Wednesday, March 4, 2009

March 4 2009: Un éléphant, ça trompe énormément

National Photo Co A Turn for the Worse 1921
Auto wreck in Washington, D.C.

Ilargi: I read Wall Street is up today because China will "stimulate" its economy with another $500 billion. That is really funny. What people most likely didn't read is that China also announced a 15% increase in its military spending. Or did the American arms manufacturers shares cause the 2%+ gain? Other than those, what US companies will profit from China trying -in vain, just like the US- to stave off its own economic collapse?

I did some back of the envelope scribbling. Almost 700.000 Americans lost their jobs in February, which is 100.000 more then in January. The revised versions of these numbers will be between 10% and 20% higher. Somehow they always miraculously are. So I assumed that for the rest of 2009 pink slips will rise by 100.000 every month compared to the one before. That is, for the sake of my scribblings I pretend the economy will not deteriorate exponentially. I know that takes a lot of pretending, but since the results are bad enough even when I pretend, I'll stick with it.

The total number of jobs lost would be about 13.7 million on December 31. Obama's stimulus plan will not create or save more than 1 million jobs by that date. There is a chance the plan will create more in 2010, but certainly not before.

8.3 million US homeowners are underwater today, with 2.2 million additional "owners" on the brink. Every month, about 250.000 cases are added to the list. If prices go down another 5%-10%, there will be 10.5 (or more) million people living in homes that are worth less than the mortgages they have taken out on them. If prices decrease another 20% before the year is over, I'm sure the number would be at least 15 million.

There are undoubtedly many among you who have faith that the economy will turn around sometime later this year. After all, government and federal Reserve officials keep on hammering out that exact mantra. First of all, I would invite them to look at some of the numbers and information that came out just today. The services industry contracted at, you guessed it, a record clip. This happens in an economy that shrank, as we saw a few weeks ago, 6.2% on an annualized basis.

The point is that everything gets worse, and fast. If I add exponential factors to my scribbling, I would easily end up with 20 million less jobs by Christmas, bringing even the U3 unemployment rate over 10%, with 15 million underwater homeowners, with millions more foreclosure notices filed on top of the 2.5 million gathered over the past 10 months, with some really large corporations going bankrupt, including some of the major banks and carmakers. My scribblings would then show a cascading domino game in which just about all the pieces need to fall before any sort of rebuilding can begin, and you would be among the falling pieces. It won't just be in the US, but it most certainly won't be spared or be better off than other countries in the better-off part of the world.

Many people will cling to their hopes and beliefs against all odds, and they can shrug off the numbers above. No matter what the trendlines tell you, you can always think that they will magically break and your world be healed. So for now, all I can do is to tell you that I see no signs of the deterioration slowing down in any sense, shape or form. And that I hope I can convince you to prepare for losing your jobs and homes, for this happening to your friends and families, for your communities changing to great extents because of this, so much so that it may be hard at a certain point in time to keep recognizing the world around you.

As for the US specifically, and the people who think it'll have a less hard landing than for instance Europe, I was thinking this morning of an old French language nursery rhyme, Un éléphant ça trompe énormément (English: An Elephant Can Be Extremely Deceptive, or Extremely Wrong). My idea is that the bigger you are, the harder you fall. The elephant lives in your living room.

 Un éléphant
   Ça trompe, ça trompe
   Un éléphant
   Ça trompe énormément.

   La peinture à l'huile
   C'est bien difficile
   Mais c'est bien plus beau
   Que la peinture à l'eau.

"The elephant bit is untranslatable, it's a pun on the word trompe=trunk and the verb tromper=to fool or mislead. The second part is 'Oil painting is quite difficult, but much nicer than water painting'."

It is also the title of a 1976 French movie, remade in the US in 1984 as The Woman In Red starring Kelly LeBrock.

Ilargi: That would be 8.4 million jobs lost on an annualized basis. And the numbers are deteriorating, so more than 10 million lay-offs in 2009 is by no means out of the question.

ADP Says U.S. Companies Reduced Payrolls by 697,000
Companies cut 697,000 jobs in the U.S. in February as the recession’s grip tightened, offering no sign the pace of the decline in payrolls is easing.
The drop in the ADP Employer Services gauge, a survey based on payroll data, was larger than economists forecast and followed a revised cut of 614,000 for the prior month. Employers are cutting staff as demand plummets in the face of strained credit and battered housing and equity markets. The Labor Department may report in two days that employers cut payrolls in February for a 14th consecutive month, putting jobs losses in the current downturn at more than 4.2 million, according to a Bloomberg survey.

"We doubt any of these numbers have hit bottom yet," Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York, said in a note to clients. "Employment is tanking right across the economy." The ADP report was forecast to show a decline of 630,000, according to the median estimate of 26 economists in a Bloomberg News survey. Projections ranged from decreases of 500,000 to 770,000. ADP revised its methodology late last year in a bid to limit differences between its calculations and the government’s payrolls numbers. The ADP figures include only private employment and do not take into account hiring by government agencies. Macroeconomic Advisers LLC in St. Louis produces the report jointly with ADP.

Job cuts announced by U.S. employers more than doubled in February from a year earlier, led by planned cutbacks at retailers and automotive companies, Chicago-based placement firm Challenger, Gray & Christmas Inc. said today. Firing announcements rose 158 percent last month from February 2008, to 186,350. The monthly total fell 23 percent from January’s seven-year high of 241,749 following the worst holiday retail sales season in four decades, Challenger said. Today’s ADP report showed a reduction of 338,000 workers in goods-producing industries including manufacturers and construction companies. Employment in manufacturing dropped by 219,000. Service providers cut 359,000 workers. Companies employing more than 499 people shrank their workforces by 121,000 jobs. Medium-sized businesses, with 50 to 499 employees, cut 314,000 jobs and small companies decreased payrolls by 262,000.

General Motors Corp. was among companies cutting staff. On Feb. 18 the Detroit-based automaker said it planned to cut an additional 47,000 workers worldwide and needed an additional $16.6 billion in new federal loans to keep operating while it restructures its operations to avoid bankruptcy. Caterpillar Inc., the world’s largest maker of earth-moving machinery, said Feb. 11 it was offering a voluntary retirement package to about 2,000 U.S. production employees, in addition to more than 22,100 announced dismissals. "Depending on business conditions, more voluntary and involuntary workforce reductions may be required as the year unfolds," the Peoria, Illinois-based company said in a statement. The ADP report is based on data from 400,000 businesses with about 24 million workers on payrolls. ADP began keeping records in January 2001 and started publishing its numbers in 2006.

U.S. Service Industries Contracted at Faster Pace
Service industries in the U.S. contracted at a faster pace in February as job losses sapped consumer confidence and spending. The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, fell to 41.6 from 42.9 in January. Readings below 50 signal contraction. Companies from retailer J.Crew Group Inc. to financial- services firm JPMorgan Chase & Co. have slashed payrolls and spending as consumers retrench, fueling more cutbacks and weakening confidence further. President Barack Obama has pledged to create jobs and help Americans keep their homes, and Federal Reserve Chairman Ben S. Bernanke yesterday said policy makers may need to expand aid to the banking system.

"It doesn’t look like we’ll pull out of this recession anytime soon," said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, who had forecast a 41.5 reading for the index. "The labor market is very weak at this point. Firms are trimming inventories and feel they have to cut more." Economists forecast the Tempe, Arizona-based ISM’s services gauge would fall to 41, according to the median of 70 projections in a Bloomberg News survey. Estimates ranged from 37 to 44. Companies in the U.S. cut an estimated 697,000 jobs in February, a report from ADP Employer Services today showed. Job cuts announced by U.S. employers more than doubled from the same month a year earlier, placement firm Challenger, Gray & Christmas Inc. also said today.

China’s announcement that it was considering additional stimulus to revive growth helped push stocks higher around the world, lifted commodity prices and drove down Treasury securities. The Standard & Poor’s 500 Index rose 1.7 percent to 708.14 at 10:42 a.m. in New York. The yield on the 10-year note jumped to 3.00 percent from 2.88 percent late yesterday. ISM’s measure of employment for non-manufacturing businesses climbed to 37.3 from a record-low 34.4 in January. Today’s report comes two days before the Labor Department publishes February employment data. Economists predict payrolls dropped by 650,000, the most since 1949, and the jobless rate surged to 7.9 percent, the highest level since 1984, according to the median survey estimates. The ISM group’s index of new orders for non-manufacturing businesses fell to 40.7 from 41.6 in January. Its gauge of prices paid climbed to 48.1 from 42.5.

Wholesalers, retailers and management companies were among the 14 industries that shrank the most last month, today’s report showed. Only one industry, arts and entertainment, expanded in February. JPMorgan said Feb. 26 it will eliminate 2,800 jobs at Washington Mutual through attrition, bringing to 12,000 the total number of positions lost since the bank bought the failed thrift in September. J.Crew said Feb. 27 that it is cutting about 95 jobs and suspending matching contributions to employee retirement-savings plans, following companies such as Saks Inc., Macy’s Inc. and Limited Brands Inc., which have recently reduced employment to control costs. "We are operating in a very tough economic environment," Chief Executive Officer Millard Drexler said in a statement.

The U.S. economy contracted at a 6.2 percent annual pace in the fourth quarter, the most since 1982, the Commerce Department said last week. Consumer spending dropped at a 4.3 percent rate, the most since 1980. Economists say the current recession may turn out to be the worst in seven decades. Bernanke, who has called the economy’s contraction "severe," yesterday told the Senate Budget Committee that policy makers may need to expand aid to the banking system beyond the $700 billion already approved and take other aggressive measures even at the cost of soaring fiscal deficits. "Without a reasonable degree of financial stability, a sustainable recovery will not occur," the Fed chairman said.

The Treasury today issued eligibility guidelines for homeowners seeking federal aid that will allow troubled borrowers to lower mortgage rates to as low as 2 percent. The rules require applicants to fully document their income with pay stubs and tax returns, and sign an affidavit attesting to "financial hardship," the Treasury said. A report two days ago showed consumers took advantage of retailers’ post-holiday discounts. Personal spending rose 0.6 percent in January, the first increase in seven months, the Commerce Department said. "Companies are trying to generate revenue and yet the few buyers that are out there are trying to drive down pricing," Anthony Nieves, chairman of ISM’s non-manufacturing survey, said in a press conference. "It’s really frustrating." Americans collecting jobless benefits reached the highest on record last month, and the Conference Board’s index of consumer confidence plunged to a record-low 25, the New York-based group said on Feb. 24.

Consumer bankruptcy filings jump 29% in February for a year ago
The number of U.S. consumers filing for bankruptcy jumped 29% in February from the year earlier, and the number is expected to keep rising as economic troubles deepen, according to the American Bankruptcy Institute Tuesday. Some 98,344 consumers filed for bankruptcy protection in February, according to the ABI which compiles data from the National Bankruptcy Research Center. It represents the most bankruptcies filed in the month of February since new bankruptcy laws went into effect in 2005. "We expect at least 1.4 million bankruptcies this year," said ABI Executive Director Samuel Gerdano, in a statement. Gerdano added that the number will be even higher if Congress changes laws that would permit residential home mortgages to be modified under Chapter 13 of the Bankruptcy Code. Chapter 13 allows people to budget their future earnings under a plan in which creditors are paid in whole or in part.

Last year, 136 publicly traded U.S. companies filed for bankruptcy, up 74% from the year ago, according to law firm Jones Day. "Yet another surge in corporate bankruptcies is likely, as companies across all sectors react to the global economic crisis," Jones Day wrote in a report. Escalating job losses, weakening consumer confidence and declining home values have pushed companies and individuals alike into bankruptcy. IntraLinks, which provides a way to exchange bankruptcy data over the Internet, said in a release Tuesday it had seen a 180% jump in bankruptcy and reorganization deals for the three-month period ended Feb. 15, compared to the same period last year.

More Than 8.3 Million U.S. Mortgages Are Underwater, Millions More Close
More than 8.3 million U.S. mortgage holders owed more on their loans in the fourth quarter than their property was worth as the recession cut home values by $2.4 trillion last year, First American CoreLogic said. An additional 2.2 million borrowers will be underwater if home prices decline another 5 percent, First American, a Santa Ana, California-based seller of mortgage and economic data, said in a report today. Households with negative equity or near it account for a quarter of all mortgage holders. "We have way too much supply and not enough demand," Sam Khater, senior economist for First American, said in an interview. "People aren’t going to purchase a home as long as prices keep falling, and someone who is worried about their job isn’t going to purchase a home either."

Prices in 20 U.S. cities fell 18.5 percent in December from a year earlier, the fastest drop on record, according to the S&P/Case-Shiller index. Sales of previously owned homes, which account for about 90 percent of the market, fell in January to the lowest since 1997, and new-home purchases plunged to the lowest since records began in 1963, the National Association of Realtors and Commerce Department said. The total value of residential properties in the U.S. fell to $19.1 trillion by the end of 2008, down from $21.5 trillion a year earlier, First American said. California lost more than $1.2 trillion in value last year, accounting for roughly half of the national decline in housing values.

U.S. foreclosure filings exceeded 250,000 for the 10th straight month in January, RealtyTrac Inc. reported, and payrolls plunged by 598,000, pushing the unemployment rate to the highest since 1992, according to the Labor Department. An average of 230,000 borrowers a month slid to negative equity in the fourth quarter of 2008, First American said. California led with 43,000, followed by Texas with 16,000, Nevada with 15,000, and Florida and Virginia each with 14,000. New negative equity borrowers may rise to 250,000 a month in the first half of the year if prices continue falling, Khater said. President Barack Obama has proposed a $275 billion plan intended to help as many as 9 million troubled borrowers refinance or restructure their loans. About $75 billion would be used to rescue homeowners by agreeing to pay lenders for altering troubled mortgages while reducing borrowers interest rates as low as 2 percent.

The initiative would require applicants for loan modifications to fully document their income with pay stubs and tax returns, and sign an affidavit attesting to "financial hardship," according to documents released by the U.S. Treasury in Washington today. The second, larger part of the plan relies on government-run Fannie Mae and Freddie Mac to refinance loans. Obama also supports revised U.S. bankruptcy rules that would let judges reduce mortgages on primary residences to fair-market value, if borrowers pay their debts under a court-ordered plan. "None of this is enough for people who are so upside down that they won’t have positive equity," Khater said. More than 2.2 million U.S. borrowers have "severe negative equity," or loans worth 125 percent or more of the property’s value.

The geographical distribution of underwater mortgages is broadening beyond states in the U.S. West and Florida, where rapid price appreciation was fueled by subprime lending, to areas in the South and Midwest, Khater said. Cities such as Atlanta, Chicago, Dallas and Cleveland will have an increasing share of homes with negative equity if home values drop, he said. California had the most underwater borrowers in the fourth quarter with 1.9 million, followed by Florida with 1.3 million, Texas with 497,000, Michigan with 459,000 and Ohio with 435,000, First American said.

Nevada had the highest share, at 55 percent. Michigan was second at 40 percent, followed by Arizona at 32 percent and Florida and California at 30 percent, said First American. New York had the lowest share of underwater mortgages at 4.7 percent. Connecticut was at 9.1 percent and New Jersey was at 9.7 percent. First American compiles its negative equity report from almost 42 million properties with mortgages and covers single- family homes, cooperatives, condominiums, town homes and attached properties up to four units. The estimates account for 85 percent of all mortgages in the U.S. and the data includes homes priced from $70,000 to $1.25 million.

U.S. Economy Weakened in January, February, Fed Says
The U.S. economy "deteriorated further" in almost all corners of the country over the last two months as consumer spending slumped and manufacturing declined, the Federal Reserve said in its regional business survey. Ten of 12 Fed district banks reported "weaker conditions or declines" in their regional economies, and respondents didn’t expect a "significant pickup" until late 2009 or early 2010, the Fed said today in its Beige Book release, published two weeks before officials meet in Washington to set monetary policy. Housing "remained in the doldrums in most areas," the Fed said. Lending fell across the U.S. and credit availability "remained tight," the Fed said. The recession and financial crisis have prompted Chairman Ben S. Bernanke to start a $1 trillion lending program and buy $600 billion of housing debt, while the Obama administration is betting its $787 billion fiscal stimulus will reverse the economy’s slide.

"We’re in the throes of the deepest part of the recession now," Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley’s individual-investor clients, said in an interview with Bloomberg Television. The report reflects information reported through Feb. 23 and summarized by staffers at the San Francisco Fed, which oversees the largest portion of the U.S. economy. The Federal Open Market Committee next meets in Washington March 17-18. Stocks climbed today, bolstered by Chinese authorities considering additional stimulus measures to help spur that nation’s growth. The Standard & Poor’s 500 Stock Index rose 3.3 percent to 719.61 at 2:54 p.m. in New York. Benchmark 10-year Treasury yields jumped to 3 percent from 2.88 percent late yesterday.

"Consumer spending remained very weak on balance, albeit with slight firming noted by many districts," the Fed report said. About half of the districts said consumer demand was slower or "fell significantly" from a year earlier. The economy shrank at a 6.2 percent annual rate in the fourth quarter, the most since 1982, revised government figures showed last week. Home construction contracted at a 22 percent pace following a 16 percent decline in the prior quarter.
The recession in U.S. manufacturing persisted for a 13th month in February, a private report showed this week. Other reports showed consumer spending rose in January with a spurt of post-holiday discounts, and construction dropped more than twice as much as anticipated.

"Reports on manufacturing activity suggested steep declines in activity in some sectors and pronounced declines overall," the Fed said. Exceptions to the economy’s weakening included food production and pharmaceuticals, the Fed said. The Boston district reported "double-digit" sales gains for biopharmaceutical companies, the central bank said. In January, Fed officials downgraded their forecasts for growth this year, seeing a deeper contraction as the credit crunch tightens. Most forecast a contraction of 0.5 percent to 1.3 percent. The White House last week forecast a less severe U.S. economic contraction this year and faster growth next year than most economists are predicting, saying gross domestic product will shrink 1.2 percent in 2009, followed by an expansion of 3.2 percent in 2010.

Separately today, the administration set loan modification guidelines for its $75 billion homeowner rescue plan, agreeing to pay lenders for altering troubled mortgages while reducing borrowers’ interest rates to as low as 2 percent. The Fed report said home prices kept falling this year "with little or no signs of a deceleration evident." Homebuilders "remain pessimistic regarding recovery prospects this year," the Fed said. Demand for commercial real estate "weakened significantly," and the retreat in construction is expected to continue through at least year-end, the Fed survey said.

U.S. employers probably eliminated 650,000 jobs from payrolls in February, the most since 1949, while the jobless rate may have increased to 7.9 percent from 7.6 percent, according to the median estimates of economists surveyed by Bloomberg News. The Labor Department will report the figures March 6. The Beige Book said unemployment is up in "all areas, reducing or eliminating upward wage pressures." Weaker demand is spurring discounting of goods other than fuel and food, the Fed said. As such, "upward price pressures continued to ease across a broad spectrum of final goods and services," the Fed said. The consumer price index was unchanged in January compared with a year before. That was the first month without a year-on- year increase since 1955.

