. I am afraid these guns will just be used on other civilians.

The arms of the professional military may very well be of higher quality than that of the typical citizn.

But the number of armed citizens in the US outnumbers the professional military personnel by about 50 to 1.

Which side would you like to be on?

Gravity said...

A people's voice is dangerous,
when charged with wrath.

Every care must be taken
that our financiers,
being more greedy than our citizens,
may not grow too much for them
and become savage beasts.

Greenpa said...

"The fund shocked analysts during a briefing in which it was revealed that the UK will see its economy shrink by 3.8 per cent in 2009, and a further 0.2 per cent in 2010 – the only large economy predicted to still be in decline next year as well as this. "

I think what that actually tell us is the UK has the only reasonably honest accounts, who are mostly telling the truth. Everybody else is reporting- and pretending to believe- data straight from the Tooth Fairy.

Coy Ote said...

Behind all the Wall St. corruption looms the real hammer...

"In years to come, if traditional energy supplies should prove inadequate because capital expenditure was curtailed due to unsustainable prices, unreliable indication of future demand or hopes for a substitute that oil cannot deliver, such a supply crunch would be catastrophic," Ali Al-Naimi said yesterday...

This is not pretention, nor mere posturing. Catastrophe from energy depletion is appearing more and more a probability rather than a possibility.

/thehangedman/ said...

David: "But the number of armed citizens in the US outnumbers the professional military personnel by about 50 to 1.

Which side would you like to be on?"

Neither. They are both mobs.

Ilargi said...


"I think what that actually tell us is the UK has the only reasonably honest accounts, who are mostly telling the truth. Everybody else is reporting- and pretending to believe- data straight from the Tooth Fairy."

More honest than the US for sure, but not than continental European countries like Germany.

Going through the pension funds article, I once again got this image that things are much worse than we presently see, because most of the bad investments are still hidden. They've all played the same risk and leverage games, from pension funds to municipal fund managers, and they'll keep the damage hidden as long as they can. Which is often years. And all that mayhem is still ahead.

TampaSteve said...

Interesting story about the difficulty people are starting to have at actually getting cash from their accounts these days. I didn't put the two together until just now, but I've been having trouble getting withdrawals from my companies money market account to cover the day to day needs in our operating accounts.

About a month ago, I needed about $5M to cover a large A/P check that was about to clear, and for the first time since opening the money market, liquidating suddenly became an issue. What once took a couple of hours took nearly the entire day to process, and I nearly bounced the check (not to mention that the fund manager was suddenly no longer taking my increasingly frantic phone calls). Since then, I've kept a few extra million in our operating account in case the day comes when our fund manager is unable to process another request...

Considering the account that used to yield 5.25% now yields .03%, they should be happy I keep anything in there, but I try to keep the cash as spread out as possible in case we lose a bank. :-) Working in treasury sure is less fun than it used to be.

Anonymous said...


See Stoneleigh's comment on yesterday's post, she seemed to think it fine stuff.

Ilargi said...

David, Vulturo, Hangedman,

Look at the US army record in asymmetrical warfare. A firepower surplus means little unless you know how to use it. The US hasn't won anything in 50 years if you ignore invasions with no resistance, while in those same 50 years its firepower has gone up 100 or 1000 times, depending on how you look at it. Something doesn't add up.

David said...

@ Illargi,


The US military is particularily unprepared to deal with localized guerilla warfare. And has proven so from Korea, to Vietnam, to Iraq.

If we are talking about bringing back troops from overseas service to control unruly, armed, US citizens, there are a couple levels of tactics to consider.

1) An Army Infantryman from Illinois, who has served for 2 years in Afghanistan, then subsequently redeployed to quell mob violence in Tennesee, will be at a particularily disadvantageous logistical position vis a vis the local MountainMen Militia.

2) Then there is the Moral Dilemma of the repatriated military personnal choosing to fire to kill, not on some ethnic bogeyman, but on middle-class American citizens. True, this was a surmountable issue in the Civil War. But this will not be a War Between The States, it will be a war between the Government and its citizens.

3) It is an historical precept that during previous imperial extravagances, numerous indigineous populations, armed with crude and minimal firepower, were able to grind down the invading legions in due time.

The government attempt of surpressing the armed US citizenry through force is doomed to abject failure.

Stoneleigh said...

Look at the US army record in asymmetrical warfare. A firepower surplus means little unless you know how to use it. The US hasn't won anything in 50 years if you ignore invasions with no resistance, while in those same 50 years its firepower has gone up 100 or 1000 times, depending on how you look at it. Something doesn't add up.

Agreed. For those interested in asymmetric warfare, I strongly suggest reading the work of Martin Van Creveld, for instance, The Transformation of War.

VK said...

But, but... In the movies don't they show the CIA and US military is all powerful. There are super smart NSA analysts on the job and secret assassins and spy satellites ready to listen in on all corners of the globe!! (I just watched the Bourne trilogy)

OH wait, oops, they missed how bad Iraq was going to be. They've missed peak oil, climate change, top soil depletion, ozone depletion, the financial debacle, fertilizer peak etc etc. All this information is free!!

But what can we do against rampant denial and self deception?

No need for anything too fancy. Just read up TAE, Mish, KD, TOD, Orlov. So they spend nearly half the US budget on the military and Intelligence and they can't see what's coming? If they see it can't they take action?? Seems surreal.

ExRanger said...

The US hasn't won anything in 50 years if you ignore invasions with no resistance,

Nobody ever wins at war.

The american people may have a lot of firearms but IMO very few have it in them to go up against any kind of organized force. When I was the president of our local shooting range for 10 years I watched a lot of everyday people shoot and most are just not very accurate. Most of your ex military people are another story on both counts.

Greenpa said...

"But this will not be a War Between The States, it will be a war between the Government and its citizens."