Ilargi: This is very interesting. There's at least the promise of putting the losses where they belong, unlike in the Obama scheme, which puts them with taxpayers. Of course there is the question of scale: it looks like a laborious process. Another question is whether the newly set price will hold, and for how long. Then there's the recourse vs non-recourse issue. And yes, it will topple quite a few banks, including big ones, but that will happen regardless unless there's a way to prop up prices indefinitely despite non-existent demand. It certainly deserves some good scrutiny from Congress.

Bank of America Charges May Surge as Hedge Funds Mark Mortgages to Market
Patricia Greenberg’s townhouse in Irvine, California, was losing about $10,000 a month in value when she received a letter in February 2008 that looked too good to be true: An investor was offering to cut her $472,000 mortgage by 26 percent and her monthly payment by a third. "I didn’t want to get involved in a scam," says Greenberg, a cosmetics saleswoman for Orlane Inc., who had bought the house with no money down eight months earlier. It was no ruse. New York hedge fund manager Ralph DellaCamera Jr. says he’d purchased the mortgage for 60 cents on the dollar and forced the originator, MLSG Home Loans of Reno, Nevada, to eat the loss. Protecting his investment, DellaCamera lowered Greenberg’s debt to keep her in the home. She now pays $2,400 a month instead of $3,800 and plows some of her savings into upgrading the Cape Cod-style residence.

One in five borrowers in the $10.5 trillion U.S. mortgage market owes more than their property is worth, according to First American CoreLogic Inc., a real estate data company based in Santa Ana, California. Ten percent or fewer have benefited from the principal reductions that Ron D’Vari, former head of structured finance at New York-based investment adviser BlackRock Inc., says would help solve the mortgage crisis. "You have to take the poison out of the water at the source," says D’Vari, 50, who is now chief executive officer of his own firm, New York-based NewOak Capital LLC, which advises mortgage investors. "You have to go to the borrower, and you need to create liquidity at the borrower level."

So far, recovery plans by the federal government and private lenders have avoided writing down mortgage loans to market values in the worst slump since the Great Depression. Home prices have dropped 30 percent since the market peak in June 2007, according to New York-based Radar Logic Inc., which tracks real estate sales in 25 markets. December 2009 contracts traded on the company’s RPX index signal a further 16.5 percent decline this year. If not for the government commitment to recapitalize U.S. banks under the Troubled Asset Relief Program, lenders’ losses would exceed their capital by $400 billion, estimates Nouriel Roubini, a professor of economics at New York University’s Leonard N. Stern School of Business.

While the government and banks agree that loan restructurings are their best defense against an increase in the record 2.3 million foreclosures last year, Roubini’s calculation shows that forcing lenders to write down the value of their distressed mortgages to cash values would render banks insolvent. Bankers also say that reducing homeowners’ mortgage balances precludes lenders from sharing in the properties’ eventual recovery and creates an incentive for all borrowers to seek concessions, even those who aren’t in danger of defaulting. "It suggests enormous and lasting damage to our mortgage markets and real estate values, which as a homeowner I don’t particularly want to see," says Gary Townsend, 57, a former federal banking examiner who is now CEO of the investment firm Hill-Townsend Capital LLC in Chevy Chase, Maryland.

President Barack Obama announced a $75 billion rescue plan Feb. 18 that promotes more affordable monthly payments for as many as 9 million borrowers through government-subsidized interest rates and extended loan terms up to 40 years. The administration is scheduled to release more details today. Obama also endorsed "cramdown" legislation that would authorize bankruptcy judges to renegotiate the terms of distressed borrowers’ mortgages closer to market values. Homeowners would have to exhaust all other options before using the bankruptcy court to reduce their loan payments, House Majority Leader Steny Hoyer said yesterday.

While buying time for the financial system to stabilize and the economy to recover, the government program steers clear of restoring homeowners’ lost equity, which is a more effective method of stemming foreclosures, according to research by Credit Suisse Group AG and Goldman Sachs Group Inc. Less than 1 percent of the 88,830 modifications tracked by the California Department of Corporations from January through September last year included reductions of principal. By comparison, 47 percent of the restructurings lowered borrowers’ interest rates, according to the state agency. One in 10 revisions from a national sample in November included decreases in principal, wrote Alan M. White, an assistant law professor at Valparaiso University in Valparaiso, Indiana, in the paper, "Deleveraging the American Homeowner: The Failure of 2008 Voluntary Mortgage Contract Modifications." Bank resistance to more aggressive action was reflected in a December study by the Comptroller of the Currency, a federal banking regulator. After six months, more than 55 percent of the loans modified last year re-defaulted, that report showed.

By comparison, 28 percent of homeowners whose modifications trimmed their principal by a fifth or more were late after six months, according to research by Diane Pendley, a managing director of Fitch Ratings in New York. The Obama administration’s failure to close the negative- equity gap means that its plan "will likely join the dud parade of federal rescues," says John Kiff, an International Monetary Fund economist in Washington. DellaCamera, 55, the principal of DellaCamera Capital Management LLC, says that government reluctance to force banks to write down the value of distressed loans and securities to prices that buyers are willing to pay creates "gridlock," delaying bad-debt workouts and an eventual recovery. "We felt there was going to be an opportunity going forward, not anticipating that it would be as bad and ugly as it is," says DellaCamera. He says he has bought about $125 million in distressed mortgages, a 10th of his target, through affiliate National Asset Direct Inc., based in San Diego.

Greenberg, 55, the cosmetics saleswoman, says she was making timely payments and had no intention of giving up her residence when NAD loan adviser Sarah Hussion, 34, contacted her early last year. She says she was skeptical at first. Loan-modification frauds were proliferating, according to the California Department of Real Estate. The state regulator logged 292 complaints against foreclosure-avoidance firms last year and has issued nine desist-and-refrain orders since November, says Tom Pool, the agency’s assistant commissioner. Greenberg says she warmed to NAD’s proposal after Hussion explained that the value of the house had fallen well below the amount of the loan, and that it was in the company’s interest to head off a default by reworking mortgages like hers. "If something happened to my job, I would be at high risk of not making my payment," Greenberg says she recognizes now.

With the national economy slowing and state housing prices in free-fall, declining 42 percent last year, according to a California Association of Realtors report in December, Hussion reduced Greenberg’s mortgage by $121,300 and her interest rate to a fixed 6.375 percent from an adjustable 9.629 percent. The changes allowed NAD to lock in a $65,900 profit. Ed Goormastic, the former owner of MLSG Home Loans, which originated Greenberg’s loan, isn’t cheering the outcome. "If we were a lot of other countries, we’d make them pay," says Goormastic. His company folded in October 2007, a victim of competitive pressures that produced "no-income, no-asset loans" that led to the real estate bust, he says.

Three of the largest mortgage companies, Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co., announced plans late last year to modify as many as 1.3 million mortgages. Only Charlotte, North Carolina-based Bank of America, under an agreement with 31 states, explicitly pledged reductions of principal on some loans at its Countrywide Financial Corp. unit. Bank of America said it would modify 400,000 Countrywide mortgages at a cost of $8.4 billion. It is part of a companywide initiative to help 630,000 customers with more than $100 billion in mortgage financing remain in their homes. The bank added Feb. 18 that it will halt foreclosure sales until the details of Obama’s rescue program are known. Most loan modifications replicate "the bad-loan structures that created the crisis: things like interest-only loans or having a temporary rate reduction that is going to increase payment shock later," says Valparaiso University’s White.

"The banks need to flush out all the bad assets, says Louis Amaya, 44, NAD’s chief investment officer. ‘‘Let guys like us buy them, service them, reliquefy them into good loans.’’ The process will ‘‘put a lot of them out of business,’’ Amaya says. ‘‘There’s going to be some hard, short-term pain that needs to happen in order for us to start rebounding.’’ Ernst Henry, 43, a respiratory therapist in Charlotte, North Carolina, responded as skeptically as Greenberg had after receiving a solicitation from NAD early last year. ‘‘My initial instinct was to shred the letter,’’ he says.

NAD’s Hussion says the company bought Henry’s $149,900 loan on a four-bedroom rental property for $94,296, a 37 percent discount from the unpaid balance. Yet with the mortgage market collapsing and the appraised value of Henry’s property declining, Hussion says she struggled to refinance the debt. Henry balked at her offer to cut the principal by about $50,000, contingent on his paying $8,000 in closing costs. ‘‘I’m giving you $50,000. Give me the eight, stop complaining!" Hussion says she told him, raising her voice. That got Henry’s attention. "It made clear sense to me," he says now.

He took the offer.

Details of housing rescue plan are revealed
The Obama administration on Wednesday outlined key details of a $75 billion housing rescue plan expected to help as many as 9 million homeowners rework mortgages into more affordable monthly payments. The plan was announced Feb. 18. Wednesday's details show who would qualify and how the help would be provided to homeowners who want to refinance mortgages or who are unable to afford their current payments. "It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets," Treasury Secretary Tim Geithner said.
  • Loan Refinancing. Up to 5 million homeowners with a solid payment history on mortgages held or owned by Freddie Mac and Fannie Mae will be eligible to refinance into more affordable terms. Normally, these borrowers would have been unable to refinance because heir homes have lost value, pushing their current loan-to-value ratios above 80%. The program will end in 2010.

  • Loan Modifications. Lenders and other servicers can immediately begin making modifications that could help up to 4 million at-risk homeowners stay in their properties. To be eligible, homeowners must have loans that originated on or before Jan. 1, 2009. Eligible are first-lien loans on owner-occupied properties with unpaid principal balances up to $729,750. Higher limits will be allowed for owner-occupied properties with two to four units. All borrowers must document income, which includes providing information such as two most recent pay stubs and an affidavit of financial hardship. The program will run until Dec. 31, 2012. Incentives also are provided to get lenders to modify mortgages if a borrower isn't late on payments but is at risk of default.

  • Lenders and other servicers. Lenders will be required to use a formula — basically, a net value test — on each loan that is 60 days past due or delinquent. The test basically requires servicers to do the modification if the net present value of cash flows with a modification is greater than without a reworking.
    Servicers also must follow an established process to reduce the monthly payment to no more than 31% of the borrowers' gross monthly income. In order to do that, lenders will first reduce the interest rate on the loan and then extend the term of the loan to up to 40 years. Servicers will get financial incentives, such as an up-front fee of $1,000 per modification, to encourage participation.

Ilargi: Want to know exactly how morally bankrupt the country, its political system and its economy are? Look no further.

Former Countrywide leaders start firm to buy bad loans
Whether they deserve to be or not, Countrywide Financial and its top executives would be on most lists of those who share blame for the U.S. economic crisis. After all, the banking behemoth made risky loans to tens of thousands of Americans, helping set off a chain of events that has the economy staggering. So it may come as a surprise that a dozen top Countrywide executives now stand to make millions from the home mortgage mess. Stanford Kurland, Countrywide's former president, and his team of former company executives have been buying up delinquent home mortgages that the government took over from other failed banks, sometimes for pennies on the dollar. They get a piece of what they can collect.

"It has been very successful — very strong," John Lawrence, the company's head of loan servicing, told Kurland one morning last week in a glass-walled boardroom here at PennyMac's spacious headquarters, opened last year in the same Los Angeles suburb where Countrywide once flourished. "In fact, it's off-the-charts good," he told Kurland, who was leaning back comfortably in his white leather boardroom chair, even as the financial markets in New York were plunging. As hundreds of billions of dollars flow from Washington to jump-start the nation's staggering banks, automakers and other industries, a new economy is emerging of businesses that hope to make money from the various government programs that make up the largest economic rescue in history. They include contractors who are supplementing the labor of overworked government bureaucrats, big investors who are buying up failed banks taken over by the U.S. government and lobbyists helping businesses receive a chunk of the bailout money. And there is PennyMac, led by Kurland, 56, once the soft-spoken No. 2 to Angelo Mozilo, the perpetually tanned former chief executive of Countrywide and the firm's public face.

Kurland has raised hundreds of millions of dollars from big players like BlackRock, the investment manager, to finance his start-up. Having sold off close to $200 million in stock before leaving Countrywide, Kurland has also put up some of his own cash. To Kurland and his colleagues, PennyMac's operations serve as a model for how the U.S. government, working with the nation's banks, can help stabilize the housing market and lead the nation out of the worst recession in decades. "It is very important to the entire team here to be part of a solution," Kurland said, standing in his office, which has views of the nearby Santa Monica Mountains. It is quite evident that their efforts — and the nascent government program to encourage other private investors to work with lenders — are, in fact, helping many distressed homeowners. "Literally, their assistance saved my family's home," said Robert Robinson, of Felton, Pennsylvania, whose interest rate was cut by more than half, making his mortgage affordable again, even though he recently lost his job.

But to some, it is distressing turn of events to see the Countrywide team, led by Kurland, in the business again. "It is sort of like the arsonist who sets fire to the house and then buys up the charred remains and resells it," said Margo Saunders, a lawyer with the National Consumer Law Center, which for more than a decade has sought to place limits on abusive lending practices. More than any other major lending institution, Countrywide has become synonymous with the excesses that led to the housing bubble. The once-highflying firm's reputation has been so tarnished that Bank of America, which bought it last year at a bargain price, announced that Countrywide's name and logo, which had once proudly announced the biggest mortgage lender in the United States, would soon disappear forever. Kurland acknowledges pushing Countrywide into the type of higher-risk loans that have since, in large numbers, gone into default. But he said that during his tenure, he always insisted that the loans went only to borrowers who could afford to repay them.

He also said that Countrywide's riskiest lending took place after he left the company, in late 2006, after what he said was an internal conflict with Mozilo and other executives, whom he blames for loosening loan standards. In retrospect, Kurland said, he regrets what happened at Countrywide and in the mortgage industry nationwide, but does not believe he deserves blame. "It is horrible what transpired in the industry," said Kurland, who has never been subject to any regulatory actions. But lawsuits against Countrywide raise questions about Kurland's portrayal of his role. They accuse him of being at the center of a culture shift at Countrywide that started in 2003, as the company popularized a type of loan that often came with low "teaser" interest rates and that, for some, became unaffordable when the low rate expired. The lawsuits, including one filed by New York State's Comptroller, say Kurland was well aware of the risks, and even misled Countrywide's investors about the precariousness of the company's portfolio, which grew to $463 billion in loans, from $62 billion, during the final six years of his tenure.

"Kurland is seeking to capitalize on a situation that was a product of his own creation," said Blair Nicholas, a lawyer representing retired Arkansas teachers who are also suing Kurland and other former Countrywide executives. "It is tragic and ironic. But then again, greed is a growth industry." David Willingham, a lawyer representing Kurland in several of these suits, said the allegations related to Kurland were without merit, and motions have already been filed to seek their dismissal. U.S. government banking officials — without mentioning Kurland by name — added that just because an executive worked at an institution like Countrywide did not mean he was to blame for questionable lending practices. They said that it was important that they did business with experienced mortgage operators like Kurland, who knew how to work with borrowers creatively to renegotiate their delinquent loans.

PennyMac was born last spring after Kurland received a phone call from a childhood friend, Lawrence Fink, now the chief executive of BlackRock, which along with other investment groups is trying to figure out how to profit from the decline by buying up distressed loans at fire-sale prices. Fink lured him back in business, and BlackRock invested. PennyMac, whose full legal name is the Private National Mortgage Acceptance Company, also received backing from Highfields Capital, a hedge fund based in Boston. Other investors include Atlantic Philanthropies, based in Bermuda and created by the billionaire former owner DFS Group, a chain of airport duty free shops. PennyMac makes its money by buying loans from struggling or failed financial institutions at such a huge discount that it stands to profit enormously, even if it offers to slash interest rates or make other loan modifications to entice borrowers into resuming payments.

Its biggest deal has been with the Federal Deposit Insurance Corp., which it paid $43.2 million, or the equivalent of 38 cents on the dollar, for $560 million worth of mostly delinquent residential loans left over after the failure last year of the First National Bank of Nevada. Many of these loans resemble the kind that Countrywide once offered, with interest rates that can suddenly balloon. Under the initial terms of the FDIC deal, PennyMac is entitled to keep 20 cents on every dollar it can collect from borrowers, with the U.S. government receiving the rest. Eventually that will rise to 40 cents. Telephone operators at PennyMac's offices — working in shifts — spend 15 hours a day trying to reach borrowers whose loans the company now controls. In many cases, they offer drastic cuts in the interest rate or other deals, which PennyMac can afford, given that it paid so little for the loans.

PennyMac hopes to achieve a profit of at least 20 percent annually, and it is actively courting other investors in an effort to build its portfolio, which now consists of $800 million in loans, to as much as $15 billion in the next 18 months, executives said. For the borrowers whose loans have ended up with PennyMac, it can translate into an extraordinary deal. The Laverde family of Porter Ranch, California, had fallen three months behind on its mortgage after sales at a furniture store owned by the family dipped in the economic crisis. Margarita Laverde and her husband were fearful that they might need to move their four children, four dogs and giant saltwater aquarium, among other household items, into a cramped apartment, leaving behind their dream home — a five-bedroom ranch on a quiet suburban street overlooking the San Fernando valley.

But a PennyMac representative instead offered to cut the interest rate on their $590,000 loan to 3 percent, from 7.25 percent, reducing their monthly payments nearly in half, Laverde said. "I kept on asking, 'Are you sure this is correct? Are you sure?' " Laverde said. Even with this reduction, PennyMac stands to make a profit of at least 50 percent, a company official said. Laverde could not care less that executives at PennyMac used to work at Countrywide. "What matters," she said, "is that we know our house is secure and our credit is safe."

Ilargi: And, not surprisingly, from morally bankrupt to a nation of sicko's is but a small step for man and a giant leap for man unkind.

You’re Dead? That Won’t Stop the Debt Collector
The banks need another bailout and countless homeowners cannot handle their mortgage payments, but one group is paying its bills: the dead. Dozens of specially trained agents work on the third floor of DCM Services here, calling up the dear departed’s next of kin and kindly asking if they want to settle the balance on a credit card or bank loan, or perhaps make that final utility bill or cellphone payment. The people on the other end of the line often have no legal obligation to assume the debt of a spouse, sibling or parent. But they take responsibility for it anyway. "I am out of work now, to be honest with you, and money is very tight for us," one man declared on a recent phone call after he was apprised of his late mother-in-law’s $280 credit card bill. He promised to pay $15 a month.

Dead people are the newest frontier in debt collecting, and one of the healthiest parts of the industry. Those who dun the living say that people are so scared and so broke it is difficult to get them to cough up even token payments. Collecting from the dead, however, is expanding. Improved database technology is making it easier to discover when estates are opened in the country’s 3,000 probate courts, giving collectors an opportunity to file timely claims. But if there is no formal estate and thus nothing to file against, the human touch comes into play. New hires at DCM train for three weeks in what the company calls "empathic active listening," which mixes the comforting air of a funeral director with the nonjudgmental tones of a friend. The new employees learn to use such anger-deflecting phrases as "If I hear you correctly, you’d like..."

"You get to be the person who cares," the training manager, Autumn Boomgaarden, told a class of four new hires. For some relatives, paying is pragmatic. The law varies from state to state, but generally survivors are not required to pay a dead relative’s bills from their own assets. In theory, however, collection agencies could go after any property inherited from the deceased. But sentiment also plays a large role, the agencies say. Some relatives are loyal to the credit card or bank in question. Some feel a strong sense of morality, that all debts should be paid. Most of all, people feel they are honoring the wishes of their loved ones.

"In times of illness and death, the hierarchy of debts is adjusted," said Michael Ginsberg of Kaulkin Ginsberg, a consulting company to the debt collection industry. "We do our best to make sure our doctor is paid, because we might need him again. And we want the dead to rest easy, knowing their obligations are taken care of." Finally, of course, some of those who pay a dead relative’s debts are unaware they may have no legal obligation. Scott Weltman of Weltman, Weinberg & Reis, a Cleveland law firm that performs deceased collections, says that if family members ask, "we definitely tell them" they have no legal obligation to pay. "But is it disclosed upfront — ‘Mr. Smith, you definitely don’t owe the money’? It’s not that blunt."

DCM Services, which began in 1999 as a law firm, recently acquired clients in banking, automobile finance, retailing, telecommunications and health care; DCM says its contracts preclude it from naming them. The companies "want to protect their brand," said DCM’s chief executive, Steven Farsht. Despite the delicacy of such collections, he says his 180-employee firm is providing a service to the economy. "The financial services industry is under a tremendous amount of pressure, and every dollar we collect improves their profitability," he said. To listen to even a small sample of DCM’s calls — executives played tapes of 10 of them for a reporter, electronically edited to remove all names — is to reveal the wages of misery, right down to the penny.

A man has left credit card debt of $26,693.77, the legacy of a battle with cancer. A widow says her husband "had no money. He pretty much just had debt." Asked about an outstanding account of $1,084.86, a woman says the deceased had no property beyond "some tools in the garage" and an 18-year-old Dodge. Not everyone has the temperament to make such calls. About half of DCM’s hires do not make it past the first 90 days. For those who survive, many tools help them deal with stress: yoga classes and foosball tables, a rotating assortment of free snacks as well as full-scale lunches twice a month. A masseuse comes in regularly to work on their heads and necks. Brenda Edwards, one of DCM’s top collectors, spoke with a woman in New Jersey about her mother’s $544.96 credit card bill.

"She had no will, no finances, nothing," the daughter said. "Nothing went to probate." The $200 in the checking account was used for funeral expenses. But the woman also said the family "filed a form with the county," indicating that perhaps there was a legal estate after all. "Is anyone in the family in a position to pay this?" Ms. Edwards asked, adding: "I’m not telling you it needs to be paid at all." The woman reached a decision. "I will talk to my brothers and sisters and we will pay this," she said. Ms. Edwards has a girlish voice that sounds younger than her 29 years. "If you plant a seed and leave on a good note, they’ll call back and pay it," she said.

DCM started a Web site called to provide the bereaved with information, tools and, some day, products. "We will never sell death. But it’s O.K. to provide things that could be helpful to the survivor," Mr. Farsht said. Death will be the end of one customer relationship but the beginning of another. Some survivors are surprised, and a few are shocked, that they are hearing from a collector. Eric Frenchman, an online consultant, said a DCM agent inquired about his late father’s $50 Discover card balance before the bill was even due. Since Mr. Frenchman had been planning to pay it anyway, he emerged from the experience vowing never to get a Discover card himself.

The major deceased-debt firms say such experiences are rare. Adam Cohen, chief executive of Phillips & Cohen Associates of Westampton, N.J., said his team of 300 collectors "are all trained in the five stages of grief." If a relative is more focused on denial or anger instead of, say, bargaining, the collector offers to transfer him to the human resources company Ceridian LifeWorks, where "master’s level grief counselors" are standing by. After a week, the relative is contacted again. DCM executives say some of the survivors not only gladly pay but write appreciative notes. They offered up a stack, with the names deleted, as proof. One widow wrote that a collector "was so nice to me, even when I could only pay $5 a month a few times." Saying that money was "so tight" after her husband died, she added: "It was very hard for me, and to get a job at my age. Thank you."

The stock market has been exhausted as cure-all
The stock markets are sliding steadily and despondently to new lows. No one wants securities anymore. Citizens and politicians are searching for scapegoats. Fear predominates. Everything is contracting: the economy, jobs, house prices, shares. Markets are by definition governed by fear and greed, but where are the greedy buyers now that the market needs them? Who will buy up all the shares that international British bank HSBC put up for sale on Monday? HSBC needs 14 billion euros. The good news is that the bank does not need any money from the government. The bad news, however, is that the shares are being sold at a heavy discount. Thus the company has shrunk its own share price.

In a despondent mood, the financial markets fell below the low points of the previous decline in the past few days. The Dow Jones index fell under 7,000 points. The Amsterdam AEX index was at 202 on Tuesday, 16 points below the low point of March 2003. But the markets are not undergoing heavy drops like in October and November of last year. More and more asset managers are waving the white flag. They don't want securities. Experts and historians say this is the start of the capitulation, an absolutely necessary prerequisite for any recovery. The stock market fall marks the end of the securities cult that had slowly but surely taken hold of the world since the summer of 1982.

The stock market seemed to be the cure-all for the economy and society. Securities investments made the rich richer, but the middle class too proved it could blossom into folk capitalists. Governments were able to get rid of their state companies for phenomenal amounts. Managers watched happily as rises in share prices inflated their remunerations and bonuses to record heights. The smartest men and women went to work in the financial world. Everyone counted on the power of stock market gains to inexpensively save up for a pleasant old age. The economy provided the ideology for politics: lower taxes, policies that favour shareholders, low or preferably no financing deficit and a compact government. There was no one talking about any kind of ideological struggle after the fall of the Berlin Wall. Nor did the internet boom and subsequent economic decline signal any definitive break with the cult of securities.

Now with every share price drop there are fewer assets available to put a new stock market rise in motion. New records are still being made. But they are the kinds of records that only make citizens and company managers more anxious. Who is yet able to comprehend that US insurer AIG booked a loss of 62 billion dollars and needs another 30 billion in support from the US government? Until recently AIG was the country’s pride and joy and a logical cornerstone in any investment portfolio. US government actions to bail out banks and insurers are gradually starting to look a bit desperate. On Friday the US government expanded its stake in Citigroup, the once so mighty international bank, to 36 percent.

Every bail out action now raises the question: is it now really enough? And the setbacks of the depression are still to come, when companies go bankrupt and banks have to write off their loans as worthless. Every crisis gets the scapegoats it deserves. And just like in the nineteen thirties, those scapegoats are the bankers on Wall Street, traders in the City of London, and directors in the Dutch financial sector. Sir Fred Goodwin, former CEO of the Royal Bank of Scotland and architect of one of the most disastrous bank takeovers in history, that of ABN Amro for 71 billion euros, is on the street, but with a gilt-edged farewell package.

The excesses of the era of earning free money lie not only in the culture of bonuses and irrationally high senior management salaries, but also in the outright fraud and swindling that is now coming to light. That too is reminiscent of post 1929, the years following the big stock market crash. Citizens and politicians are looking for a guilty party to pay the penalty. In the Netherlands, confidence in insurers is shrinking. Dutch Finance minister Wouter Bos told international securities investors at a conference in Amsterdam on Tuesday that they too had failed. They should have kept the senior managers better in check. In the atmosphere of fear and shrinkage, Warren Buffett, the most famous American securities investor, paid something of a penalty last weekend as well. He has lost vast sums, but remains confident in history: America and shares always rise again. Buffett refuses to capitulate.

Countries Stepping in to Finance Export Trade
As hard as it is for businesses to get loans these days, consider this: even for Toyota Motor, the world’s largest automaker, the well has run dry. The problem, which led Japan to take the rare step Tuesday of tapping its foreign currency reserves to help, is a result of banks curbing the once-easy stream of credit that had helped nurture a boom in global trade. When the world’s economies were expanding, banks financed up to 90 percent of the $13.6 billion market for merchandise trade. But lenders pulled back sharply when the credit crisis hit, forcing governments that are already providing trillions of dollars to financial institutions to support another vital part of the system that extends loans to exporters and importers.

In Japan’s case, while many companies are flush with cash, the government said Tuesday it would dip into $1 trillion worth of foreign currency reserves to lend dollars to Toyota, Sony and other struggling exporters, a sign of how deeply the credit crisis has started to affect even the biggest businesses. About $5 billion of Japan’s foreign currency reserves will be used to finance a government-backed bank that will be charged with making dollar-denominated loans. The carmaker said its wholly owned subsidiary Toyota Financial Services was requesting money that would help it make more loans to customers in the United States.

"We expect difficulties in corporate financing in Japan as well as overseas to reach their peak soon as economic difficulties deepen," said Japan’s finance minister, Kaoru Yosano. Japan will also expand an emergency loan facility aimed at struggling domestic companies to 1.5 trillion yen ($15.4 billion), from 1 trillion yen, Mr. Yosano said. Elsewhere in the world, companies are complaining about similar problems. "We cannot get credit from U.S. banks," said Byon Hyong Jun, who works for a small trading firm in South Korea that takes orders from American clothing companies and arranges for them to be made in Vietnam and other Asian countries.

In part because of the borrowing difficulties, he added, "garment exporters like us have reduced our shipments to the U.S. by as much as 70 percent." Normally, trade finance is considered virtually riskless. The collateral is the underlying merchandise itself, which is occasionally lost at sea or damaged but cannot vanish into the air like home values or the price of a stock. "Trade financing is one of the safest lending activities, and it is very simple," said Jean-François Lambert, global head of trade finance at HSBC in London. But those dynamics have changed as the global economy contracts. Consider the tale of Jeff Auton, the manager of trade finance at Mark Andy, a maker of specialized printing equipment in Chesterfield, Mo. When he fielded a call from his distributor in Brazil in December, Mr. Auton received the good news first.

"Hey, we’ve got a buyer here," Mr. Auton recalled the distributor saying. The bad news, however, was that at least three sales, worth a total of $1 million, were at risk because "the local banks were pricing the deal out of the picture." Hoping to rescue the sales, Mr. Auton dug into the financials of his customers and managed to persuade the Export-Import Bank of the United States, a government agency, to guarantee a private loan to the Brazilian buyers. "You can sit on the sidelines or you can get involved, especially with the customers you have relationships with," Mr. Auton said. "But it is tough and it takes a lot of effort."

Mr. Auton, who called the current climate for exports the worst he has ever seen, said he was lucky to make the Brazilian sales. Many potential customers abroad, he thinks, simply give up when they cannot get credit locally. The change in the cost of financing trade deals highlights the problem. The interest rate on export finance loans to India, to take but one example, has gone from a fraction above Libor, a floating benchmark rate set in London, to about 5.5 percentage points higher. Sure enough, one potential Mark Andy customer in India, mulling a $750,000 order, has not been able to get financing. "The deals don’t so much fall through as we haven’t been able to obtain the business in the first place," Mr. Auton said.

That is amplifying a demand-driven downturn in international trade: For example, Japan, long an export powerhouse, registered its fourth consecutive month of trade deficits in January, the longest such stretch since the price of oil upset its trade balance in the 1970s. The International Monetary Fund expects the total volume of global trade to shrink in 2009 by 2.8 percent, the first contraction since 1982. Japan’s initiative Tuesday was the latest in a series of programs by countries and international organizations to revive the private market. The nation recently pledged $1 billion to the World Bank to finance trade with emerging markets in partnership with banks, and is underwriting a regional insurance system for trade finance. In Europe, the French government recently used a new agency to finance exports of $6.5 billion in planes made by Airbus, the European commercial jetliner manufacturer. The German government, working through a private insurance company, is putting more resources into exports to Russia.

The world’s export credit agencies, like the Ex-Im Bank, are also finding new ways to finance exports. In a shift, the agency, which traditionally insures only loans made by private banks, is lending money directly to non-American buyers of American products, exercising a legal authority that it has but almost never uses. Last year, it lent about $12 million to sell helicopters to Brazil and $344 million for a rural electrification facility in Ghana. In January, it made two loans for Boeing-made airplanes to customers in Dubai and Morocco. Still, said Jeffrey Abramson, vice president for trade finance and insurance at Ex-Im, taking the place of the banks is a distant second choice. "Part of our basic mandate is not to compete with the private market," he said. "We want people to stay in the trade finance game."

Financial Rescue Turns to Toxic Assets
The Obama administration is aiming to solve one of the toughest riddles at the heart of the financial crisis -- how to value the toxic assets weighing down the books of banks -- by setting up several funds to vie for these securities, sources familiar with the plans said yesterday. By competing to buy assets, the funds could set a market price that would finally allow banks to sell them off. The government is seeking to attract private investors to manage and put their own money into these funds by offering to cap their losses and share in the risk of buying the troubled assets. These investors would likely include hedge funds, private-equity firms and other wealthy Wall Street financiers, according to market analysts and industry executives. They said the government could draw political fire for teaming up with these unregulated enterprises.

Obama's team is hoping to unveil this effort, which is the signature program in its multipronged rescue of the financial system, in the next few weeks, a source said. The size of the initiative could range from $500 billion to $1 trillion, according to Treasury officials. While it is unclear how much of that would come from private sources, Treasury Secretary Timothy F. Geithner warned yesterday that the administration may ask Congress for more rescue funds. "As expensive as it already has been, our effort to stabilize the financial system might cost more," he said in prepared remarks for a House hearing on the federal budget. Federal officials in the Bush and Obama administrations have struggled for months to find a way to price these distressed assets, which are backed by troubled mortgages and other loans, that is high enough to help banks but low enough to protect the government from massive losses. Establishing several funds, run by private managers, would take that vexing problem out of the government's hands, allowing market forces to determine what these assets are worth.

This effort shares some similarities with a separate government initiative, the Term Asset-Backed Securities Loan Facility, which officials detailed yesterday. The TALF program -- which begins with $200 billion in public funds and could expand to $1 trillion -- is intended to jump-start the lending markets for education, autos, small businesses and credit cards. Ford Motor Credit, for one, is expected to announce today its intentions to use TALF to sell new securities that would allow people to get loans to buy Ford cars. The program also relies on private-sector enterprises -- such as hedge funds and private-equity firms -- to determine how much to pay for asset-backed securities, which provide financing for consumer loans. The government would give these private investors loans to help buy the securities and offer to cover some losses. But unlike the program to buy toxic assets, the TALF is focused on newly issued and highly-rated assets.

Both of these initiatives look to tap private investment funds, bond traders and some hedge funds, which are key players in what is often called the "shadow banking system" -- the financial markets beyond traditional commercial banks that provided about 70 percent of credit to borrowers before the crisis. Developed by Treasury official Steve Shafran, a Bush administration holdover, and New York Federal Reserve Bank president William C. Dudley, the TALF initiative is the most sweeping step yet to get these markets functioning again. "When congressional committees berate bank CEOs for not lending, they entirely neglect this securitized shadow banking world," said William H. Gross, chief investment officer of Pacific Management Co., the nation's largest investor in bonds. "The Fed has recognized that, but it's taken them a while to get this program operating."

Government officials said lending could not return to normal without helping the shadow bankers. Officials said that the more rigorous executive compensation restrictions that apply to banks that receive rescue money would not apply to the hedge funds and other middlemen who make the TALF money available to borrowers. Both the toxic-assets program and the TALF would involve non-recourse financing. This means the companies can lose the money they invest to buy securities but cannot lose more than they invest. Stephen Schwartzman, chief executive of private-equity giant Blackstone Group, said the TALF has gotten an encouraging response from the credit markets, which have begun to revive in recent weeks in anticipation. Blackstone, he said, has decided to look into buying up the assets offered in the TALF, though the firm has never bought such securities before.

The government's terms give private firms the potential for making tremendous profits, while limiting the losses private investors could face. "I think if the government is prepared to partner with the private sector as well as put up leverage to facilitate certain kinds of investment it could be quite interesting to a private-sector investors," Schwartzman said. He added it is very difficult today for most private investors to get such favorable opportunities. The TALF will begin taking applications from investors March 17 and pumping money out March 25, officials said. Lenders with big consumer credit divisions that could benefit from the TALF moved higher yesterday on the stock market. American Express shares rose by nearly 7 percent, while Capital One Financial advanced 1 percent.

Geithner ducks a big question
Mr. Geithner was on the hot seat again today. He did his best to sell a bad budget. The closing tape speaks for itself. One of the Congressmen asked a hard question. "Mr. Geithner can we sell the bonds necessary to fund this deficit? Are the Chinese still buying our bonds?" Mr. Geithner responded with a full three minutes of non-answers to those questions. At the end of three minutes the Congressman repeated his questions. For another two minutes Mr. Geithner ducked the questions. He just repeated the sound bites that had been drilled into his head.

Mr. Geithner has to remember that he is in the big leagues now. When he talks on the Hill these days a few hundred thousand bond and currency traders are tuning in. I doubt that many of them missed the significance of Mr. Geithner’s non-answers to a direct question. These are questions that should be asked and should be answered. After all, if Treasury is unable to sell about $2 trillion of paper over the next eighteen months at the current historically low rates then whole plan falls apart. This is a cart and horse situation. Mr. Geithner is up front on the horse, believing he is charge. While actually the bond market is in the cart and it has the whip.

Mr. Geithner should be aware by now that the markets have been just vicious when they have had a target in their sights. If in doubt he should consult with Jeff Immelt. Mr. Immelt can describe what it is like when the market turns on you. Ducking tough questions with sound bites does not instill confidence. At least not in this watcher. If that congressman had asked me the questions on China I would have answered;
"Asian Central banks have reduced their holdings of Agency debt by $70 billion in the period 7-12/08. That trend is continuing in the first quarter of the year. At this time it unclear what surpluses the Asian investors will have in the next 24 months. What surpluses they may have could be directed to their domestic economies, reducing their ability to acquire our bonds. They also do not like the fact that Treasury yields are near zero in the short term and lower than inflation in the long term."

If Mr. Geithner’s answer to the Congressman’s question was, "No problem. Ben Bernanke is going to buy all the bonds note and bills he has to in order to keep rates low". "Just like he is doing now with the $1 T of Agency paper he is buying". Well, in that case, maybe it would have been better to have just ducked the question.

Geithner blames budget woes on Bush administration
U.S. Treasury Secretary Timothy Geithner on Wednesday blamed soaring budget deficits partly on failure by the former Bush administration to make needed investments in energy security and healthcare. "We begin our time in office after a long period in which our government was unwilling to make the long-term investments required to meet critical challenges in health care, energy and education," he said in prepared remarks to the Senate Finance Committee.

The Obama administration is projecting a deficit of $1.8 trillion, or 12.3 percent of gross domestic product, in fiscal 2009, which ends September 30. Geithner said $1.3 trillion of that total was inherited from the Bush administration. Most of his testimony echoed remarks he delivered on Tuesday to the tax-writing House Ways and Means Committee. Geithner told lawmakers on Tuesday that $43 billion of new investments will be made in clean energy technology, but on Wednesday he boosted that estimate to $65 billion.