On the other hand; I have it on very good authority that one of the contingencies the upper US military is planning for- is a north/south war, based on politics and religion. Really. Started by the south, they think; and this time they have Texas, which has way more than it's share of military manufacturing capability.

In case anyone needs to feed their inner paranoid.

Anonymous said...

Given current attitudes I don't think the North and the West Coast would mind the South leaving.

Quite a few people would be happy with that turn of events.

Anonymous said...

Many 'civilians' in this country served in the military. In my neighborhood a score of men are ex-soldiers and I would hate to go up against them as a national guardsman. Not only are they my follow citizens, they really 'know the territory'. Any troops from outside this area would have one hell of a time out maneuvering this guys on their home turf.

Many have sons in the military who would never turn on their country men and would be an added potent force for any federal troops.

Greenpa said...

Plus ça change-

Downstairs right now, my 4 year old Smidgen is chanting a rhyme game well known in the US-

Who stole the cookies from the
Cookie Jar?

Mama! stole the cookies from the
Cookie Jar!

Who ME? (Mama answers)

Yes You!!

Couldn't be!

Then Who?

Daddy! stole the cookies
from the
Cookie Jar!



Just seemed hauntingly relevant. We start teaching the process very early, apparently.

David said...


The american people may have a lot of firearms but IMO very few have it in them to go up against any kind of organized force. When I was the president of our local shooting range for 10 years I watched a lot of everyday people shoot and most are just not very accurate. Most of your ex military people are another story on both counts.

I would feed back at you one of our more observant anonymous contributors:

Anonymous said...
Many 'civilians' in this country served in the military. In my neighborhood a score of men are ex-soldiers and I would hate to go up against them as a national guardsman. Not only are they my follow citizens, they really 'know the territory'. Any troops from outside this area would have one hell of a time out maneuvering this guys on their home turf.

Many have sons in the military who would never turn on their country men and would be an added potent force for any federal troops.

March 19, 2009 8:35 PM

I repeat,

History is replete with multitudinous examples of major imperial entities, with supposedly superior firepower, and supposedly superior trained personell, and supposedly superior logistics, tactics, and supply lines . . .


in the face of a determined local, indigenous, determined force.

Over, and Over, and Over again.

Case Closed.

VK said...

@ David

Just look at the history of the US. During the battle of Independence from the British. The American Army primarily engaged in guerrilla warfare and the British with their well armed and well trained forces couldn't do much.

@ Board
On this note of wars and battles. How do you see this playing out in China, Europe, Russia etc?

Armando Gascón said...

Your dreams of armed civilians facing the US army, poor you! Let me tell you the words of Pinochet: "When the Army goes on the street, it goes on the street to kill." (Cuando el Ejército sale a la calle, sale a la calle a matar.)

If facing shots from a building, the American Army would level the whole street with cannon shells or bomb it from the air. If they hid in cellars or woods, they would burn them with napalm and phosphor. Damn the collateral damage, they would kill a thousand bystanders in Manhattan to get rid of a handful of enemies.
While the guerrilleros would have constantly diminishing resources, both human and material, the Army will constantly become stronger, more concentrated and more deadly.

War is not the soldier taking shots at other soldiers, as in a computer game. War is the cannon and the bomb.

It won't happen, anyway. Because you forget where you live, usacos. The usa is a bigger police state than the USSR was in its time. You have more police agencies, and better ones than any one. As soon as something realy troublesome happens, all these fools with guns will be rounded up, and in the best case interned in those famous Lagern.
In the best case. How many are them, 500,000? I reckon there are more than 500000 lamposts to hang them from in the USA.
"Which side would you like to be on?" On the side of the Army.

David said...

@ VK


Just look at the history of the US. During the battle of Independence from the British. The American Army primarily engaged in guerrilla warfare and the British with their well armed and well trained forces couldn't do much.

Of Course, That is what Americans' are basically derived from, from their cultural/historical heritage . . .

. . . to resist Tyranny.

And if that Tyranny comes from a Foreign Power, well we know what happened there.

But what if that Tyranny comes from our own Elected Government??

Yes, there are those that worship the supposed superiority of American military personnal, so, that's a possible perspective.

But, think again if you believe you can just automatically rotate those American military personnel 180 degrees, and have them fire on the US citizenry at will,

well .... you might want to reconsider that position.

Many of them would be firing on their own relatives/friends/acquaintences . . . not because of regional cultural differences but because of government dictat.

I think not.

Anonymous said...

An odd thing happened today at work. I got asked to advise a customer on a minor point of software and inadvertently ended up viewing some of their private email traffic.

I apologized for the gaff in protocol. Instead of moving on to the matter at hand, this guy went on a rant about how exciting this news was and began to elborate about it. Without being too specific, the correspondence had to do with a friend of his who had contacts in the European banking community. Reps from these Euro banks, who just coincidentally had received large funds from AIG, were chopping at the bit to loan some of these newly acquired funds back to the States (to 'Special' customers) to 'buy up assets at pennies on the dollar', contrary to my belief that nobody is lending any money.

A few things immediately sprang to mind. The tone of the correspondence was strangely upbeat. (delusional?) This customer, who is an otherwise very savvy and well to do successful businessman, said almost none of his quite wealthy friends were doing well but that their might be a way to make lemonade from the current crop of lemons.

The correspondence centered not on hard industrial assets like manufacturing or infrastructure targets, but on recreational stuff, resorts, theme parks, accommodations. It mentioned how many owners of such assets were being badly squeezed by debt and would shortly have to sell these assets for 'peanuts'.

Fair enough, they choose poorly. But I was surprised by the tone of almost glee the writer had in describing how this was such a great opportunity to screw their fellow millionaires. No class loyalty in sight here.

This customer informed me of how many people had done this during the last depression, bought up stocks and securities for pennies on the dollar, to then wait long enough to see them worth a fortune after the depression lifted.

My gut reaction said 'this depression is gonna be Way different dude', it strikes me something that will never really 'lift' again.
Peak Oil. Peak growth, Peak Climate, Peak food production......

So my question for Stoneleigh and Ilargi: is this guy nuts, or jumping the gun too early for such an adventure?

Prices on everything seem like they will get Much lower than today's bargains, especially on non-essential assets.

Is he and his fellow travelers delusional about how bad this will be compared to the 30's?

David said...

@ Armando Gascon

It won't happen, anyway. Because you forget where you live, usacos. The usa is a bigger police state than the USSR was in its time. You have more police agencies, and better ones than any one. As soon as something realy troublesome happens, all these fools with guns will be rounded up, and in the best case interned in those famous Lagern.
In the best case. How many are them, 500,000? I reckon there are more than 500000 lamposts to hang them from in the USA.
"Which side would you like to be on?" On the side of the Army.


You seem you have this illusion that all the police/military in the US operate as one, simple, efficient unit.

Let me refute you.

They do not. The *Police State* in the US is fragmented beyond your belief. They do not operate as one single synergistic operation.

On the contrary, in doing the most simplistic investigations in supposed excellent communication protocol, they revert to local, state, regional, and federal politics relating to comand and control, much to their dismay in the final collapse of the complete operation.

I've seen it first hand.

You overestimate the capabilities of the Federal, State, Regional, and Local authorities to work together.

Witness Katrina.

Say no more.

Nihm said...

hoping for a little feed back:

without commenting on the potential moral ethical or other issues,

i have the chance to buy a house using a no recourse loan. I am able to buy the house and get a 50K kickback from the seller.

This would allow me to pay off all Credit card debt, my car and have 20K left.

If TSHTF like it really looks, this seems to be an obvious choice. While statistically there is a good chance of default in my future is i take this route, i would still come out not owing anyone anything.

on top of that my actual monthly outlay would be reduced as compared to paying the interest on my current credit card debt

Nihm said...

follow up

at the moment it seems as though this is my only likely way out.

the ship is going down and if playing the bankers game improves my chances even slightly then i am beginning to feel very foolish for maintaining integrity

jal said...

@ Nihm
It sound too good to be true ... sounds like a scam

Greenpa said...

Armando Gascon: " usacos."

Usacos! I like it. How is it pronounced- and what secondary meanings does it have? And who uses it?

We've long needed something new to replace "gringo" which is getting tired.

" The usa is a bigger police state than the USSR was in its time. You have more police agencies, and better ones than any one."

And prisons. And more people in prison than anyone. I don't understand why the Chinese don't just quote that stuff back when the "human rights" squads complain that China is still ... China.

Anonymous said...

David: "well .... you might want to reconsider that position.

Many of them would be firing on their own relatives/friends/acquaintences . . . not because of regional cultural differences but because of government dictat.

I think not."

Bizarre. Are you aware of The American Civil War? Firing on relations was a commonplace. As it was during the American Revolution. Almost the norm.

And in both cases- it WAS "government dictation" - clothed in patriotic and moral sheeps-clothing. So easy to do.

You think not? I think you are correct. You're not.

Anonymous said...

The American Civil War was delineated along geographical lines, North and South.

Families were divided along the border states. Much less so as you got away from the Mason-Dixon Line. Almost never in the Deep South or the Far North. There, you did Not betray kith and kin.

In contrast, the English 'War of the Roses' was very messy because the loyalists to the King and those against Him were spread out and interwoven like a patchwork across the landscape. Town against town, parts of a county against other parts of a county. It was murderous. Very hard to watch your back or plan a large scale action against an enemy with very little geographical definition.

In Yugoslavia, even though it was defined as ethnic and religious, it was very much country against city.

Civil wars come in all flavors and combinations. Some are so complex, they defy the 'rules' of engagement.

The Former United States of America's (FUSA) breakup will be a Horse of a Different Color and not something easily predicted. It will spill over into Canada and Mexico and be very, very messy indeed.

In some parts (urban areas) central control will be easier to attain, as you get into the rural areas and have to spread more and more resources thinner and thinner for less and less substance, not so much.

This will not be Black and White by a long shot.

Ahimsa said...

Here's the article discussing how the Pentagon's Talon Program infiltrated a Quaker group in So. Florida for participating in peaceful anti-war activities.

The technology available for surveillance of dissenters is unprecedented in world history. Gascon and Greenpa are correct.

David said...

@ Anonymous @ 10:30

Bizarre. Are you aware of The American Civil War?

Yes, I mentioned it above. But as the following Anonymous stated it so eloquently --

The American Civil War was delineated along geographical lines, North and South.

Families were divided along the border states. Much less so as you got away from the Mason-Dixon Line. Almost never in the Deep South or the Far North. There, you did Not betray kith and kin.

This will not be a Civil War --

This will be a war where the government assigns random individuals from random worldwide assignments to come back to the US and fire on random US citizens in random geographical locations.

There will be no coalescence of geographical/cultural/spiritual interests . . . it will just be a government bringing back broad-based troops from abroad and flinging them out into the great Amrican divide and instructing them to fire at will.

Where is the supposed center in all that?

Not even remotely connected to the great schism of the War Between the States. Not even close.

You will have mass confusion of command and control between the many layers of agencies and bureaucrats and military and police and state and county and city and regional governments all piling into the whole mess at once, and you think for one tiny instance that this will be a cohesive and concerted and focused attack on the American revolt?


It will be chaos and anarchy, and if you belive that the military will somehow miraculously overcome all this and behave in a disciplined manner against armed insurgent guerillas, unlike they have been unable to do against Koreans, Vietnamese, Somalias, Iraqies, etc. . . . .then you are sadly mistaken.

Anonymous said...

The U.S. has already lost in Afghanistan, the government just haven't broken the news to the public yet. Big Surprise.

The Russians were next door and couldn't come out on top. We have had to maintain a 12,000 mile supply line and try to do the same exact tasks as the Russians tried in terms of occupying a foreign land with a Very Hostile native population.