No alternative to hiking bank fees -- FDIC's Bair
The head of the Federal Deposit Insurance Corp said the agency saw no alternative to aggressively raising bank fees in order to replenish the deposit insurance fund. FDIC Chairman Sheila Bair said it would be dangerous to public confidence if the fund was allowed to drop to zero and that the agency will "pull back" on the fees if the condition of the fund improves. "I think it's painful. We didn't want to do it, but we searched for alternatives and couldn't find any," Bair told the National Association of Attorneys General. The FDIC last week passed an interim rule to further increase the fees it charges banks to insure deposits and also approved a one-time special assessment fee that will cost the industry $15 billion.

Bank Robbery
The Treasury and Federal Reserve continue to cook up creative ways to pump taxpayer money into troubled financial institutions. So we're having a tough time understanding why another federal agency, the FDIC, has announced plans to take $27 billion out of the banking system this year. It's true that the FDIC's deposit-insurance fund has been shrinking, and that since the beginning of 2009 the FDIC has rolled up two banks a week, on average. It took over two more last Friday. The fund is now down to $19 billion from $52 billion a year ago and by law had to be replenished. But the deposit-insurance fund is itself a legal fiction. There is no bank vault with those billions socked away for FDIC Chairman Sheila Bair to dip into when she seizes a bank. Like the Social Security Trust Fund, the insurance fund hands its money over to the Treasury to spend and draws it down as needed. Even if the fund falls to zero, the FDIC has an existing $30 billion Treasury line of credit, which may soon grow to $100 billion.

Ms. Bair painted Friday's decision to dun the banks for $27 billion this year as an act of fiscal responsibility, noting that unlike other rescue programs, the FDIC might not have to hit up taxpayers or tap that credit line this year. But this is a false economy if the money sucked out of the banking system to pay for deposit insurance drives more banks to the brink of failure. That $27 billion levy against an insured deposit base of $4.76 trillion may not seem like much. But it could mean $2 million or more this year for a bank with $1 billion in deposits, which could in turn represent a substantial drain on earnings at a time when the economy needs banks to earn their way out of trouble. Money paid to the FDIC can't be leveraged to support new lending, so $27 billion in FDIC premiums could also take $150 billion or so out of lending in the coming year.

To be sure, the law under which the FDIC operates is perverse. For most of a decade beginning in 1996, bank failures were rare and the FDIC collected no premiums from most banks. That forbearance was required under the law, which was designed to make sure that the insurance fund never got too big or too small. But the parameters are so narrow that, as we are now seeing, a slew of bank failures can force premium increases at the worst possible time. If we are going to have deposit insurance, then by all means let the banks pay for it. But the FDIC needs the flexibility to collect premiums in good times, and not wait until a crisis is under way to step in and start skimming from the banks.

Ms. Bair also has more flexibility than she claims. There is that Treasury line of credit. And Congress could have appropriated additional funds to cover deeper losses last year, as these columns urged. It could do so again now. The real problem here is political. A year and a half into this financial mess, the name of the game in Washington is still cover-your-assets, and neither the FDIC nor Congress wants to own up to the need for more taxpayer help to protect depositors. Banks should pay for their insurance over the course of a business cycle, rather than raiding their earnings when they desperately need the capital. President Obama's budget foresees an additional $250 billion in financial-rescue funding, which means bank losses. When we're putting that kind of money into the banks to keep them solvent, why is the FDIC taking billions out?

Ilargi: Know why the markets are losing money hand over fist? Here's your answer: they are psychologically damaged. Bring out the Prozac.

Short-Sale Rule Revival Undermined by SEC Data After Bernanke Urges Review
The revival of Securities and Exchange Commission rules aimed at curbing speculators who seek to drive down stocks may be hindered by a report from the agency’s own economists. Daniel Aromi and Cecilia Caglio, economists at the SEC in Washington, said in a December report to former Chairman Christopher Cox that the so-called uptick rule was less effective when needed most, during panics that drive prices down and volatility up. Even with delays imposed by the curb, short sellers in a simulation executed trades 25 percent faster on average when stocks plunged than when prices were steady, according to the study.

"The uptick rule is not going to slow down the market that much," said Michael Pagano, a finance professor at Villanova University in Villanova, Pennsylvania, who read the report. "The time when you’d want to see the uptick rule become more binding is exactly when you have high volatility, and particularly when you have large negative returns." Regulators are considering restrictions on speculators after the Standard & Poor’s 500 Index fell 54 percent in the 20 months since the uptick rule was eliminated. Mary Schapiro, who succeeded Cox, said in January during her confirmation hearings that examining the rule is "one of the things that I would be committed to doing very quickly." Federal Reserve Chairman Ben S. Bernanke told Congress last week that the measure, removed after 69 years on the books, should be revisited.

"My sense is that it’s worth looking at, and I would say that to the new chairwoman if she asks me about it," Bernanke told the House Financial Services Committee on Feb. 25. The rule "might have had some benefit," he said. In a short sale, traders borrow stock and sell it, hoping to profit by replacing the shares at a lower price. The uptick rule required bearish traders to wait for a price increase in the stock they wanted to short, and prevented so-called bear raids where successive short sales drive prices down. Members of Congress, New York-based banks Citigroup Inc. and Morgan Stanley, and Charles Schwab Corp. in San Francisco blamed the SEC’s elimination of the uptick rule for exacerbating losses. The S&P 500 fell 0.6 percent yesterday to 696.33, a 12-year low. Cox failed to convince a majority of SEC commissioners last year to reinstate the regulation or create a modified version that was easier for brokerages to implement. The agency eliminated the uptick rule after SEC and academic studies showed it didn’t work in markets dominated by electronic trading.

NYSE Euronext Chief Executive Officer Duncan Niederauer said late yesterday that he supports bringing back the uptick rule. "When markets are psychologically damaged like they are right now, I actually think it would go a long way to adding confidence," he said at the Museum of American Finance in New York. "We at least owe the investing community an answer. No more rhetoric, no more maybes, just what are we going to do." The December SEC report examined the benefits of barring short sales unless they were done at prices at least 1 cent higher than the last trade. While more than 58 percent of short sales would be delayed or barred by such a requirement, the impact lessens in times of panics, according to the 28-page study. Short sellers would be able to execute as much as 57 percent more trades in certain stocks when the market slides, compared with times when prices are steady, the report shows.

The SEC also considered raising the threshold to as much as 5 cents. For increments of 4 cents or more, the uptick rule would effectively ban short sales, a policy counter to the agency’s position. In October, the SEC said short selling plays an "important role" by increasing liquidity, helping traders hedge other assets and curbing speculation. A separate SEC analysis concluded that in September, when the S&P 500 lost 9.1 percent, short sales were more common during rallies than declines. "We found that a short-sale price test would be most restrictive during periods with little volatility," Aromi and Caglio wrote in the report. "Our results are inconsistent with the notion that, on a regular basis, episodes of extreme negative returns are the result of short selling activity." John Nester, a spokesman for the SEC, said that while Schapiro plans to review the issue, there is no specific proposal under consideration. Aromi didn’t return a call seeking comment, and Caglio referred questions to Nester. Fed spokeswoman Michelle Smith didn’t respond to a request for comment.

Regulators from Washington to London last year cracked down on short selling. In the U.K., a Financial Services Authority prohibition on shorting 34 financial companies expired in January. The SEC eliminated a similar measure Oct. 9 after exchange data showed the prohibition fueled volatility and made it more costly to trade. "What we have right now is a banking and credit crisis, and the equity markets were functioning quite well before they started tampering with short sales," said Stephen J. Nelson, a lawyer in White Plains, New York, who represents brokerages and investment advisers. "There is a lot to do with financial service regulation, which is going to involve thousands of issues that are much more important than an uptick rule."

To nationalise or not – that is the question
by Martin Wolf

Lindsey Graham, the Republican senator, Alan Greenspan, the former chairman of the US Federal Reserve, and James Baker, Ronald Reagan’s second Treasury secretary, are in favour. Ben Bernanke, current Fed chairman, and an administration of liberal Democrats are against. What is dividing them? "Nationalisation" is the answer. In 1978, Alfred Kahn, an adviser on inflation to President Jimmy Carter, used the word "depression". So angry was the president that Mr Kahn started to call it "banana" instead. But the recession Mr Kahn foretold happened all the same. The same may well happen with nationalisation. Indeed, it already has: how else is one to describe the actions of the federal government in relation to Fannie Mae, Freddie Mac, AIG and increasingly Citigroup? Is nationalisation not already the big financial banana? Much of the debate is semantic. But underneath it are at least two big issues. Who bears losses? How does one best restructure banks?

Banks are us. Often the debate is conducted as if they can be punished at no cost to ordinary people. But if they have made losses, someone has to bear them. In effect, the decision has been to make taxpayers bear losses that should fall on creditors. Some argue that shareholders should be rescued, too. But, rightly, this has not happened: share prices have indeed collapsed. That is what shareholders are for. Yet the overwhelming bulk of banking assets are financed through borrowing, not equity. Thus the decision to keep creditors whole has huge implications. If we accept Mr Bernanke’s definition of "nationalisation" as a decision to "wipe out private shareholders", we can call this activity "socialisation". What are its pros and cons?

The biggest cons are two. First, loss-socialisation lowers the funding costs of mega-banks, thereby selectively subsidising their balance sheets. This, in turn, exacerbates the "too big to fail" problem. Second, it leaves shareholders with an option on the upside and, at current market values, next to no risk on the downside. That will motivate "going for broke". So loss-socialisation increases the need to control management. The four biggest US commercial banks – JPMorgan Chase, Citigroup, Bank of America and Wells Fargo – possess 64 per cent of the assets of US commercial banks (see chart). If creditors of these businesses cannot suffer significant losses, this is not much of a market economy.

The "pro" of partial socialisation is that it eliminates the risk of another panic among creditors or spillovers on to investors in the liabilities of banks, such as insurance and pension funds. Since bank bonds are a quarter of US investment-grade corporate bonds, the risk of panic is real. In the aftermath of the Lehman debacle, the decision appears to be that the only alternative to disorderly bankruptcy is none at all. This is frightening. The second big issue is how to restructure banks. One point is clear: once one has decided to rescue creditors, recapitalisation can no longer come from the debt-into-equity swaps normal in bankruptcies. This leaves one with government capital or private capital. In practice, both possibilities are at least partially blocked in the US: the former by political anger; the latter by a wide range of uncertainties – over the valuation of bad assets, future treatment of shareholders and the likely path of the economy. This makes the "zombie bank" alternative, condemned by Mr Baker in the FT on March 2, a likely outcome. Alas, such undercapitalised banking zombies also find it hard to recognise losses or expand their lending.

The US Treasury’s response is its "stress-testing" exercise. All 19 banks with assets of more than $100bn are included. They are asked to estimate losses under two scenarios, the worse of which assumes, quite optimistically, that the biggest fall in gross domestic product will be a 4 per cent year-on-year decline in the second and third quarters of 2009 (see chart). Supervisors will decide whether additional capital is needed. Institutions needing more capital will issue a convertible preferred security to the Treasury in a sufficient amount and will have up to six months to raise private capital. If they fail, convertible securities will be turned into equity on an "as-needed basis". This, then, is loss-socialisation in action – it guarantees a public buffer to protect creditors. This could end up giving the government a controlling shareholding in some institutions: Citigroup, for example. But, say the quibblers, this is not nationalisation.

What then are the pros and cons of this approach, compared with taking institutions over outright? Douglas Elliott of the Brookings Institution analyses this question in an intriguing paper. Part of the answer, he suggests, is that it is unclear whether banks are insolvent. If Nouriel Roubini of the Stern School in New York were to be right (as he has been hitherto), they are. If not, then they are not. Professor Roubini has suggested, for this reason, that it would be best to wait six months by when, in his view, the difficulty of distinguishing between solvent and insolvent institutions will have gone; they will all be seen to be grossly undercapitalised. In those circumstances, the idea of "nationalisation" should be seen as a synonym for "restructuring". Few believe banks would be best managed by the government indefinitely (though recent performance gives some pause). The advantage of nationalisation, then, is that it would allow restructuring of assets and liabilities into "good" and "bad" banks. The big disadvantages are inherent in organising the takeover and then the restructuring of such complex institutions.

If it is impossible to impose losses on creditors, the state could well own huge banks for a long time before it is able to return them to the market. The largest bank restructuring undertaken by the US, before last year, was that of Continental Illinois, seized in 1984. It was then the seventh largest bank and yet it took a decade. How long might the restructuring and sale of Citigroup take, with its huge global entanglements? What damage to its franchise and operations might be done in the process? We are painfully learning that the world’s mega-banks are too complex to manage, too big to fail and too hard to restructure. Nobody would wish to start from here. But, as worries in the stock market show, banks must be fixed, in an orderly and systematic way. The stress tests should be tougher than now planned. Recapitalisation must then occur. Call it a banana if you want. But bank restructuring itself must begin.

How the competent bankers can be assisted
There is a lot of talk about bank nationalisation. But the word is used in two different senses. Sometimes people mean state ownership. Government has, explicitly or implicitly, the primary equity interest in the future performance of banks. In this sense, government now owns many large banks. Not just institutions such as Northern Rock or Anglo Irish Bank, in which it is the only shareholder. For other banks, the combination of capital provision, insurance and guarantees means that most future losses, and a significant though smaller part of future profits, will be assumed by the public. At Royal Bank of Scotland, Fortis, Lloyds and Citigroup, the government holds a dominant equity interest, whether or not it owns a majority of the ordinary shares.

Perhaps government is the substantive owner of Bank of Ireland, Barclays and Deutsche Bank: these organisations could not trade as they do today in the absence of market expectation of government support. The second component of nationalisation is strategic direction. Governments have attempted to impose the first element of nationalisation (ownership) without the second (ultimate control and accountability). But such a separation is neither desirable nor workable for long. The wrangling over Sir Fred Goodwin’s RBS pension is an immediate, if trivial, illustration of problems that arise when the government, in effect, owns an institution but maintains ambiguity about authority. So is the far more substantive issue of who implements lending obligations of publicly supported banks.

Vikram Pandit, Citigroup’s chief executive, poses the issue in stark terms. When the US government announced further support last week, he was reported as telling analysts: "We completely remain in day-to-day charge of the company. We are going to run Citi for shareholders." But if I were a US taxpayer, I would ask why I had provided $45bn (€36bn, £32bn) to a business that was going to be run for shareholders, especially when the current value of outside equity is barely 10 per cent of my own contribution. I can think of no good answer. The US government has not given Citigroup $45bn because it thinks such support is a good financial investment. Most experience shows the situation of struggling banks gets worse much more often than it improves. The US government has given Citigroup $45bn because it fears, rightly, that its collapse would have devastating consequences for the US financial system.

The first objective of Citigroup’s management should be to put the bank in a state in which it can operate without government support. The second should be to ensure that the organisation is structured in a way that can never again jeopardise the stability of the world economy. The interests of shareholders must be entirely secondary. So when Mr Pandit says that the government’s injection of capital will not change strategy, operations or governance, I would e-mail my congressman to ask why on earth not, and tell that congressman what changes I did expect. The company should divest or close activities not related to its essential public function. If Citigroup wants to continue to engage in proprietary trading, it should raise capital for the purpose from private sources.

No one wants bank managers to be replaced by civil servants. But there are a lot of perfectly competent bank managers out there, even if there are a lot of incompetent bank executives. If only the failed managers such as Sir Fred and Mr Pandit would get out of the way. They should take with them traders and financial innovators who have brought great institutions to the point of collapse, and the grandstanding politicians and regulators who, with little idea of what they are doing, are determined to claim credit for every initiative and disclaim responsibility for every problem. An interlude of nationalisation, followed by the reflotation of narrowly focused retail banks, is now the least bad route to the principal public objective – allowing real bankers to get on with their real jobs.

Harvard Losing AAA Benefit in Bond Market Shows Perils of Derivatives Debt
Harvard, the oldest and richest academic institution in America, with more U.S. presidents than any other university, isn’t getting the respect it deserves in the bond market. Even with its pristine AAA credit, the President and Fellows of Harvard College are paying more than similarly rated schools and companies for the first time in memory after even the smartest money managers in Cambridge, Massachusetts, became entangled in derivatives that proved toxic. The extra interest that Harvard, founded in 1636, had to give bondholders for its $1.5 billion December sale is the consequence of the most sophisticated financing gone awry from Wall Street to the Ivy League.

The trouble started a few years ago, when Lawrence Summers, then Harvard’s president and now director of President Barack Obama’s National Economic Council, presided over the purchase of so-called interest-rate swaps to protect the school against rates going up. Instead, the swaps backfired as rates fell, forcing Harvard to search for more cash in the bond market late last year just as credit dried up. As a result of its mishaps, Harvard wound up enabling Princeton University, with an identical AAA rating, to obtain better terms from investors in January. While Harvard’s bonds yielded 3.37 percentage points more than Treasury yields on its $500 million of 6.5 percent notes due in 2039, the New Jersey school paid a smaller premium of 2.7 percentage points five weeks later when it borrowed $1 billion, divided between 10-year and 30-year maturities. . "Harvard certainly helped us" by establishing a "baseline" for yields that other schools didn’t need to approach, said Kenneth Molinaro, Princeton’s controller.

The Harvard bonds will pay $150 million more in interest over 30 years than if it had matched Princeton’s spread over Treasury yields, according to data compiled by Bloomberg. Bonds of companies with AAA ratings traded with lower yields than Harvard when it sold notes due in 2014, 2019 and 2039. Bonds of Johnson & Johnson, the world’s biggest maker of health-care products and a benchmark in the $6.1 trillion market for corporate debt, yielded as much as 1.41 percentage points less than the university’s on the day it was sold, according to data compiled by Bloomberg. Harvard’s high-yielding securities were so cheap that professionals couldn’t get enough of them. Investors snapped up so many of the 30-year bonds that they now yield 0.53 percent more than comparable maturity notes of New Brunswick, New Jersey-based J&J’s securities.

Harvard also sold $1 billion of tax-exempt bonds with interest of 5.8 percent. Those securities replaced debt that paid an average rate of 3.4 percent last year, after taking into account derivatives that include interest-rate swaps that effectively converted some to fixed rate, according to the school’s annual report. The new debt increased interest costs by at least $400 million over the 27-year life of those bonds, according to Bloomberg data. The tax-exempt bonds also proved generous for investors. A day after the Dec. 10 sale, securities firms traded $9.8 million of 5.5 percent bonds due 2036 for as much as 97.08 cents per dollar, up from the initial price of 95.871, trading reports filed with the Municipal Securities Rulemaking Board show. By Dec. 12, banks sold them to customers for as much as 100.375 --a 4.7 percent increase from the initial price. "It was a riot," said John Flahive, a senior vice president at BNY Mellon Wealth Management in Boston, who purchased $1 million of the debt, "only 20 percent or 25 percent of what I wanted."