Gee, it went so well in Iraq, I guess we're exporting the model to the mountains of the Khyber Pass.

Pax Americus Uber Allës

el gallinazo said...

Greenpa said...
Armando Gascon: " usacos."

"Usacos! I like it. How is it pronounced- and what secondary meanings does it have? And who uses it?"

Oosacose. Spanish is unbelievably phonetic. Spelling dictates pronunciation. I thought I gave my Peruvian girlfriend an Ipod Shuffle, but I was wrong. I gave her an eepode shuflay :-)

Nightly Summary said...

* Nothing's going to work; Nothing worked for Japan; Current action will buy some time
* For TAE humanure composters the sh*t has hit the pan
* Lawyer reports: 1) Small developers belly up last year 2) Big developers going belly up this year 3) Building suppliers going belly up 4) Jumbo loans in trouble 5) 7 year supply of empty lots 6) Commercial lending is going bust
* Veracity of Swedes impugned
* You can live on potatoes alone
* Authorities walking tightrope between staving of fear of deflation and fostering fear of inflation; They are impotent to cause an actual wage/price spiral
* This may be the larger rally; If so expect large fall in equities this fall
* There is no financial profit, only theft; Truth and competency are lacking
* No one wants to work for Geithner; Maybe ex-GM workers will help out
* Everyone wants theirs to be the reserve currency but hard to deliver
* El Gallinazo asks about personal productivity; Let the riffraff be known
* New word: crashstead; Similar to doomstead, panicstead and crunchstead
* Military have better weapons than populace, but populace have more of them; Both military and armed populace are mobs; Army has poor record in asymmetrical warfare; Civil war preparation rumored; Would the army shoot the populace?
* Things are worse than they appear because many bad investments still hidden
* Some people having difficulty getting money out of bank accounts

Ahimsa said...

Great video!

"Urban Food Growing in Cuba"

Anonymous said...

@David -
....Which side would you like to be on?....

The only side a reasonable person would rather be on is :
"the other side" - of the ocean Atlantic or Pacific, but not participating in a member measuring contest of adolescents suffering from testosterone poisoning.

Not to be rude of course, but please realize that most people in this forum here can think not just read, so those sort of arguments don't really belong here. IMHO

Anonymous said...

I can't believe the level of discourse in tonight's comments. TAE sounds more like a conspiracy web site a la prisonplanet or infowars. For some useful comments, go to

Anonymous said...

how many military vets are around in the US? from korea till now? they know how to use weapons, they were trained. there are more military vets in the shadows than active duty has ever been.

power to the people! err, i mean military vets. the active duty military is very outnumbered.

Anonymous said...

@ David
You want a Watts type thing where common people attack each other? That’s not what you want. Digest this simple fact: Crooks, liers and killers with high intelligence and no scruples are in charge of all our institutions. These people are afraid of us. They want good citizens like you to consider the masses and their behavior in a perjorative light. The masses aren’t saints but are far more responsible than politicians and PHDs in their ivory towers. Our best weapon is miserly buying habits, not violence. The powers can’t do a damned thing about it and it crashes economies, businesses and political careers. Get it?

Armando Gascón said...

"Usacos": Used in Spain, not a lot. There was a Spanish novel "Los usacos". Like from Poland, Pole > polaco, from usa> usaco, Cosack, > cosaco. It happens that "estadounidense" is too long, "americano, norteamericano" too indefinite.

Anonymous said...

Anyone who follows Kevin at Cryptogon will agree that he is a very knowledgeable guy. Not one to make unsubstantiated claims, nor to go off on hyper-emotional rants (like Denninger tends to do).


"This is the most serious economic development to occur in my lifetime"


Well, guys, there it is. The main mechanism of U.S. debt financing has broken down.

This is, by far, the most serious economic development to occur in my lifetime (I’m 37). What will happen, and when, as a result of this, is a mystery to me. I have no way of assessing an event of this magnitude.

In a sane world, the dollar would collapse, but we all know that 'sanity' left the building a long time ago.


The USD is now at very real risk. A 'waterfall event' will wipe out your wealth in matter of hours. And without any INFLATION.

Imagine what it would feel like to wake up one morning and find out that your wealth had evaporated overnight? Would you panic? Cry? Be angry?

As a precautionary measure, I recommend spending some of your dollars on tangible goods - food, water filters, spare gardening equipment, warm clothing, extra boots and shoes, medicine, guns, ammo etc. Stuff you WILL need in the next 10 years.

Even if the USD doesn't collapse, this is still the right thing to do. Because sometime - perhaps abruptly - the global supply line is going to shut down. Perhaps permanently. When that happens, we almost certainly will have squandered any opportunity to acquire the tools we will need to survive.

It won't matter how much money you have. Because the equipment you need to survive, will be the same equipment 300 million other Americans desperately need. Owners will simply NOT be willing to part with these things, no matter the price. Their survival depends on it.

The "purchasing power" so often fantasized about will only apply to all the crap Americans own but don't need -- big Screen T.V.'s, I-pods, printers will be dirt cheap. :)

Anonymous said...