The university, whose alumni include former Goldman Sachs Group Inc. co-Chief Executive Officer and Treasury Secretary Robert Rubin, 70, and Stephen Schwarzman, the 62-year-old chairman and chief executive officer of Blackstone Group LP, needed the $2.5 billion because it got hit by a double whammy of losses in both derivatives contracts late last year and in its $28.8 billion endowment, the world’s largest, as of Oct. 31. A 22 percent slump in the four months ended Oct. 31 in the endowment triggered about $1 billion of so-called margin calls, or demands from lenders to cover losses, according to a person familiar with the endowment who spoke on the condition of anonymity. At the same time, the value of Harvard’s interest- rate swaps plunged, prompting demands for more collateral, said another person familiar with those contracts. Harvard had 19 swap contracts with New York-based Goldman Sachs; JPMorgan Chase & Co.; Morgan Stanley; Charlotte, North Carolina-based Bank of America Corp. and other large banks, according to a bond-ratings report by Standard & Poor’s.

The agreements required Harvard to pay banks fixed interest rates on a total underlying amount of $3.52 billion in exchange for receiving floating-rate payments. Some of the swaps were used with existing floating-rate bonds, essentially converting the school’s cost to fixed rates. Most of the swaps, signed when Summers, 54, was Harvard’s president from 2001 to 2006, were intended to lock in rates for debt that Harvard expected to issue as far off as 2022, for a 340-acre campus expansion, according to Moody’s Investors Service. In 2006 and 2007, Moody’s warned of risks from those so-called forward swaps, though it said the school’s finances and management experience mitigated them. Summers declined to comment on the record about the matter. The value of the swaps dropped as the fixed rates charged by banks in exchange for floating rates on new contracts fell below what the university was paying. By Oct. 31, its swaps were worth a negative $570 million, meaning that’s how much Harvard needed to pay to get out of them, S&P said. The losses widened from $330.4 million on June 30 and $13.3 million a year earlier, according to Harvard’s annual report.

The losses required Harvard to put up more collateral, causing a cash squeeze because the tumbling value of the endowment also required payments, said the person familiar with the contracts. "They definitely had some liquidity needs, without a doubt," said Marc Savaria, an analyst at S&P, which confirmed Harvard’s AAA rating on Dec. 5, the day of the $1.5 billion bond sale. The cash demands prompted the endowment to sell stocks and withdraw money from hedge funds, while also trying without success to sell buyout-fund investments, said the person familiar with the endowment. By December, school officials realized they needed to tap the bond market, rather than sell assets at depressed prices, this person said. "It was heavy in equities, public and private, and hedge funds and all sorts of alternative assets, and for many years, those assets were continuous providers of cash return," said John Morris, who helps oversee $30 billion for endowments and other clients as managing director of HarbourVest Partners in Boston. "And that party has stopped."

Harvard was forced into credit markets that were still reeling from the collapse of Lehman Brothers Holdings Inc. in September. When the university issued its bonds, the so-called TED Spread that measures the difference between what banks and the Treasury pay for three-month loans was about 2.17 percentage points. In the decade before the collapse of subprime mortgages caused markets to begin freezing in July 2007, the TED Spread averaged 0.54 percentage point. Some of the money from the $1.5 billion bond sale paid fees to terminate the forward-rate swaps, the S&P report said. Harvard declined to say how much it spent to get out of the agreements. As much as $99.3 million of the $1 billion sale paid off swaps related to existing debt, according to Harvard’s statement on those bonds.

"They had to get out of a hole; they had to cover the swaps," said D. Ronald Daniel, a former Harvard treasurer. When he left in June 2004, the school didn’t have any interest-rate swaps related to planned debt, "and we didn’t have any liquidity issues," Daniel said. Investment losses are a departure for Harvard’s endowment, which gained an annual average of 13.8 percent over the past decade, compared with the Standard & Poor’s 500 Index’s 2.9 percent. In the year ending June 30, Harvard’s 8.6 percent return beat the average of 4.7 percent for the top 10 percent of U.S. endowments by performance, according to Commonfund Institute, a researcher in Wilton, Connecticut, affiliated with nonprofit money manager Commonfund. The losses in the four months through October left Harvard’s fund with $28.8 billion, compared with Yale University, which has the second-largest, at $17 billion as of mid-December.

North American college endowments lost an average of 22.5 percent from July 1 through Nov. 30, according to the National Association of College and University Business Officers and Commonfund. The S&P 500 fell 29 percent in that period. Harvard, which depended on the endowment for about 35 percent of its $3.48 billion in revenue during the fiscal year that ended June 30, is more accustomed to accolades. Obama is the eighth U.S. president with a Harvard degree -- more than any other college, the Harvard University Gazette Online said on Nov. 5, citing journalist Robert Windrem. Harvard’s alumni include John Adams, John Quincy Adams, Rutherford B. Hayes, Theodore Roosevelt, Franklin D. Roosevelt, and John F. Kennedy. George W. Bush got his business degree from the university in 1975, and Obama is a 1991 graduate of Harvard Law School, the article said. Now, the performance is getting worse. Harvard estimates the endowment will lose 30 percent this fiscal year, the most in at least four decades, according to a Dec. 2 memo from President Drew Gilpin Faust and Executive Vice President Edward Forst, who was a Goldman Sachs executive before joining the school in September to help oversee its finances.

Harvard Management Co., which administers the endowment, has been run since July by Jane Mendillo, former chief investment officer of nearby Wellesley College. She took over from Mohamed El-Erian, now chief executive officer of Pacific Investment Management Co., which oversees the world’s largest bond fund from Newport Beach, California. He succeeded Jack Meyer, who ran it for 15 years, in February 2006. In the months since the sale, Harvard’s $500 million of 30- year, 6.5 percent taxable bonds rose to an estimated 109.60 cents on the dollar from 99.64, Bloomberg data show. The $500 million 10-year note climbed to an estimated 107.11 from 99.52, or 7.3 percent. Prices of investment grade corporate bonds in a Merrill Lynch & Co. index, with an average maturity of 10 years, rose less than 2 percent in the same period. Harvard paid lead underwriters JPMorgan and Morgan Stanley, along with Goldman Sachs and other bankers, a total of $6.07 million for their services on the $1 billion tax-exempt issue, documents on the sale show. JPMorgan, Morgan Stanley and Goldman earned an undisclosed sum as lead underwriters of the $1.5 billion sale of taxable bonds.

The university declined to comment publicly about the bond sales. JPMorgan, whose CEO Jamie Dimon received his business degree from Harvard Business School, and Morgan Stanley had no comment. Michael DuVally, a spokesman for Goldman Sachs, said the bonds’ rates were reasonable at the time they were sold. Goldman CEO Lloyd Blankfein graduated from both Harvard College and Harvard Law School. "On the back of the Lehman Brothers bankruptcy filing in September, the world was a very fragile place," he said in an e-mail. The prices of several "high-quality" bonds issued late last year have rallied since, and "Harvard happens to be one of these deals." Christopher Cowen, who also advised Harvard on the sales as managing director of Prager, Sealy & Co. in San Francisco, said the yields weren’t too generous because other borrowers couldn’t attract investors at the time and "institutional buyers just weren’t there." Prices for Harvard’s bonds "certainly could have gone in the other direction," he said.

Auto Sales: Worst February in 40 Years
GM is the biggest loser, with new-car sales down 53%. And carmakers are finding that even lavish incentives aren't stopping consumers from buying used cars

February was another dismal month for carmakers as every major producer saw sales drop from 35% to 53%. The sales rate of 9.1 million cars sold was the worst February performance in 40 years as a dismal economy warded nervous consumers away from showrooms. Car sales fell 41% for the month; General Motors was the biggest loser, with sales falling 53%. Ford Motor (F) also took a big fall, as sales dropped 48%. Toyota's U.S. sales fell 40% and the company has asked the Japanese government for $2 billion to help its finance arm write car loans. The news was bad for other Japanese automakers, too. Honda (HMC) sales fell 38% for the month, and Nissan was down 37%.

"Americans are pulling in their horns because they are worried about lost income," said Michael DiGiovanni, executive director of global market analysis for GM. DiGiovanni said that between Americans who are laid off and those who say in a recent Gallup poll that they fear losing their jobs, about 36 million consumers are shying away from the market. GM's sales drop was the biggest. Even though a big chunk of that was due to falling sales to rental and corporate fleets, which command thin if any profit, GM's retail sales still dropped faster than the market. GM still suffers from the credit crunch and the fact that its chief lender, GMAC, has lacked funds to make new-car loans. Its former captive finance company, GMAC Commercial Credit, which is now owned more by Cerberus Capital Management and the federal government than by GM, has tightened credit standards and pulled back on leasing.

Rival Ford owns Ford Motor Credit and can use the lending arm to cut financing deals and write leases to help move inventory. GM can't. But there are small signs of relief for GM. Mark LaNeve, vice-president for sales and marketing at GM North America, said GMAC took part in 35% of GM's retail sales. At its peak, GMAC's lending supported nearly 40% of GM's retail sales, and at times when Americans bought twice the number of cars. The company's total market share fell to 18.2% from 22.7% a year ago. The lender got a $6 billion infusion from the Treasury Dept. in December and has access to funds from the Federal Reserve. LaNeve said GMAC's new liquidity is helping, but it hasn't been a big boost yet. GM isn't the only company hurting. The market is so bleak that Ford lowered its worst-case scenario for auto sales this year to 10.5 million.

That weaker outlook came just before Ford reported a 45% drop in retail sales and a 53% shortfall in fleet sales. Ford had been holding up better than GM and Chrysler. A surge in sales of pickup trucks in the fourth quarter helped Ford score four straight months of retail market-share gains. But higher incentives, especially from Chrysler, halted Ford's streak. Automakers on the whole jacked up incentive spending by about $400 last month, according to auto sales information Web site, while Ford actually reduced its spending by about $800 per vehicle, according to George Pipas, Ford's chief of sales analysis. "At a certain point, just piling on more incentives doesn't bring in more buyers and hurts the vehicles' residual values too much," Pipas says.

Ford continues to reduce head count and pursue other cost-cutting moves to cope with the dramatic fall in demand. It is trying to conserve cash this year in the hopes of not needing to tap a $13 billion U.S. government line of credit. GM and Chrysler are cutting costs and selling assets in order to qualify for billions more in government credit. Ford is also keeping its production of new cars and trucks at very conservative levels, even though it is predicting a rebound of demand for new vehicles in the second half of the year. Ford's chief economist, Emily Kolinski Morris, says that continuing poor economic data makes it difficult to predict where the bottom of the auto market will be and for how long it will remain. "There's no anchor on the economic horizon to make that call."

Chrysler sales fell 44%, which wasn't bad if GM and Ford are the barometer. But Chrysler was laying plenty of money on the hood with employee pricing plus thousands in rebates and 0% financing all available as a package. Still, says analyst Jesse Toprak, "Chrysler's incentives certainly helped." But it appears that incentives are having less effect on the market. Despite bigger rebates and sweeter deals being offered all month, 27% of shoppers ended up buying used cars, Toprak says. The good news is that this means consumers haven't given up on cars. The bad: "Carmakers are spending money to sell new cars, but consumers are buying used," he says. Given the fear among consumers, dealers will be wrangling with bargain hunters for quite a while.

GM, Chrysler Sales Pressure U.S. to Provide Aid or Risk Failure
U.S. auto sales in February fell to a worse-than-expected rate and so low that the U.S. Treasury will face pressure to give more money to General Motors Corp. and Chrysler LLC or let them fail, analysts say. Industry sales plummeted 41 percent last month to a 9.1 million vehicle annual rate, the lowest since December 1981, according to Autodata Corp. GM, surviving with the aid of government loans, reported a 53 percent drop. At that level, nearly every automaker is struggling and GM and Chrysler, which are requesting $21.6 billion in additional loans from the U.S. government, said they likely will need it all. Additional government aid to keep the automakers out of bankruptcy is making less sense, because it has become difficult to project an end to the sales declines, said Stephen Spivey, an automotive analyst at Frost & Sullivan in San Antonio.

"If it stays contracted at this rate for a significant period of time, the bridge loans are being recalled and they are going into bankruptcy," Spivey said yesterday in an interview after the sales results. President Barack Obama’s automotive task force has been meeting with automakers, union officials and auto-parts makers about how to address the collapsing industry. The government already has committed $17.4 billion to GM and Chrysler. Both companies are working on a March 31 deadline to accomplish a restructuring plan that includes concessions from labor and lenders, or the loans can be called by the government. The sales rate in February, below the 9.5 million average of 27 analysts’ and economists’ estimates compiled by Bloomberg, "implies the maximum amount of government aid -- if not more -- will be necessary" for GM and Chrysler, said Rebecca Lindland, an analyst at IHS Global Insight in Lexington, Massachusetts.

"These are obviously unsustainable levels which are causing almost every major auto manufacturer across the world to look for government aid," Michael DiGiovanni, GM’s chief sales analyst, said on a conference call yesterday. He said February is the low point in the market. Toyota Motor Corp. and other automakers previously seen as having solid financial footing cannot sustain a selling rate as low as February’s for a year or longer without laying off workers or taking more dramatic steps, said Spivey, the Frost & Sullivan analyst. The 40 percent February U.S. decline for Toyota, the world’s largest automaker, was its biggest ever. Toyota, forecasting its first loss in 59 years, may ask Japan’s government for 200 billion yen ($2 billion) in loans for its credit unit as private financing has become too expensive, public broadcaster NHK reported yesterday, without naming its source.

Sales tumbled 48 percent for Ford Motor Co., 44 percent for Chrysler, 38 percent for Honda Motor Co. and 37 percent for Nissan Motor Co. GM said it plans to build 34 percent fewer vehicles in North America next quarter, and Ford announced a 38 percent reduction from a year earlier. Ford’s plunging sales, hurt by a 55 percent drop in F-series pickup trucks, hasn’t changed the Dearborn, Michigan-based company’s stance that it won’t require U.S. aid, George Pipas, the company’s sales analyst, said in an interview yesterday. Chrysler has scaled its factories to meet the lower demand and can operate at the low sales rate, Ron Kolka, the chief financial officer of the company, said in a call with reporters yesterday. Chrysler has a $4 billion loan from the government and has asked for $5 billion more.

The automaker’s efforts to negotiate with its banks about cutting debt by $5 billion have stalled as the lenders aren’t interested in discussing trading their secured position for equity, people familiar with the talks said. "At this point, it’s not as much credit as it is a consumer confidence issue," Al Castignetti, Nissan’s vice president of U.S. sales, said in an interview. "Even if you can afford the loan, people are not willing to take on the risk right now because of concern about jobs." Sales of Toyota’s Lexus fell 38 percent, Bayerische Motoren Werke AG’s BMW dropped 38 percent and Daimler AG’s Mercedes-Benz declined 24 percent last month as the sagging U.S. economy crimped demand for luxury autos.

Annual U.S. sales of cars and light trucks averaged more than 16 million this decade. In 2008, they totaled 13.2 million, a 16-year low. The Conference Board said Feb. 24 its measure of consumer confidence plunged to the lowest in 42 years of record-keeping. U.S. employers probably shed 650,000 jobs last month, the most since 1949, according to the median estimates in a Bloomberg survey before the Labor Department’s March 6 report. The jobless rate for January was 7.6 percent, the highest since 1992. GM’s February sales of cars and light trucks fell to 126,170 from 268,737 a year earlier, the automaker said. That included declines of 69 percent for Hummer, 59 percent for Saab and 57 percent for Saturn, three units the company is seeking to shed.

GM urges EU states to come to its aid
General Motors said on Tuesday that its European arm could run out of money by as early as next month, putting up to 300,000 jobs on the continent at risk. Fritz Henderson, the struggling Detroit carmaker’s chief operating officer, said that GM would face a liquidity crunch "early in the second quarter" if emergency funds from European countries did not materialise. "We would try to stay alive, but there’s no guarantee we could stay alive," Mr Henderson told reporters on Tuesday at the Geneva motor show. "We would become insolvent at that point." Drawing a direct line between its pleas for government aid and possible factory closures, GM estimated that its excess capacity in Europe stood at 30 per cent, meaning it had three plants too many on the continent. Carl-Peter Forster, GM Europe’s president, called for European countries hosting its car factories to share the "burden". GM has asked German states for €3.3bn worth of bailout funds in exchange for shares in what will become a semi-autonomous European arm, of which its German Opel unit is the largest component.

GM has also held talks with governments of the UK, Spain, Poland and other European countries about providing aid. The request has been met with scepticism by some in Germany, where the government has pressed the company for more details on its plans, and assurances that none of the money would flow back to Detroit. GM’s European arm is a closely integrated part of its global operation, making the mechanics of the separation complex. GM has ruled out a full separation of its European arm, as called for by its unions, pointing out that GM Europe would need the leverage of its US parent’s scale in a tough global market. Mr Forster said that a European treasury function would be created within the unit to "make sure the money isn’t flowing without both parties’ consent." Issues like transfer pricing would be "looked at daily by tax advisers." "The British government can’t expect the German government to carry all that burden," Mr Forster said. "It has to be a shared burden."

He described GM’s two UK plants in Luton and Ellesmere Port as "very lean and productive." Gordon Brown’s government has approved £2.3bn ($3.3bn) of loan guarantees for the entire car industry, but thus far resisted individual pleas for assistance from carmakers like GM and Jaguar/ Land Rover. In Spain, the state government of Aragon has pledged €200m in aid for GM. The carmaker employs about 50,000 people directly in Europe, and estimates that between 200,000 and 300,000 people depend on it for jobs, including suppliers and dealers. In the US, GM last month asked the Treasury for up to $16.6bn in additional bailout funds, $4.6bn of which it said it would need in March and April to stay afloat. Presenting its restructuring plan to the US government, GM said it needed to close 14 North American plants by 2012, but did not outline plans for factory closures in Europe. Mr Forster said that GM was looking at voluntary separations, wage and salary concessions, and working time reduction models to meet its promise to the US government to cut $1.2bn from its European costs. "It’s not easy to get to $1.2bn," he said. "This is a lot of money we have to save to make our business viable."

German PM Merkel Critical of GM Bailout
A plan to make Opel largely independent of General Motors, and save the German carmaker from failure, will cost at least 3,500 jobs, says the head of GM Europe. The Detroit automaker hopes to free Opel to win financing from a skeptical German government. German carmarker Opel said Wednesday it expected to slash at least 3,500 jobs as part of its plan to re-establish the General Motors subsidiary as a largely independent operating unit. The layoffs are part of a rescue plan the company has submitted to the German government in the hope of obtaining federal financial aid for ailing Opel. GM Europe head Carl-Peter Forster told the mass-circulation Bild newspaper that the plan would eliminate "hopefully not more than 3,500 jobs." But he also reiterated his plea for a bailout from Berlin, which has still not committed to investing billions to save Opel.

With its spinoff proposal, Opel is seeking to obtain at least €3 billion ($4.18 billion) in aid from European governments. On Tuesday, though, German Chancellor Angela Merkel said Opel was not a "system-critical" corporation. "There are system-critical financial institutions," she told her conservative party's parliamentary group, according to the Rheinische Post newspaper. "But there are no system-critical industrial firms." It was Merkel's indirect way of saying that Opel is less important to Germany than its crisis-stricken banks. Her statements were intended to counter earlier comments made by the head of the left-leaning Social Democratic Party that Opel was indeed "system relevant." She added, however, that Opel should be given a chance to survive and that like all companies, it has the "right to apply for state aid." The fate of Opel has been a matter of debate in Germany since the financial crisis hit automakers in Detroit last year.