Yeah I'm rollin' down Rodeo wit a shotgun
These people ain't seen a brown skin man
Since their grandparents bought one

So now I'm rollin' down Rodeo wit a shotgun
These people ain't seen a brown skin man
Since their grandparents bought one

So now I'm rollin' down Rodeo wit a shotgun

Bangin' this bolo tight on this solo flight can't fight alone
Funk tha track my verbs fly like tha family stone
Tha pen devils set that stage for tha war at home
Locked wit out a wage ya standin' in tha drop zone
The clockers born starin' at an empty plate
Momma's torn hands cover her sunken face
We hungry but them belly full
The structure is set ya neva change it with a ballot pull
In tha ruins there's a network for tha toxic rock
School yard ta precinct, suburb ta project block
Bosses broke south for new flesh and a factory floor
The remains left chained to the powder war

Can't waste a day when the night brings a hearse
So make a move and plead the fifth 'cause ya can't plead the first
Can't waste a day when the night brings a hearse
So now I'm rollin' down Rodeo wit a shotgun
These people ain't seen a brown skin man
Since their grandparents bought one

Yes I'm rollin' down Rodeo wit a shotgun
These people ain't seen a brown skin man
Since their grandparents bought one

So now I'm rollin' down Rodeo wit a shotgun

Bare witness to tha sickest shot while suckas get romantic
They ain't gonna send us campin' like they did my man Fred Hampton
Still we lampin' still clockin' dirt for our sweat
A ballots dead so a bullet's what I get
A thousand years they had tha tools
We should be takin' 'em
Fuck tha G-ride I want the machines that are makin' em
Our target straight wit a room full of armed pawn to
Off tha kings out tha west side at dawn

Can't waste a day when the night brings a hearse
Make a move and plead the fifth 'cause ya can't plead the first
Can't waste a day when the night brings a hearse
So now I'm rollin' down Rodeo wit a shotgun
These people ain't seen a brown skin man
Since their grandparents bought one

Yeah I'm rollin' down Rodeo wit a shotgun
These people ain't seen a brown skin man
Since their grandparents bought one

Yeah I'm rollin' down Rodeo wit a shotgun

The rungs torn from the ladder can't reach the tumour
One god, one market, one truth, one consumer

Just a quiet peaceful dance!
Just a quiet peaceful dance!
Just a quiet peaceful dance!
Just a quiet peaceful dance!
Just a quiet peaceful dance for the things we'll never have
Just a quiet peaceful dance for the things we don't have

Rage Against The Machine

Persephone said...

@ the U.S. guerilla arms debate

The gubmit is not going to out of the blue deploy the U.S. army with orders to shoot and kill Middle America. Organizations choose paths of least resistance - which for the U.S. is perfectly healthy media propaganda.
An organized effort to create a "new reality" would emerge first aimed at the population's collective psyche.
Even if small pockets of chaos emerged, they would be quietly squelched - and most people would never know. The gubmint may try to control people's resources (gas and food rationing) "for the people's own good". American propensity to allow slow moving atrocities is great - FISA, for instance.

Besides, when TSHTF, does it matter whether the gubmit is firing on you - or whether your neighbor is firing on you? When people get to the point that they have nothing to lose, they are willing to do drastic things.

As for the internment camps, 1. We don't have enough prisons as it is (for the number of inmates) - another discussion at another time, 2. FEMA was not very coordinated in Katrina, 3. The gubmint has already created a structure that imprisons people in virtual slave labor via debt.
Things are not always what they seem.

Anonymous said...

Don't know if you've come across this yet - it's a link through to leaked Barclays Bank documents detailing how they avoid paying tax in the UK.

Very detailed, even down to who's ammended the pdfs.

Gotta love the names:


hope it's useful somehow!


Persephone said...

Today's news
U.S. unemployment rate likely around 9.5 percent: think tank

Fed plan may lower rates, but at what cost?

Dollar Heads for Record Weekly Loss Versus Euro as Supply Rises

Raters See Windfall in Bailout Program

EU Rebuffs Calls to Increase Fiscal Stimulus, Aid

Travel Spending Sinks Sharply

Northern Rock Made Risky Loans After Brown Rescue, Auditor Says

Naked Capitalism: Merrill Writedowns: The Plot Thickens

EP: U.N. panel says world should ditch the dollar

Anonymous said...

The NWO will is about among other things, dismantling nation states.

TPTB know that most troops won't fire on their own citizens...therefore while US troops are engaged in wars half way around the world, a pretext will be created for the need of foreign troops on America's soil. These forces may be Chinese and/or Mexicans. It is primarily these that would be engaged in the killing/subjugation of American citizens.

Been reading that people are noticing shortages of bullets/ammo, particularly for certain firearms.

An Earth progressing towards the futuristic one depicted in the Star Trek TV series, it aint.

Persephone said...

@Anon 712
These forces may be Chinese and/or Mexicans. It is primarily these that would be engaged in the killing/subjugation of American citizens.

Think of the wasted resources it would take to implement this action. Even if I bought the NWO theory - which I do not - it would be much more simplistic to cut off food supplies, drinking water, shut down gas stations and let common people destroy each other.
If there were a grander scheme, the military would come in post chaos and take control.

Think about what happened with Katrina. People were begging for martial law. That is the most likely scenario.

Anonymous said...

"Think about what happened with Katrina. People were begging for martial law. That is the most likely scenario."

Allowing Chaos to happen does not take much brains or planning. That is the plan of least resistance and resource.

Katrina was the template.

Most parts of the country will break down, like Katrina, Very rapidly. Break the 3-day food supply delivery system, some rolling blackouts, and poof!, like magic, a pliable populous.

The US middle class aren't fighters, they're consumers.

They won't fight til they drop, they can only shop til they drop.

They're programed that way.

Like turkeys smothering each other in the corner of the coop after a loud noise frightens them.

Booga Booga Booga

Anonymous said...

Karl D can be a real Pill sometimes but today 3/20/09, he really hit the nail on the head with his definition of fraud and speculation and wealth creation.

Defining the terms of the discourse and public debate (or lack of it) often boils down to the definition of words and terms and their proper use and context.

The U.S. Ministry of Propaganda and their paid lackeys in the MSM are good at this. The public's precision with language is appalling.

Look at George Bushit II.

The public bathed in the glory of that miscreant mutilating the language on a daily basis in front of the children and the world.

Never Misunderestimate America's resolve!

Stoneleigh said...

Anon @9:30,

So my question for Stoneleigh and Ilargi: is this guy nuts, or jumping the gun too early for such an adventure?

Prices on everything seem like they will get Much lower than today's bargains, especially on non-essential assets.

Is he and his fellow travelers delusional about how bad this will be compared to the 30's?

Often wealthy people got where they are by being very aggressive risk takers and speculators. Most have also been trained over the last couple of decades to buy the dips, and many are aware that assets were available at pennies on the dollar during the depression (when so few people had even pennies that those with money cleaned up).

This particular person is seriously jumping the gun though. Now is generally not the time to pick up bargains. Although there may be some exceptions under certain local circumstances, these will usually only be obvious in hindsight. Most people who take the plunge now will lose badly, especially if they had to finance the purchase and therefore carry debt. Interest rates will skyrocket at some point and debt will rapidly become a millstone around people's necks.

Prices have much further to fall. We have yet to see real depression conditions comparable to the 1930s, and this depression will be significantly worse. The best thing people can do is to preserve purchasing power as liquidity (generally after getting rid of debt). Some will use that preserved capital to invest later and others will use it simply to survive. Those who have preserved what they could will at least have more freedom of action than those who did not, even if what they managed to preserve has relatively modest. Even modest sums will go a long way in the future.

Stoneleigh said...

Linda S,

I remember you have asked me a question in the last few days, but I can't remember what it was. Could you ask it again or let me know which day's thread to look through please?

Anonymous said...

Hey,Ilargi -
Have you ever heard of or watched the Showtime series, "Deadwood"?
It's about a gold mining camp in the Dakotas during the 1860's. The characters often used an epithet that applies to the cause of all the financial chaos: "Evil Cocksuckers"
Maybe you can use it as the theme of your next post.

el gallinazo said...

@Anonymous 1:01 am

"I can't believe the level of discourse in tonight's comments. TAE sounds more like a conspiracy web site a la prisonplanet or infowars."

Yes. I am sure you can't believe it. As the late, great Richard Pryor put it when his wife caught him in the act with another woman, "Are you gonna believe me or your lying eyes?"

As to how this will play out, at least over the next couple of years, I think Persephone is closest to reality. TPTB are vicious but they are not stupid. It's never wise to underestimate either their viciousness or their abilities.

As to Katrina as a guide to their incompetence. The truth is that they really didn't give a shit about the suffering. They didn't perk up until they realized, a la Naomi Klein, that there was an opportunity to loot a little more from our treasury.

Orion said...

One of the most insightful people to be featured here on the Front Page of TAE pointed out something significant a couple months back.

Which people seem to have forgotten.

There has never, ever been a successful violent rebellion here in the U.S.. Starting from George Washington onwards, each President has been quite successful at turning arms and propaganda on its citizens and exterminating rebellion.

It is one significant thing which distinguishes the U.S. from many other countries.

IMO, people who are talking about the US splitting up, or armed insurrection, are basically wasting their time typing up their wetdreams which will never happen.

This is one of the clueless things that I find about Dmitri Orlav, especially.

Anonymous said...

Anon's of 8:00 a.m. - it doesn't sound like you think very much of most people. While I agree with Stoneleigh's use of herding behavior to describe markets, I have never found it particularly helpful to describe people is broad sweeping generalizations.

David said...

The Selling of the Big Lie is much easier than Selling the Little Lie

A few people on Capitol Hill moan and groan but there is popular agreement on the wisdom of this transfer of ONE HUNDRED AND SEVENTY THREE BILLION dollars from the taxpayer to the financiers.

But when AIG itself pays out $165 million in bonuses -- money it is contractually obliged to pay -- the entire political system goes insane. President Barack Obama says he’s going to find a way to abrogate the contracts and take the money back. A U.S. senator says that AIG employees should kill themselves.

. . . . .

From this episode we can observe several general truths about the financial crisis, and the attempt to end it:

1) To the political process all big numbers look alike; above a certain number the money becomes purely symbolic. The general public has no ability to feel the relative weight of 173 billion and 165 million. You can generate as much political action and public anger over millions as you can over billions. Maybe more: the larger the number the more abstract it becomes and, therefore, the easier to ignore. (The trillions we owe foreigners, for example.)

. . . .

3) The complexity of the issues at the heart of the crisis paralyzes the political processes’ ability to deal with them intelligently. I have no doubt that, by the time this saga ends, we will all know what happened to every penny of that $165 million in bonuses and each have our opinion of the morality of it.

I doubt seriously we will ever understand the morality of the $173 billion payment that is the far more serious issue.

. . . . .

Since the beginning of the crisis I’ve wondered why the government has found neither the will nor the way to attack the root of the problem -- the people who borrowed money to buy homes they shouldn’t have bought.

Now I think I understand. It would be too simple. People would understand a lot of small payments to the guy down the street who doesn’t deserve them, and become outraged. Far better to throw trillions at opaque corporations, the inner workings of which no one still really understands.

MikeB said...

Per Celente's awesome post about real estate collapse:

Please check out the pictures from my hometown that I posted a year ago at the link below. The collapse started here in 2006 and has gotten worse. We're the classic "canary in the coal mine." The entire center of the town has been closed down and for sale now for three years. Check it out:

jal said...

Re: Available tools to end this financial crisis

Here they are ...

You can figure out which ones have been used to date and look at the markets to see if they have worked as Planned.

Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002
Deflation: Making Sure "It" Doesn't Happen Here

Ben S. Bernanke will be giving a presentation and answering question later today.

VK said...

Regarding Barclays bank,

New whistleblower claims over £1bn Barclays tax deals
• Judge upholds ban on publishing bank's documents
• Insider says tax avoidance central to firm's business

Further detailed allegations about tax avoidance schemes set up by Barclays Bank emerged tonight from whistleblowers who said the bank made close to £1bn profit a year from a series of elaborate deals.

The schemes are similar to those detailed in documents published by the Guardian this week which have been the centre of a three-day hearing at the high court, and are the subject of a gagging order.

The article is carried on at the link above, the level of contempt is sickening for the rule of law and right procedure.

rumor said...