In addition to concerns about the government using taxpayers' money to bail out a failing company, there is also worry the rescue funds might be diverted by GM to the United States to save American jobs. According to the Rheinische Post, Merkel and her party want to insist that Opel be legally separated from GM and that its parent company return patents to Opel as preconditions for any Berlin bailout. Merkel reportedly also told the meeting Opel must first find a "second investor," although GM could stay on board as a minority shareholder. The chancellor and officials with the parliamentary group of the Christian Democrats and their Bavarian sister party the Christian Social Union, however, are reported to have categorically ruled out the possibility of a German government stake in Opel. Instead, they said they would consider credit guarantees or government loans.

Other members of the government have also been skeptical of the rescue plan set forward by GM Europe on Monday, including Finance Minister Peer Steinbrück of the Social Democrats and Economy Minister Karl-Theodor zu Guttenberg of the conservatives, who said there were still many open questions remaining. GM says Opel and Saab will go bankrupt without rescue plans. GM's European subsidies of Opel, Saab and Vauxhall together employ about 55,000 people in Europe, including 26,000 workers at four Opel plants in Germany. If dealers and car components suppliers are added to that figure, Forster claimed, as many as 300,000 jobs could be at risk. In addition to a government bailout, Opel is also looking for a third-party investor -- a task that has so far proven extremely difficult in a time of crisis and overcapacity throughout the entire global automobile industry. The idea of a private rescue by Daimler AG -- another German company with unhappy experience in a merger with a Detroit carmaker -- was ruled out by Daimler chief executive Dieter Zetsche on Tuesday. "We don't see a role for Daimler in the future development of Opel," he told reporters at the Geneva Auto Show. Daimler extricated itself from a marriage with Chrysler in 2007.

Daimler and BMW caution against aid for carmakers
German carmakers Daimler AG and BMW on Wednesday warned against state bailouts in the car industry, arguing that governments should not interfere in necessary structural changes during the economic downturn. The German government is currently under pressure to rescue GM's German automaker Opel as the industry faces a slump in demand. "I have an understanding when it is about banks because they are central elements of an economy," BMW chief executive Norbert Reithofer told the Financial Times. "But for the rest, where do you start and ... stop?"

"If governments would not get involved, we would have a much stronger selection process. Because then only companies with high liquidity, net financial assets and no, or almost no, cash-burn would survive." Governments around the world have moved to support their automotive industries, which have suffered heavily from the economic fallout of the credit crunch. But that state help has sparked concerns about a surge in protectionism, which many fear could leave long-lasting damage. "Every industry needs structural development and this is not something that should be influenced in the long term by governments," Dieter Zetsche, chief executive of Daimler, told the newspaper.

Fed Eliminates Compensation Limits for TALF Program
The Federal Reserve and U.S. Treasury eliminated executive-compensation limits for companies that bundle loans accepted under a new $1 trillion program, indicating the rules may have hampered efforts to start the plan. The rules won’t apply to the Term Asset-Backed Securities Loan Facility out of "desire to encourage market participants to stimulate credit formation and utilize the facility," the New York Fed said in a document on its Web site today. The government separately said it will expand the TALF to support vehicle-fleet leases and loans for business, construction and farm equipment. The change suggests the government doesn’t intend to apply compensation limits beyond firms that receive direct investments from the Treasury’s $700 billion bailout fund. Officials have yet to announce whether such requirements will be imposed on firms participating in a separate effort to remove as much as $1 trillion of distressed assets from banks’ balance sheets.

"Just like salesmen toward the end of the month get kind of worried if they’re not meeting their quota, the Federal Reserve has got to worry," former Fed monetary-affairs director Vincent Reinhart said. Today’s moves are "an attempt to make the facility more accommodating," said Reinhart, now a scholar at the American Enterprise Institute in Washington. The TALF, aimed at propping up the market for auto and business loans, will start disbursing funds March 25 and will probably accept securities backed by vehicle-fleet and equipment leases starting next month, the Fed and Treasury said in a statement today. The Fed also lowered interest rates and so-called collateral haircuts for loans tied to asset-backed securities with guarantees by the Small Business Administration or to government- guaranteed student loans. The TALF will hold monthly fundings through at least December.

The Treasury and Fed also today reiterated that they will seek legislation to give the Fed "additional tools" to manage its balance sheet. The effort stems from concern that taking on longer-term assets will make it more difficult for the central bank to raise interest rates once the economy recovers. Possible legislation may allow the Fed to issue its own debt or let the Treasury issue bills for Fed use that are exempt from the federal debt ceiling, JPMorgan Chase & Co. economist Michael Feroli said. Under the October bailout law, recipients of rescue funds are subject to compensation limits when the Treasury has a "meaningful equity or debt position in the financial institution as a result of the transaction." The law prohibits golden- parachute payments to a departing executive and allows a company to recover any bonus paid to an executive based on statements that are later shown to be "materially inaccurate."

Alabama Senator Richard Shelby, the ranking Republican on the Banking Committee, said compensation requirements should be applied where government funds are "involved." "I think where federal money is involved, that we should put some limits on it," Shelby told reporters today in Washington when asked about the TALF change. "If it’s ordinary private enterprise, that’s none of my business." The revised terms and conditions of the TALF, posted on the New York Fed’s Web site, omitted a previous section on compensation requirements. The limits were previously instituted because the program is being seeded with funds from the $700 billion financial-stability plan, which has provided capital injections to banks with compensation rules attached.

"Executive compensation restrictions are targeted towards ensuring that executives of institutions that receive government support are not unjustly enriched," the New York Fed said in a question-and-answer document on its Web site. Some companies that may securitize loans for the TALF, such as GMAC LLC, may already be subject to executive-compensation requirements because they are receiving separate funding from the financial-stability plan. The Fed and Treasury didn’t mention the change on executive compensation in a news release today. It was included on page 15 of the "Frequently Asked Questions." Chairman Ben S. Bernanke and his colleagues, after cutting the benchmark interest rate almost to zero, are counting on the TALF to help revive credit and end what may become the deepest U.S. recession since World War II.

"The expanded program will remain focused on securities that will have the greatest macroeconomic impact and can most efficiently be added to the TALF at a low and manageable risk to the government," the Fed and Treasury said. The Fed and Treasury "currently anticipate that ABS backed by rental, commercial, and government vehicle fleet leases, and ABS backed by small-ticket equipment, heavy equipment, and agricultural equipment loans and leases will be eligible for the April funding of the TALF," which is scheduled for April 14, the agencies said. Small-ticket equipment may include office gear such as telephone systems, computers and printers, while heavy equipment includes construction vehicles. The Fed originally planned to start the program in February. Central bank officials postponed it to ensure "all our legal and procedural steps had been taken," Bernanke told lawmakers last week.

The TALF will start by offering $200 billion in loans to hedge funds and other investors to jump-start lending to consumers for autos, education and credit cards and to small businesses. The program also will help auto dealers finance the cars on their lots. Treasury is providing $20 billion in capital from the Troubled Asset Relief Program to protect the Fed from losses. Treasury Secretary Timothy Geithner plans to increase the contribution to $100 billion, letting the Fed expand the program to $1 trillion and add other assets such as commercial mortgage- backed securities and rental-car loans. Treasury and Fed staffers are "analyzing the appropriate terms and conditions for accepting" CMBS, the agencies said today. Officials are considering accepting collateralized loan and debt obligations, ABS backed by non-auto-dealer financing and ABS backed by mortgage-servicer advances, the statement said.

Fed officials are also evaluating how the TALF might be used to aid markets for securities already on the market. The central bank has already doubled its balance-sheet assets to $1.92 trillion in the past year by creating other emergency credit programs. Adding support for car-rental-fleet loans may not help the auto industry right away, said Joe Barker, an analyst at consulting firm CSM Worldwide Inc. in Northville, Michigan. Fleet sales to rental-car agencies, other businesses and government agencies accounted for 20 percent of the new cars and light trucks sold in the U.S. last year. "It won’t have a substantive impact on overall demand for the industry until businesses are on solid ground and, quite frankly, until we see more and more travel by the American consumer," Barker said.

TALF hopes rein in asset-backed spreads
Just the knowledge that the Federal Reserve was getting ready to plow up to $1 trillion in cheap funding into the asset-backed securitization market has driven down spreads on these pooled credit-card and auto loans, a sign that investors are ready to buy into the central bank's latest liquidity program. Spreads on 3-year credit-card securitizations have fallen to about 400 basis points from 650 basis points over swap rates at the end of last year, according to Barclays Capital. Spreads on 3-year prime fixed auto loans have fallen to about 350 from 600 at year's end and 850 at the end of November.

Lower spreads indicate investors are demanding a lower yield compared with a commonly used rate benchmark to hold this debt, which uses revenue streams from credit-card and auto-loan payments to pay interest to the bond holder. "Some of the tightness in spreads can be attributed to TALF," or the Fed's Term Asset-backed Securities Loan Facility, said Glenn Boyd, head of asset-backed securities research at Barclays Capital. "There has been very considerable investor interest in the program." On Tuesday, the Fed said starting on March 25 it will lend up to $200 billion to investors holding new, highly rated asset-backed securities backed by recently originated auto, credit-card, student and small-business loans. It's hoping the program will generate up to $1 trillion in new business and household lending.

Spreads on asset-backed securities had spiked after the collapse of Lehman Brothers, making it too costly for many credit-card companies and auto companies to issue these securities that pool loan originations for sale to institutional investors -- a major way card companies and auto lenders accessed funds to make new loans. Large credit-card banks such as J.P. Morgan & Co. , Capital One Financial Corp. and Discover Financial Services , as well as auto companies such as Honda Motor Co. and Toyota Motor Corp., have been big issuers of asset-backed securities. But investor appetite dried up in the fourth quarter and hasn't come back.

During the first two months of this year, only $3.4 billion in nonmortgage-related asset-backed securities came to market worldwide, down 92% from the same period last year, Dealogic says. The seizing up of this market prompted the Fed in late November to unveil yet one more liquidity program aimed at a frozen pocket of the credit markets. It worried that lenders that couldn't use the capital markets to fund new loans would further curtail originations, exacerbating the credit crunch. Last month it said it might expand the program to as much as $1 trillion and broaden it to encompass other collateral, such as commercial mortgage-backed securities.

The launch, originally expected for February, was delayed. Now it's finally on track. The Fed said Tuesday it expects issuers and investors in the private sector to begin arranging and marketing new securitizations of recently generated loans. The program will hold monthly fundings through year's end "or longer," the Fed added. The program will try to encourage investors to buy more consumer asset-backed securities by lending money to investors at below-market rates, using new ABS as collateral. The opportunity to buy ABS using Fed-supplied leverage should entice more hedge funds and other institutional investors that have been big past buyers of these securities, using leverage to drive profits from these stable but historically low-yielding securities.

Before the credit crunch started, some ABS traded at less than benchmark Libor, meaning investors were receiving negligible yield on their investment. But if they bought those with borrowed money, they could drive up returns -- which many fixed-income hedge funds did in past year. "There is significant interest in the hedge-fund space regarding this program," said Mitch Nichter, a partner at law firm Paul Hastings who works with hedge funds. "Managers are looking at it very closely and seriously." Investors that want to buy eligible asset-backed securities can apply to get a three-year loan from the Fed of the same size, minus a discount or haircut of 5% to 16%. The rates the Fed is charging on the loan are below where these securities are trading in the secondary market.

Plus, the loan is nonrecourse. That means if a borrower defaults on its loan from the Fed and the Fed sells the collateral -- in this case asset-backed securities -- for less than the loan's value, the Fed can't hit up the borrower for the difference. The combination of little money down and low rates results in attractive yields, say market participants. An investor who buys $100 million in auto ABS can borrow $90 million from the Fed at a rate of Libor plus 100 basis points. If the coupon rate is 250 basis points over Libor, the investor can make 250 basis points spread on the $10 million in her own money, plus a lower yield on the borrowed $90 million, for total annual yield of about 15% to 20%, depending on Libor.

"My sense is that there are people out there with cash still, and they are looking for good opportunities," Boyd at Barclays said. Issuers must also participate, of course. The funding terms may be more attractive to auto lenders than to banks, which can also use other government programs, such as the FDIC bank-bond guarantee program, to access cheap alternatives to private capital. At the American Securitization Forum in Las Vegas last month, "there seemed to be some consensus views that credit-card issuers would be reluctant to issue new deals where the Fed is offering funding now," Boyd commented.

Moody's warns it may downgrade Ambac to junk
Moody's Investors Service said late Tuesday that it may downgrade Ambac Financial again because the bond insurer's capital position has deteriorated further and it may suffer larger-than-expected losses from mortgage-related exposures. Moody's put the Baa1 insurance financial strength ratings of Ambac Assurance Corporation and Ambac Assurance UK Limited on review for possible downgrade.

The agency also placed the debt ratings of Ambac Financial Group, Inc. on review for possible downgrade. "The outcome of the ratings review could result in a multi-notch downgrade, including the possibility of non-investment grade insurance financial strength ratings," Moody's said in a statement. Non-investment grade is also known as junk.

Bank of America Ratings Cut at S&P
Standard & Poor's Ratings Services lowered its long-term counterparty credit rating on Bank of America Tuesday and repeated its negative outlook on the company and its bank subsidiaries. The agency cut BofA's long-term rating to "A" from "A+" while at the same time affirming its "A-1" short-term ratings on the financial-services firm. In addition, S&P dropped its ratings on BofA's bank units to "A+/A-1" from "AA-/A-1+". The "AAA" rating was affirmed on the debt of BofA and its divisions that's guaranteed by the Federal Deposit Insurance Corp.

"We downgraded BofA one notch because we believe that the economic weakness will persist and that in turn, earnings pressures will be more intense than we anticipated as recently as Dec. 19, 2008, the date of our last downgrade of BofA," S&P analyst John K. Bartko, wrote in a research report. The report said BofA's creditworthiness "has deteriorated given its exposure to consumer credit and more generally to various asset types that have approached -- and, in certain instances, exceeded -- the stress tests we used as a basis for our Dec. 19, 2008, sector review of large complex banks and brokers."

Shares of BofA closed up 2 cents at $3.65, but they had been much stronger before the downgrade. At one point in the session, the stock reached $4.08. The late drop-off in BofA also weighed on the Dow Jones Industrial Average, of which it is a component. Since the end of 2008, BofA's stock has fallen 74% as it and other financials have been pummeled by the continuing credit crisis and worries about the value of their common equity. S&P also cut its hybrid capital rating because of its growing fear that Charlotte-based BofA could defer dividend payments, either by its own accord or under instruction from regulators. Citigroup's recent decision on suspending payouts, "demonstrates a precedent for a highly systemic bank to defer hybrid dividends," the research note said

U.S. senator wants Fed to name loan recipients
A U.S. senator berated Federal Reserve Chairman Ben Bernanke on Tuesday for refusing to name banks that borrow from the central bank and introduced legislation that would require public disclosure. In a testy exchange at a hearing before the Senate Budget Committee, Vermont Sen. Bernie Sanders, an independent who usually votes with the Democrats, said he found it "unacceptable" that the central bank risked taxpayer money without detailing where the funds went.

"My question to you is, will you tell the American people to whom you lent $2.2 trillion of their dollars?" Sanders asked, referring to the size of the Fed's balance sheet. Bernanke responded that the Fed explains the various lending programs on its website, and details the terms and collateral requirements. When Sanders pressed on whether Bernanke would name the firms that borrowed from the Fed, the central bank chairman replied, "No," and started to say that doing so risked stigmatizing banks and discouraging them from borrowing from the central bank.

"Isn't that too bad," Sanders interrupted, cutting him off. "They took the money but they don't want to be public about the fact that they received it." According to the text of the proposed legislation, e-mailed by Sanders' staff, he wants the central bank to identify any firm that has received financial assistance since March 24, 2008, including details on the type of borrowing, amount, date, terms and the Fed's rationale for lending. Sanders wants the Fed to publish those details on its website and update them at least every 30 days. At the hearing, the senator said businesses in his state were in trouble and needed loans, but were not permitted to borrow from the Fed.

"Do you have to be a large, greedy, reckless financial institution to apply for this money?" he asked. Bernanke said the Fed's lending programs were not gifts or subsidies but rather over-collateralized loans. He said the law restricted the types of firms to which the central bank can lend. "We have never lost a penny doing it," he said. Sanders responded: "Let me just say this, Mr. Chairman. I have a hard time understanding how you have put $2.2 trillion at risk without making those names available, those institutions public." "It is unacceptable to me that that this goes on," he added.

Gordon Brown Tells US Congress to 'Seize Moment,' Reshape Banks
Gordon Brown told U.S. lawmakers to "seize the moment" created by the credit crunch and election of President Barack Obama and reshape the global banking system. The fifth British prime minister to address a joint session of Congress, Brown, 58, said that where predecessors such as Winston Churchill, Tony Blair and Margaret Thatcher came "in times of war to talk of war," his message is "of a global economy in crisis and a planet imperiled." The remarks were aimed at gathering U.S. support for his agenda at the summit of leaders from the Group of 20 nations, which Brown hosts in London next month. Brown wants global financial regulations to bolster the power of national watchdogs including the Securities and Exchange Commission in the U.S. and Financial Services Authority in Britain.

Brown’s speech omitted his usual reference to the turmoil in financial markets as having their origins in the U.S. and its regulatory system. He also reiterated his message that governments around the world should cut interest rates and raise fiscal spending. "America and a few countries cannot be expected to bear the burden of the fiscal and interest rate stimulus alone," Brown said. "We must share it globally. So let us work together for a worldwide reduction of interest rates and a scale of stimulus round the world equal to the depth of the recession and the dimensions of the recovery we must make." For the prime minister, the speech was an opportunity to boost his status with British voters by portraying himself as a leader on the world stage. Opinion polls show he would now lose an election, which he must call within 18 months, and suggest that the Conservative opposition is more trusted to steer Britain out of recession.

The speech was well received by both Democratic and Republican lawmakers, who granted Brown several standing ovations. "It was a great speech," said Senator Jim Webb of Virginia, a Democrat. "There is a tremendous amount and U.S. and the U.K. can work together on to resolve the international banking crisis." Mitch McConnell, the top Republican in the Senate, said it was an "excellent speech" and emphasized the "bilateral relationship" between Britain and the U.S. Democratic Senator Frank Lautenberg of New Jersey said "the delivery was almost perfect." Brown said, "An economic hurricane has swept the world. When banks have failed and markets have faltered, we the representatives of the people have to be the people’s last line of defense."