This J.K. Galbraith article (h/t Naked Capitalism today) really pegs down the financial crisis succinctly and the problems in the Paulson/Geithner approach. For that much, it is a masterful article. Unfortunately, Galbraith's prescription for a New New Deal approach while otherwise fantastic seems to fail to take into account that we are hitting limits to further long term growth. He's also obviously fully invested in maintaining the current economic paradigm (fiat money, fractional reserve banking). Pragmatic? Probably. Virtuous? No.

He's far, far ahead of the administration on understanding the economic crisis and presents it quite well. So for that much, it's an article well worth reading.

Greenpa said...

Anonymous 9:23: "The characters often used an epithet that applies to the cause of all the financial chaos: "Evil Cocksuckers" "

I have to say, from a PR standpoint it's doubtful if you want to malign what is certainly the most favorite activity of 4/5 of the species.

May I suggest "evil thumbsuckers" instead. It will likely connect more rapidly to the target audience.

Greenpa said...

Anon 11:40 pm: "The U.S. has already lost in Afghanistan,"

This really should provide a source of humor for us for thousands of years to come. Hopefully they'll recall that it was George The Least who put us there. (And yes, I know all the rules about comparatives. Think about it.)

It was such an obvious blunder that it had already, long ago, devolved into humor. The line from The Princess Bride should become an even better laugh-getter now:

"The first rule is; 'Never get involved in a land war in Asia.' "

Ever since Alexander, it's been a mistake to try to pacify Afghanistan.

rumor said...


I don't want to disparage a wonderful activity either. I prefer "cockbag" as a favourite alternative.

jal said...

Hi rumor!
Good find!
"No Return to Normal", by James K. Galbraith with "Deflation: Making Sure "It" Doesn't Happen Here", by Ben S. Bernanke should be a primer.

Anonymous said...

@ anonymous & gallinazo 9:30 am

Pryor & Deadwood are spot on and so is the following clip. I think it demystifies what's happenning in Washington & Wall Street:

Anonymous said...

@ anonymous & gallinazo 9:30 am

Pryor & Deadwood are spot on and so is the following clip. I think it demystifies what's happenning in Washington & Wall Street:

el gallinazo said...


"The first rule is; 'Never get involved in a land war in Asia.' "

Why not? The MIC has made hundreds of billions from it and put the debt on our grandchildren. Sounds like a success to me. Gotta give Cheney credit for the original promotion, false flag and all. Great marketing.

Greenpa said...

El Gallinazo - so have you seen "Ice Age II; The Meltdown"? Gotta say, your pic always brings to mind vultures doing Busby Berkeley these days.

"Why not? The MIC has made hundreds of billions "

Ah; perfectly true, probably back in Big Al's day, too. "The Princess Bride" being a fairy tale, they were probably thinking about the concept of "victory"- which of course has nothing to do with profit.

brendan said...


It seems that the Guardian has lost their case with Barclays... What does this portend? I'd be interested to hear from British posters on this.


Greenpa said...

Ilargi: "I think what that actually tell us is the UK has the only reasonably honest accounts, who are mostly telling the truth. Everybody else is reporting- and pretending to believe- data straight from the Tooth Fairy."

More honest than the US for sure, but not than continental European countries like Germany. "

Very interesting; I'm glad to hear it. (not being sarcastic!)

So - a serious speculation for you, and Stoneleigh:

Two of the most powerful economies on the planet at the moment are Japan and Germany. What they have in common is, they lost WW II - and were then extensively re-built - by the USA.

Here is my speculation: the reason they are thriving at the top of the heap is; quite a few of the top parasites were killed in WWII, and the following business climates had fewer resources diverted into dead ends via "corruption", theft, and Masters of the Peruniverse. (note to Nightly: neologism just coined.)

Japan had, however, a resilient organized crime structure, and pervasive corruption redeveloped more rapidly there. (In Italy, it was so embedded that it prevented a similar economic resurgence.)

What is the situation with organized crime in Germany? Was it badly damaged in WWII? Do you agree that the "fresh start" Germany and Japan received after WWII- the removal of existing corruption - is at least part of the reason those economies have been thriving?

Greenpa said...

Gallinazo: "Oosacose. Spanish is unbelievably phonetic. "

Si, si, yo se. Pero- it coulda been Oo-Es-Ah-cos. Which would be fun, too, and might be warped in other ways.

Armando G- gracias!

Ahimsa said...

Growing world population will cause a "perfect storm" of food, energy and water shortages by 2030, the UK government chief scientist has warned.

rumor said...

Good stuff over at firedoglake:

But underlying the public's trust was the assumption that those in charge were doing this because there was no other choice, and they thought people like Timothy Geithner knew it was their job to keep the people who had looted their retirement funds and sacked their value of their homes from profiting from taxpayer largesse while they struggled. They most certainly did not share Timothy Geithner's belief that everyone in the banking industry should continue to get rich.

It's impossible to know when Geithner realized that the AIG bonuses were eminent, but one thing is clear -- he did not anticipate the public rage, the critical breaking of trust that the bonuses symbolized. He thought he could stomp around a bit, shake his head and talk about "outrage" but it would eventually blow over. He, the administration and the anxiety pundits do not seem to realize that the AIG bonuses are not just a "drop in the bucket." They trigger a whole set of ugly conclusions. As dday says, "the public knows intuitively that they've been getting a raw deal for decades, and the bonuses are only a small part of the story.

What they telegraph to the American public, quite appropriately, is that the people in charge are perpetuating a broken system and enriching their friends at taxpayer expense, and it calls into question everything they have been told. It's a signal that the whole thing is a crock, that it's no more than a great and penultimate oligarchical looting."

Anonymous said...

"The US military is particularily unprepared to deal with localized guerilla warfare. And has proven so from Korea, to Vietnam, to Iraq."