The prime minister amplified the message he and Obama gave after meeting in Washington yesterday, that the rulebook governing banks must be modernized to prevent future turmoil in markets that tipped the world economy into recession. Obama last month signed into law one of the biggest economic rescue efforts in U.S. history, a $787 billion stimulus bill that he says will restore some of the jobs lost in the recession and spur future U.S. growth. Brown has set out his own plans for 20 billion pounds ($28 billion) in tax cuts and spending increases and may have further measures in a budget statement due on April 22. "How much safer would everybody’s savings be if the whole world finally came together to outlaw shadow banking systems and offshore tax havens?" Brown said. "Each of our actions, if combined, could mean a whole much greater than the sum of the parts. All and not just some banks stabilized. On fiscal stimulus, the impact multiplied because everybody does it."

In a speech that quoted Abraham Lincoln and was interrupted by 16 standing ovations, Brown said the election of a new president "gave the world renewed hope" and that "now, more than ever, the rest of the world wants to work with you." He warned his audience not to "succumb to a race to the bottom and a protectionism that history tells us in the end protects no one." The passages calling for increased spending and regulation were received more warmly on the Democratic side of the chamber than the Republican. When Brown referred to outlawing tax havens, some Democrats cheered.

Brown argued that the current crisis offers an opportunity for governments as well as a challenge. "We are summoned not just to manage our times but to transform them," he said. "And if perhaps some once thought it beyond our power to shape global markets to meet the needs of the people, we know now it is our duty." The prime minister also urged Americans to back European efforts to protect the environment and to focus on cutting emissions of carbon associated with burning oil and gas. "You, the nation that had the vision to put a man on the moon, are also the nation with the vision to protect and preserve our planet Earth," Brown said. The prime minister also announced that Queen Elizabeth II will give Senator Edward Kennedy an honorary knighthood, for his work for peace in Northern Ireland and his contribution to U.S.- U.K. relations.

French lessons on the state’s new role
The painful financial crisis has challenged the economic orthodoxies of all developed country governments. Long-cherished beliefs in balanced budgets have been abandoned. In Europe the stability and growth pact has vanished from view. British prime minister Gordon Brown’s golden rule has been melted down and sold with the family silver. But an even bigger challenge has been posed to the political projects of western governments of the centre left and centre right. In the economic sphere they can look back to Keynes for intellectual underpinning of the new fiscal realism forced upon them. Politically, explaining the new role of the state is more difficult. Where should the government intervene and how? Public ownership may be unavoidable in the short term, but what is the endgame? Are present conditions an aberration, or will we need to contemplate a new social contract between the state and the markets for the long term? In the UK, are we witnessing the death throes of Thatcher-Blairism, and if so what rough beast slouches toward Westminster to be born?

Similar questions are posed elsewhere, of course, but the conditions are different, and the consequences not so threatening to the established order. In Washington there is a new ideology called "Change". It may require fleshing out, but it offers a clean break from the Bush doctrines. President Barack Obama does not need to try to reconcile what he is doing with his past practices, as Mr Brown is obliged to do. And in any event, the US body politic is less interested in ideology. Elsewhere in Europe, governments are finding it easier to slip into a new rhetoric about the role of the state. Nicolas Sarkozy, president of France, is more of an Action Man than a Philosopher King, it is true. But behind and around him members of his government, led by François Fillon, prime minister, are constructing a new narrative. For Mr Fillon the crisis is an op?portunity to refurbish and to some extent redefine Gaullism. In a fascinating speech in Paris in January, he described it as "the synthesis of economic efficiency, capitalism and social justice"; then, in words the general would have relished, as "a certain idea of the human condition faced with the reductionist and destructive forces of history". No Parisian dinner party is complete without a debate on the human condition and the force of destiny.

Mr Fillon’s Gaullism is practical, too, however. He waxed lyrical on the "return of the state" and the need to take big economic decisions, harking back to strategic choices of nuclear power and high-speed trains made by former Gaullist governments. So a new role for the state in the economy fits him like a glove. The Germans have struggled more. It was difficult for Angela Merkel’s government to accept the need for a major fiscal stimulus. But the Christian Democratic Union, with its commitment to Mitbestimmung (worker representation on boards) and social dialogue, is far more comfortable than the British opposition Conservative party in an interventionist role. In a thoughtful speech at the London School of Economics last week Wolfgang Schäuble, the German interior minister, sketched out a reconciliation between the "open society" of the philosophers Karl Popper and Friedrich Hayek and a positive and sustaining role for federal and regional governments, with a strong dose of localism and diversity. The public sector should nurture local banks focused on small business and retail customers, for example.

In the UK, the ruling Labour party and the Conservatives are struggling to redefine their attitude to the state and the markets. The rhetoric on all sides about regulation (more, less, "de-", light-touch) is content-free. Neither party likes the word nationalisation and nor do most voters. While the French and Germans can look back on successful state-owned enterprises, we struggle to recall a time when government involvement in industry or finance was a solution rather than a problem. So UK politics, for now, is being played out in an ideological vacuum. That could be dangerous: it is an invitation to the far left and right to peddle their beguiling certainties. We hear that within government a debate is under way between those who wish to present the state’s new role as a regrettable short-term necessity and others who think a positive long-term redefinition is required. And there is a new third way, apparently articulated in a written but ungiven speech by Lord Mandelson, the British trade minister, which holds that in present conditions, the electorate is uninterested in new political visions. The best government can do is follow the progress of the recession with a shovel and a bucket.

I doubt if that will do, and suspect both Labour and the Conservatives need to find a new way of talking about the government’s role in a stumbling market economy. A British version of Gaullism, on the Fillon free-trade-friendly definition, might find a ready market. Perhaps David Cameron, Conservative leader, thought for?mer chancellor of the exchequer Ken Clarke’s Rushcliffe constituency was the British equivalent of Colombey-les-deux-Eglises, where de Gaulle awaited the call back to politics in the 1950s. Mr Brown thought it might be Brussels, recalling Lord Mandelson from there. Yet so far neither returning hero has presented a new philosophy. Maybe we need to borrow even more explicitly from the French. Prime ministers in the Fifth Republic do not last long, especially if they are successful and popular. And Mr Fillon has a Welsh wife and strong British connections. A second job could await him on this side of the Channel.

Howard Davies is director of the London School of Economics.

EU pledges eurozone rescue
Europe's financial authorities have revealed the existence of a contingency plan to rescue eurozone states at risk of default, giving the first clear assurance that the EU will mount a defence if monetary union comes under speculative attack. Joaquin Almunia, the economics commissioner, said EMU economies in distress can count on EU solidarity if they get into trouble, rather than having to go cap in hand to the International Monetary Fund. "It is clear that there are serious problems in certain countries. If a crisis emerges in one eurozone country, there is a solution before visiting the IMF. We are equipped intellectually, politically and economically to face this crisis scenario. It's not clever to tell you in public. But the solution exists," he said.

Mr Almunia said the probability of a eurozone break-up is "zero", despite the surge in interest spreads on Greek, Irish, Austrian, and Italian 10-year bonds above German Bunds. "Who is crazy enough to leave the euro area? Nobody. The number of candidates to join is growing," he said. Officials are keeping a close eye on renewed stress in Europe's credit markets. The iTraxx Crossover index measuring default risk on low-grade corporate bonds jumped above 1,100 yesterday, nearing the panic levels after the Lehman collapse last year. Hans Redeker, currency chief at BNP Paribas, said the "real" yield on 'AAA' corporate bonds has crept up to 5.3pc over recent weeks, the highest in seven years. "There is an urgent need for credit easing by the European Central Bank to bring down yields. The eurozone's peripheral economies are sliding into depression," he said. Spain's unemployment rose 154,000 to almost 3.5m in February.

The ECB is expected to cut rates from 2pc to 1.5pc on Thursday, and is exploring options for "quantitative easing" along US, British, and Japanese lines. Christian Noyer, the Bank of France's governor, said the ECB was "studying the whole panoply of measures", including the direct purchase of commercial paper to help unclog the credit markets. While the ECB has lent freely, it has held back from buying assets outright. Jacques Cailloux, Europe economist at RBS, said the ECB is wise to move cautiously before taking on credit risk. "Everybody is pleading for something to be done, but they have not their homework to find out what really works," he said. Mr Almunia's promise of a eurozone bail-out is certain to anger East European leaders.

They were denied backing for Hungary's €190bn plan to prop up the region's financial system at an EU summit over the weekend. They were advised to look to the IMF instead for external support. Hungary's premier Ferenc Gyurcsany said the contrasting treatment of East and West was denegerating into the "greatest crisis in the history of European integration. We do not want any new dividing lines. We should not allow a new Iron Curtain to be set up," he said, warning of an eruption of political unrest across East Europe. Klaus Schmidt-Hebbel, the chief economist of the OECD club of rich states, said fast-track euro membership was no magic cure for a region that built up huge imbalances during the bubble years. "Some of these countries are facing a big crisis. This is not only a balance-or-payments crisis, it is also financial crisis with a risk of default on debt," he said. The "massive accumulation of foreign debt" creates the risk of repeating the Mexican and Asian blow-ups in the 1990s.

Fresh stimulus expected in China
China is preparing additional stimulus measures to boost its economy and is expected to begin unveiling them at the opening session Thursday of the National People’s Congress, according to officials. The government announced in November a Rmb4,000bn ($585bn, €465bn, £413bn) investment plan for the next two years. But the rapid deterioration in the global economy since then has put pressure on authorities to take additional steps to prevent a collapse in Chinese growth. Li Deshui, a former head of the statistics bureau and ex-member of the central bank’s monetary policy committee said, that new spending plans would be outlined Thursday by Premier Wen Jiabao in a speech to the NPC, China’s legislature. "In Premier Wen’s report ... there will be an announcement of a new stimulus package," he told reporters. Reuters cited an unnamed official at the country’s economic planning agency as saying that additional spending on infrastructure would be introduced.

Mr Li does not have a formal role in economic policy-making and gave no details about new spending. His comments were considered a strong indication of government thinking, however, and helped prompt the Shanghai stock exchange’s main index to rise 6.2 per cent on Wednesday. Many of the details about the initial Rmb4,000bn investment plan remain unclear. But economists estimate that up to one third will be new money not already in the budget for the next two years and that the bulk will be invested in infrastructure projects. In a report released last week, Standard Chartered said officials in Beijing have been discussing the possibility of raising the investment plan to Rmb8,000bn-10,000bn. The discussion about additional stimulus measures comes amid a growing debate about how Beijing should be spending the stimulus funds.

Some Chinese officials believe the best way to revive the economy is through further aggressive investment in infrastructure. Since November, the planning agency in Beijing has been inundated with Rmb16,000bn in infrastructure project proposals from local governments. However, many economists in China argue that high growth will only be sustainable if the government takes decisive steps to reduce the importance of investment in the economy and encourage more domestic consumption. He Fan, an economist at the Chinese Academy of Social Sciences, said the government needed to increase spending on social services and deregulate parts of the service sector in order to boost domestic consumption. "Building more factories will not solve the problem," he said. Ha Jiming, economist at China International Capital Corporation in Beijing, said an investment-led recovery could be short-lived because of weak underlying demand.

"Chinese GDP may continue to rebound robustly in the second quarter due to full fiscal stimulus effects," he said. "But it may decline remarkably in the fourth quarter due to falling credit, fading stimulus effects from infrastructure construction, and shrinking private demand." President Hu Jintao told a meeting of the ruling Politburo last week that "more forceful" measures would be taken to boost consumption. A group of 16 Communist party elders warned President Hu in a letter published on a Chinese website on Wednesday that a huge scheme of public works could lead to widespread corruption if there was not more transparency about the spending. A new purchasing managers index released yesterday provided tentative evidence that Chinese economy might be stabilising. The index from the China Federation of Logistics and Purchasing increased from 45.3 in January to 49 last month, although a reading below 50 still indicates the economy is contracting.

China announces double-digit military spending boost
China will boost military spending by 14.9% this year despite the economic slowdown, continuing a run of double-digit increases that have unsettled the US and Asian neighbours. The spokesman for the National People's Congress – China's rubber-stamp parliament, which begins its annual session tomorrow – told reporters it was a "modest" increase which would increase capabilities and improve conditions for the 2.3 million members of the world's largest army. Li Zhaoxing said defence spending will reach 480.6bn yuan (£50bn), 62.5bn yuan more than 2008. But the rise is slightly below last year's 17.6% increase – and the total is still dwarfed by US military spending.

The Stockholm International Peace Research Institute (SIPRI) estimates that even when comparative buying power is considered, China spent the equivalent of $140bn (£99bn) in 2007, to America's $547bn. The UK spent the equivalent of $54bn. SIPRI suggests defence spending in China has risen threefold in real terms over the last decade. Chinese officials argue that heavy investment is needed to modernise its military after years of financial neglect and in the light of other countries' increasing capabilities and China's growing responsibilities. It has begun contributing to peacekeeping efforts and recently sent ships to join the taskforce battling Somalian pirates.

Li said the rise would mainly go towards raising wages and conditions, improving the military's hi-tech ability and enhancing its emergency response capabilities in "disaster relief, fighting terrorism, maintaining stability and other non-warfare military operations". The former foreign minister added: "China's limited military strength is to protect national sovereignty and territorial integrity and would not threaten any country." A Japanese foreign ministry deputy spokesman, Takeshi Akamatsu, said there were "untransparent points" in the defence budget. Last year a Pentagon report suggested China's true budget was two to three times the official figure. But Li insisted: "There is no such thing as so-called hidden military expenditure in China."
Rory Medcalf, of the Lowy Institute for International Policy in Sydney, Australia, told Reuters: "It is a bit surprising that they have maintained this level of spending despite the global economic crisis. Fifteen per cent is certainly not modest.

"There certainly is a sense of concern in countries like India, Japan, Vietnam, and even Australia about a much more powerful China and what this is going to mean in the future." US national intelligence director Dennis Blair said last month that China's military budget increases "pose a greater threat to Taiwan". Although relations have improved, Beijing has warned it would use force to prevent Taiwan moving from de facto to formal independence.
Teng Jianqun, a retired colonel and now deputy secretary general of the China Arms Control and Disarmament Association, told the Associated Press that spending should go down, but predicted that "the double-digit rate will remain for at least a few years". China observers are also watching closely this week for details of the 4tn yuan stimulus package announced in November. It aims to boost domestic consumption in the face of slumping exports, largely through spending on public works.

A group of respected Communist elders has written to the leadership supporting the plan but warning that corrupt officials could squander the money.
"We are very concerned that privileged and corrupt individuals may use this opportunity to enrich themselves, damaging relations between the party and the people and exacerbating social conflicts," said the letter, obtained by Reuters, and signed by a former secretary to Mao Zedong and other liberal elders. Yan Yiming, a prominent Shanghai lawyer, has also filed two government information disclosure requests demanding more details. China's growth fell to a seven-year low of 6.8% in the fourth quarter of 2008 and analysts say the government will struggle to meet its 8% target this year even with the package. Standard Chartered economist Stephen Green suggested this week could see an announcement of further investment. He said in a report that officials had told him as much as 8tn to 10tn yuan in investment over two years was "possible, if not likely".

Australia on brink of recession after economy shrinks unexpectedly
Australia's economy unexpectedly shrank for the first time in eight years in the last quarter, pushing the country to the brink of its first recession in two decades. Only the performance of the agricultural sector spared Australia a technical recession, defined as two consecutive quarters of economic contraction. Despite the global downturn, economists had expected the economy to show modest growth. In fact, Australian gross domestic product shrank 0.5pc in the last three months of 2008 compared with a 0.1pc growth in the third quarter. Economists expected 0.2pc growth and the first drop since 1991, when the introduction of a sales tax caused a one-off slump in demand.

A drop in manufacturing, wholesale trade and property and business services have been blamed as the major contributors to the fall in GDP. Prime Minister Kevin Rudd admitted Australia may fall into recession, saying that recent data showed the nation "cannot continue to swim against the global economic tide". "Australia can reduce the impact, cushion the impact of the global economic tide but we cannot stop it altogether," he said. Federal Treasurer Wayne Swan said warned conditions would get worse before they got better. "There are no quick fixes to the global recession, and many of its effects are yet to be fully felt," he said. "But the Government is doing everything in its power to cushion Australians from the worst impacts of the global recession."

The weaker-than-expected result challenged the Reserve Bank of Australia's argument that the country would ride out the global storm relatively well. Some analysts said the woeful figures, coupled with the gloomy outlook for the next quarter, signalled the country was already in recession. Opposition has seized on the figures as proof that government spending packages aimed at warding off recession had failed. As a result of the grim national accounts, the stock market slid to its lowest intraday level in five years and the dollar slumped more than 1 per cent to below US63 cents.

Switzerland To Loosen Bank Secrecy
The Swiss are being asked to give up their principle of banking secrecy as the United States, Britain, Germany and others campaign for the elimination of tax havens. The country is now asking itself how the change could affect the standard of living. Normally, Thomas Borer tries to stay out of the public eye. But there are times, he says, when he can no longer contain himself, and this is one of them. For Borer, what is happening today is painful to him as a Swiss citizen. "You can certainly make a mistake once in a while," he says, "but you cannot make the same mistake twice." Borer served as Switzerland's ambassador to Berlin at the start of the new millenium. In Germany, he was a part of the high society social circuit, and he regularly made headlines with his wife Shawne, a former "Mrs. Texas."

Irritated by coverage of Borer in the tabloids the Swiss Foreign Ministry stripped the ambassador of his posting, and he now works as a strategic consultant for Russian oligarch Viktor Vekselberg, and has an office overlooking Lake Zurich. He began his career in the 1990s, when he was called upon to represent his country in a crisis. Switzerland faced sharp criticism worldwide, because its banks were refusing to pay back the assets of the dormant accounts of Holocaust victims. The government was overwhelmed and gave in to its critics. It was not until late in the game that it installed a task force, which Borer headed. He appeared before the US Senate, where he explained Switzerland's role in World War II, and he helped to negotiate a settlement between banks and plaintiffs that was worth billions.

Switzerland is going through another crisis today. As happened in the 1990s crisis, the focus is on Swiss banks and, once again, the country is under considerable international pressure. This time even more is at stake, namely Switzerland's principle of bank secrecy, a concept that is celebrated in spy thrillers and is part of the country's identity, as much a cliché as the Swiss watch and Swiss cheese. It came as a shock to the country when, on Feb. 18, major bank UBS -- in a major breach of bank secrecy laws -- was forced to reveal the names of about 300 presumed tax evaders to the American tax authority, the Internal Revenue Service. To secure UBS's compliance, the Americans had threatened to sue the bank in the United States. The Swiss Financial Market Supervisory Authority, fearing that such a trial would lead to the bank's demise, invoked an emergency paragraph in the Swiss banking law -- only to end up revealing the names itself.

By the time Switzerland's Federal Administrative Court tried to stop the process, in response to objections filed by some accountholders, the data had long since arrived in the US. It appeared that Switzerland's largest bank had deliberately encouraged American customers to commit tax fraud. In the settlement, UBS was ordered to a pay a fine of $780 million (€624 million). Ironically, the bank that had always fought for bank secrecy laws had jeopardized them. Generations of Swiss finance ministers have repeatedly stressed that bank secrecy is "non-negotiable," and yet every few years, responding to pressure, they would relax the country's bank secrecy laws slightly. Now cash-strapped governments around the world see their opportunity to finally put an end to bank secrecy in order to gain access to information about tax evaders who had hidden their assets in Switzerland.