That all depends on the mission. The USG could opt to carpet bomb mobs from a safe distance. They could deploy gunships or other hardware that can kill thousands with little or no exposure to its troops.

Perhaps, for the first few riots they would send in the troops, but if they can't regain control, they will simple pull-out and abandon affected areas, rather than risk large causulties.

For strategic regions, that the USG deems take at all costs, they could deploy aerisol chemical weapons (lethal and non-lethal) to clear out the masses.

That said, I have doubts that the US Military will remain a viable organization. The USG has chosen a path that will cause the collapse of the US dollar. Every US gov't worker is paid is US dollars. Would Gov't workers show up for work if they are paid in worthless dollars? Would Contractors that make and support Military equipment continue to supply the USG with equipment and services?

The only real power the USG has is the value of the US Dollar. Without the dollar, Its military and its laws become useless.

Greenpa said...

Little question folks. I'm 59% seriously considering launching a new blog, to be named The Polka Dot Gallows. This would be updated like once a week and would contain news bits from those on the planet who are utterly, hilariously, out of touch with reality.

And headlines like the one that just tipped me over the edge on asking you:

From the Washington Post:

"Obama Urges Sensible Spending"

ROTFLMAO!!!!! Seriously. Regardless of any opinions about what the BigBam is doing- that's just mindblowingly hilarious to the sentient.

So, the question; would it be worth my while to do this blog? Would you read it?

Anonymous said...

"..the "fresh start" Germany and Japan received after WWII.."

Bertolt Brecht always maintained that fascism Was gangsterism/organized crime.

Fascist were better it liquidating their competitors than run-of-the-mill hoodlums.

Allowing Germany and especially Japan to run up ungodly trade imbalances with the US after WWII was a tremendous boost to their economies. In addition, Japan in particular does not allow U.S. goods and services access to their markets. A one sided form of protectionism.

This sustained trade imbalance over 55+ years to the 'losers' of WWII helped destroy the US manufacturing base over time and more importantly, it greatly hepled to destroy organized labor and US unions.

Industrialists love cheap labor. Fascist love slave labor, literally. They are a match made in heaven.

If you told Japan, starting today, that we will only allow one dollar of import from them for every dollar of our exports into Japan, they would commit Sepuku on the spot. Their Life Blood is their indefensible imbalance in trade.

They own US trade policy and US politicians as it relates to them. How many ex-US presidents have gone to Japan to collect "speakers fees' ranging in the millions per speech.

The other reason is that the U.S. picked up the defense bill for both countries all through the Cold War and beyond.

Add up the 'protection bill'for the last 55 years and ask them to pay for it.

Cover your ears from the howling.

They got to spend what they would have had to spend on their own defense budgets on civilian industrial production infrastructure.

We didn't.

The U.S. did NOT spend that defense money on productive civilian infrastructure.

The US military-industrial complex is one of the greatest wastes of natural resources and energy in the history of humanity on the late great planet earth.

Sure a couple of spillovers from the "kill people and destroy things" budget had civilian uses, but they could have just as easily been developed without the "kill people' research part of it.

Next to the astonishing mis-allocation of resources and natural wealth that the Suburbs represent, stands the military-corporate complex.

The two of them will be the death of everyone.

Greenpa said...

Anon: "They got to spend what they would have had to spend on their own defense budgets on civilian industrial production infrastructure.

We didn't.

The U.S. did NOT spend that defense money on productive civilian infrastructure."

Absolutely 1000% true. I'd forgotten that aspect. It's a huge factor.

aitrader said...

Often wealthy people got where they are by being very aggressive risk takers and speculators.

Behind every great fortune there is a crime.

-- Honore de Balzac

Pretty much covers the current sitch.

scandia said...

Greenpa, been thinking about your possible blog. First off I like an idea that causes laughter.Making the masters of the universe look ridiculous/silly helps break up the thrall we are in.
I would definitely tune in because I'd know it is YOUR blog.I've read your comments for a long time now and hold you in high regard.
If it was some unknown I'd never find them because I'm not looking for that perspective. I scan the news world-wide every day and pick up on those headlines myself. Some of the doozer spin is pure fiction.

VK said...

@ Greenpa

You could try a few postings here for two weeks, see how it goes. Like noon summary has a mini blog within this blog. And than once the audience gets used to it they could tune in to your blog.

Personally, the spun articles and over the top optimism make me quite angry so I can't stand reading them much.

pineapple said...

This is probably not the start of the sucker rally. The rally will likely start after step 5 (bank rebellion/government helicopter drop) from the 10 steps to financial doom posted on the 7th. It's hard to predict the details of the bank rebellion other than the banks will be ordered to lend more and they largely won't comply. It's also unclear what form the helicopter drop will take in terms of policy but the end result will be direct consumer subsidies of some kind. At that point the sucker rally will begin. During the 30s there were sucker rallys all the way down, but not this time. Sentiment seems to be it's all or nothing, the market either recovers or collapses. We all know it's not going to recover to what it once was.

el gallinazo said...

Lehman Stress Balls Coughed Up By Barclays (Update1)

March 20 (Bloomberg) --

I'm confused, Does this have anything to do with The Tiny Tim Two Lips stress test to see if the remaining banks have the balls to survive? Or as President of the NY Fed, did he grab Lehman by the balls, ask him to cough, and concluded that he had a terminal hernia? Enquiring minds want to know.


Think I agree and a few hours ago I started serious contemplation on going back into SDS.

el gallinazo said...

Greenpa said...
El Gallinazo - so have you seen "Ice Age II; The Meltdown"? Gotta say, your pic always brings to mind vultures doing Busby Berkeley these days.

I am rather proud of my profile. Communicates a sensitive and highly contemplative bird. Them African Grays are just extroverted showoffs.

Anonymous said...

El Gallinazo, aren't you even a little jealous of the famous Norweign Blue parrot in the Python skit?

It got to 'pine for the fiords'.

Phil said...