Heads of state worldwide, including British Prime Minister Gordon Brown, French President Nicolas Sarkozy and German Chancellor Angela Merkel, are now joining forces in the fight against tax havens, and they have set their sights squarely on Switzerland. The Organization for Economic Cooperation and Development (OECD) is considering adding Switzerland to a new blacklist of tax havens. The G-20 group of major industrialized nations demonstratively excluded Switzerland from its upcoming meeting in early April. In London, the British government is examining measures to penalize tax havens. Once again, Switzerland is in the hot seat. As in the past, the government in Bern has been passive on the issue for weeks, a position that has triggered criticism from all sides in Switzerland. And, once again, the Swiss government seems overwhelmed.

With power distributed equally to seven ministers of four major parties, it has proven to be slow in crisis situations. "In case of fire you don't send out seven firefighters in commanding rank and let them discuss what to do until the house is burned down," says former ambassador Thomas Borer. "The Swiss governmental system is just not up to handling such a situation." Swiss Finance Minister Hans-Rudolf Merz, 66, suffered from a heart attack in the autumn, and he still seems debilitated today. When journalists asked him last week why the government wasn't acting more quickly, he angrily replied that he wasn't appearing in some comedy act, but is part of a government that operates on a schedule. Now the government has appointed a strategy committee.

However, banking secrecy is no longer a non-negotiable issue for the Swiss government. Over the weekend, Merz acknowledged that Switzerland would have to "compromise". And both Justice Minister Eveline Widmer-Schlumpf and Foreign Minister Micheline Calmy-Rey, hinted that Switzerland might have to give up its protection of foreign tax evaders. Banks too are rethinking their position. Oswald Grübel, the new head of UBS, said in an interview: "It's questionable whether we can continue to hide tax evaders behind banking secrecy." And even Geneva private banker Pierre Mirabaud, president of the powerful Swiss Bankers Association, said the country might "not necessarily" need to continue the practice. In truth, banking secrecy has already been watered down.

The Swiss government has signed agreements with the European Union and the United States, and Switzerland now provides legal cooperation in tax fraud cases. It also remits withholding taxes on the interest and dividends associated with foreign assets to the EU each year. In 2007, this source of revenue amounted to €88 million ($110 million) for Germany alone. But Switzerland takes a different approach to cases involving ordinary tax evasion such as when a person merely conceals his income and does not falsify documents. This is not treated as a crime in Switzerland, but merely as a civil offence, not unlike a traffic violation. Swiss authorities so far only cooperate with foreign prosecutors in tax fraud cases, which means that common tax evaders are protected by bank secrecy laws.

A proposed compromise is gradually gaining public support, even among politicians of pro-business parties, even though it still lacks a political majority. Under it, Switzerland could provide judicial assistance to foreign courts in the future in cases of ordinary tax evasion, only applying the old distinction between tax fraud and tax evasion to its own citizens. This would satisfy the key demand of international critics. But for Christian Levrat, the president of the Swiss Social Democratic Party, which has two seats in the government, this is not enough. He says that Switzerland must finally abandon its defensive position. In Levrat's opinion, the country should dispense with the distinction between fraud and ordinary tax evasion, even for Swiss nationals, and it should assume a trailblazing role to eliminate tax havens worldwide instead of always reacting only when under pressure and then stonewalling.

"We should be the advocate for a more moral world of finance," he says. Because Britain's Channel Islands and its Caribbean possessions are among the tax havens now in disrepute, it is somewhat peculiar for Prime Minister Brown to be so critical of Switzerland. Moreover, Swiss banks developed different business models years ago that now allow them to offer services in their customers' home countries. Nevertheless, the Swiss still have the world's largest offshore banking site for private customers. At the end of last year, €1.47 trillion ($1.84 trillion) in assets were deposited in Swiss banks, including about €450 billion belonging to private customers.

The big question is: How important is banking secrecy to Switzerland's prosperity? Social Democratic economist Rudolf Strahm, a member of parliament for 13 years and an opponent of banking secrecy, tends to be skeptical. "Its importance for the economy is greatly overestimated -- especially abroad," he says. The banks, he adds, employ only 3 percent of the Swiss working population, and they are responsible for no more than about 8 percent of gross domestic product -- in good years. Strahm estimates that value added would only decrease by 1 to 2 percent if protection for foreign tax evaders were lifted. Urs Philipp Roth, the director of the Swiss Bankers Association, is sitting in his office on Aeschenplatz Square in Basel. He gives the impression that nothing has happened. What happened at UBS was no debacle but a "bad isolated case," says Roth, who insists there is no reason to believe that banking secrecy no longer applies.

He is opposed to doing away with banking secrecy. "Imagine a table with four legs: stability, competency, quality of life, banking secrecy. If you take away one leg, the table will wobble." Worldwide criticism that Switzerland protects tax evaders has nothing to do with morals, says Roth, but is merely an argument in the competing world of global financial centers. In some states in the United States, such as Delaware, corporate structures exist that render a company's owners practically invisible. Switzerland, on the other hand, says Roth, is a pioneer in the battle against money laundering, and the funds African dictators once deposited in Switzerland were returned long ago. "It is too short-sighted to say that there is a dirty little place in the world, Switzerland, and it has to be cleaned. We are not the bad guys in the world," says Roth. These days, after all that has happened, the Swiss are trying to figure out how much sheltered money is being deducted at the moment and the amount that is still in the accounts. One newspaper put it at €270 billion. "Every number is speculation," says Roth. "No one knows exactly what it is."

For Swiss Banks, an Uncomfortable Spotlight
Banking has long been to this tidy city what cars are to Detroit and computers to Silicon Valley, only more reliably. For while fortunes swung wildly in those places, quietly serving the world’s wealthy made growth here as predictable as a fine Swiss watch.  Until now. With Switzerland’s biggest bank, UBS, staggering beneath a tax scandal that has undermined this country’s vaunted banking secrecy — as well as $53 billion in write-downs on American subprime securities — not only is Switzerland’s reputation for stability threatened but so is the industry that made it one of the world’s wealthiest countries. "There is a sense that this is a very, very dangerous situation because the banking sector has been crucial to Switzerland’s well-being," said Charles Wyplosz, director of the International Center for Money and Banking Studies in Geneva. "If it were to shrink, there is no doubt it would have serious consequences for our standard of living."

Stability will not return soon. Last week, UBS replaced its chief executive, Marcel Rohner, after only 20 months in the job, choosing the former leader of its archrival, Credit Suisse, Oswald Grübel, to take his place. Pressure is building on Peter Kurer, the chairman of UBS, to step down. In the close-knit world of Swiss banking, speculation is rife that Mr. Kurer, who served in top management roles during both the tax and subprime debacles, could be out within days. Britain and the United States have spent hundreds of billions shoring up their banks, but Switzerland’s resources are considerably more limited. At roughly $2 trillion, the balance sheet of UBS is four times as large as Switzerland’s gross domestic product. Over all, Swiss bank assets equal 6.8 times gross domestic product, less worrisome than Ireland’s 9.5 multiple, but still far more than in the United States, where commercial bank assets stand at just 0.7 percent of G.D.P.

What’s more, this alpine wealth haven is set to get another blast of unwelcome attention Wednesday when a Senate panel examines how UBS helped American taxpayers evade the reach of the Internal Revenue Service. "These abuses have been going on for much too long," said Senator Carl Levin, Democrat of Michigan, who will lead the hearing and is sponsoring legislation that would crack down on offshore accounts. Last month, UBS paid a $780 million fine and turned over roughly 250 client names, avoiding a criminal indictment but igniting outrage in a country where bank secrecy — or bank privacy, as the Swiss prefer to call it — is practically an article of faith. The numbered, virtually anonymous Swiss bank account is the stuff of movie legend and popular lore.

But here it is a bread and butter issue — Switzerland’s financial services sector contributes 12.5 percent of the country’s gross domestic product. That compares to 5 percent from financial services in the countries that use the euro and about 8.5 percent in the United States. In Zurich, while politicians sputter about how Switzerland is being unfairly singled out and point fingers at British tax havens in the Caribbean and the Channel Islands, UBS executives have a more basic worry: client money is pouring out of the bank’s coffers. In 2008, clients pulled 123 billion Swiss francs, or $105 billion, out of UBS’s global wealth management business, equal to nearly 8 percent of assets under management. That outflow, along with the drop in value of investments like stocks and bonds in 2008, lowered UBS’s total private assets under management to $1.4 trillion by the end of 2008, from nearly $2 trillion at the end of 2007.

"The main reason was bad publicity and the mistakes we made, not only in trading but in wealth management," said Mr. Grübel, the new chief executive. "It created uncertainty and mistrust with clients and led to an outflow." He admitted that restoring clients’ confidence would not happen overnight. "From my experience it takes up to 12 months for outflows to reverse," he said. Referring to the United States tax case, Mr. Grübel added, "We should never have gotten into it, and we should never do something like that in the future." UBS shares closed at $8.35 in New York on Tuesday, down from a high of $35.36 last April. For Switzerland over all, as for UBS, it has been an abrupt fall.

From 2004 to 2007, the Swiss economy grew by nearly 3 percent annually, but in the final quarter of 2008, the economy shrank by 0.6 percent, according to data released Tuesday. That might not sound like much compared with the 6.2 percent contraction that hit the American economy during the same period, but the possibility of a steeper decline in 2009 is alarming to citizens long sheltered from issues like war and economic instability. "A 2 or 3 percent contraction is quite exceptional for Switzerland," said Pirmin Bischof, a member of the Swiss Parliament from the center-right Christian Democratic party. Mr. Bischof, who studied at Harvard Law School and considers himself an admirer of the United States, said that for ordinary Swiss voters, the biggest issue after the economy was the fate of bank secrecy and Washington’s effort to force UBS to hand over more names. "It’s a double standard," he said. "What’s going on now is very difficult to understand." For UBS, the fallout from the tax case as well as the boardroom turmoil could not have come at a worse time.

Just last fall, the Swiss National Bank agreed to buy $39.1 billion in so-called toxic assets, removing them from UBS’s balance sheet and providing UBS with a $6 billion injection of cash. And by the beginning of 2009, it seemed as if things were beginning to stabilize, said Urs P. Roth, chief executive of the Swiss Bankers Association. "It was in a turnaround and right at that moment, the Department of Justice decided to force UBS to deliver the information," Mr. Roth said. Over the long term, Mr. Roth said Switzerland would retain its position as a global wealth haven despite the pressure to provide more names to American authorities, and competition from even less regulated locales like the Cayman Islands and the Channel Islands. "Bad cases are always a blow to reputations," he said. "But we are quite confident that the reputation can be maintained and built up again."

German Real Estate Firms Holding Debt 18 Times Market Value Face Deadlines
Germany’s real estate companies are fighting for survival, with deadlines looming to refinance short-term debt that’s as much as 18 times their market capitalization while the recession erodes asset values. Loans defined as short-term by the 10 largest publicly traded property companies total 4.2 billion euros ($5.3 billion), according to their most recent financial reports. Patrizia Immobilien AG, Vivacon AG and IVG Immobilien AG alone owe 3.1 billion euros, part of which expires as early as next month. That’s more than five times the trio’s combined market value, which has shrunk 83 percent in the past year. "I wouldn’t be surprised if banks pull the plug for some real estate companies in the very near future," said Matthias Schrade, an analyst at GSC Research in Dusseldorf, Germany.

Augsburg-based Patrizia and Hypo Real Estate Holding AG, the commercial property lender bailed out by Germany, are among stocks on Schrade’s "don’t touch" list. Since 2003, 11 of the 91 companies on that list have gone bankrupt and shares of 63 others slumped even as the equity market rose. Toxic debt from the U.S. subprime mortgage crisis has forced banks around the world to seek bailouts. While Germany has said that Hypo Real Estate is too important to go bankrupt, none of the top 10 listed property companies is bigger than 700 million euros in market value. The prospect of some of the companies failing is turning investors away, said Matthias Born, a fund manager at Allianz Global Investors in Frankfurt who has sold most real estate shares from his 1.2 billion-euro portfolio.

The ratio of debt to assets is one benchmark banks watch closely. A range of up to 60 percent to 65 percent is where "banks would still be willing to give credit," according to Olaf Meisen, a partner who specializes in real estate finance at law firm Allen & Overy LLP in Frankfurt. Seven of the 10 companies have ratios that exceed 65 percent, with Patrizia topping the list with 80 percent, according to Frank Neumann, an analyst at Bankhaus Lampe AG in Dusseldorf. General Growth Properties Inc., the U.S. owner of shopping malls that warned last week it may be forced into bankruptcy, is saddled with $1.18 billion in past-due debt. While most of the bigger U.S. real estate firms have received debt ratings, none of the top 10 German property firms are rated by Moody’s Investors Service or Standard & Poor’s. That doesn’t make it easier for the companies to raise funds, said Torsten Klingner, an analyst at SES Research in Hamburg.

Patrizia, which builds and manages residential property, has 1.3 billion euros in short-term debt, of which 530 million euros are due at the end of March. The debt level could be "a real problem" and banks could possibly force the company to sell shares or into insolvency, according to GSC’s Schrade. Patrizia Chief Operating Officer Klaus Schmitt disputes that. "We’re in talks with our banks and there are no signs a prolongation won’t work," he said in a Feb. 20 interview. Munich-based Hypo Real Estate, which has received 102 billion euros in public guarantees and credit from the German government, is one of Patrizia’s largest lenders, according to Sal. Oppenheim Jr. & Cie.’s Frankfurt-based analyst Sven Janssen. Hypo Real Estate spokesman Oliver Gruss and Patrizia’s Andreas Menke won’t comment. Germany’s commercial property market froze in the second half of 2008 as financing dried up, said Tobias Just, a real estate economist at Deutsche Bank AG in Frankfurt. Prices will probably fall 30 percent this year from 2007, he predicts.

In a report to parliament last month, Germany’s government singled out commercial real estate as an industry where "defaults must be expected" as the financial crisis deepens. TAG Immobilien AG, the property firm founded in 1882 to build a railway in Bavaria, reported a 2008 net loss yesterday after writing down the value of its assets. Others may follow. Vivacon, which specializes in leaseholds of residential property, may have to write down about 140 million euros in asset value in the fourth quarter of 2008, according to SES Research’s Klingner. The company has 524.8 million euros in short-term debt and a market value of 39.3 million euros. A Vivacon spokesman in Cologne said the company is in "promising" talks with banks to extend its short-term debt. A spokesman at Bonn-based IVG, which owns offices, business parks and industrial property, declined to comment on how the company will refinance its 1.4 billion euros in short-term debt.

Vivacon has slumped 86 percent in the year through yesterday, leading a decline in German real-estate shares. IVG fell 83 percent. Patrizia lost 65 percent, cutting the company’s market value to 74 million euros, compared with its 1.3 billion euros in short-term debt. Eight of Germany’s top 10 real estate stocks dropped today, led by Alstria Office REIT-AG, which fell 7 percent. Colonia Real Estate AG slumped 6.4 percent. Deutsche Wohnen AG fell 6 percent. Vivacon lost 3.5 percent and IVG Immobilien retreated 3.2 percent. Patrizia added 0.7 percent. Still, lenders may prefer to extend loans and demand higher interest rates, Bankhaus Lampe’s Neumann said. Earlier this month, Eurocastle Investment Ltd., a property fund managed by Fortress Investment Group LLP that invests in Germany commercial real estate, extended a 236 million-euro loan after agreeing to increase interest payments by 75 basis points, or three quarters of a percent.

Royal Bank of Scotland Group Plc, the biggest government- controlled U.K. bank, last week reported a full-year loss of 24.1 billion pounds ($33.9 billion) and said it would shift 540 billion pounds of mortgage-backed securities and other assets to a new unit. RBS owns about 22 billion pounds of real estate loans secured by properties worth less than the amount loaned, analysts at JPMorgan Cazenove Ltd. wrote in a Feb. 19 note. "Banks can’t afford to drive real estate companies against the wall," Neumann said. "They have other problems at the moment than to cash in real estate portfolios."

Mexican Lawmakers Target Citigroup’s Banamex in Bill
Mexican opposition lawmakers plan to propose a bill that may force Citigroup Inc. to give up control of Grupo Financiero Banamex SA after the U.S. government said it will take a 36 percent stake in the New York-based company. Under the draft published today in the official Senate gazette, if a foreign government has a stake in a foreign company that owns a Mexican bank, the foreign firm would have to reduce its ownership in the Mexican bank to less than 50 percent within 30 days. Senators from the opposition Institutional Revolutionary Party, or PRI, plan to propose the bill.

The proposal would modify Mexico’s banking law, which already prohibits foreign governments from owning or having a stake in banks that operate in Mexico, such as Banamex, which Citigroup bought for $12.5 billion in 2001. The U.S. government, which has channeled $45 billion into Citigroup, agreed to a third rescue on Feb. 27 that will give it a 36 percent stake. "The U.S. government is one of the principal stockholders of a private bank, and that bank is in Mexico," Carlos Lozano de la Torre, the senator who wrote the bill, said in an interview. "Solving this issue should be on the national agenda." Lozano de la Torre urged President Felipe Calderon’s government to take a greater role in negotiating a solution to the issue. PRI lawmakers are in talks on the matter with officials from Banamex and the finance ministry, he said.

The PRI, which lost the presidency in 2000 after ruling for more than 70 years, is the second-largest party in the Senate and third-largest in the lower house of Congress. It has greater support than Calderon’s party before July’s midterm elections for the lower house, according to a poll released last month by newspaper El Universal. Paulo Carreno, a spokesman for Banamex, declined to comment on the PRI’s initiative, saying that the bank won’t comment on a legislative proposal that hasn’t been approved. Mexico’s National Banking and Securities Commission said last week that it was studying the legal implications of the U.S. government’s stake in Citigroup.

Banamex would work "perfectly well" if it needed to operate separately from Citigroup, Mexican Deputy Central Bank Governor Guillermo Guemez Garcia said last week when asked about the future of Banamex if Citigroup was forced to sell the unit.
Citigroup rose 2 cents, or 1.7 percent, to $1.22 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have declined 95 percent in the past 12 months. Citigroup Chief Executive Officer Vikram Pandit said Feb. 20 that his bank was committed to its Mexican unit. Speculation had mounted that Citigroup might sell Banamex to raise cash and shore up capital amid the global financial crisis.

"I want to make it very clear: Citi and Banamex are one and the same," Pandit said at a Banamex conference in Mexico City last month. "The future of Citi is in emerging markets. It’s in Latin America. It’s in Mexico with Banamex." The four largest banks in Mexico in terms of total assets are owned by foreign firms Banco Bilbao Vizcaya Argentaria SA, Citigroup Inc., Banco Santander SA and HSBC Holdings Plc, Fitch Ratings said in a September report. Grupo Financiero Banorte SAB, Mexico’s largest publicly traded lender, is the fifth-largest bank, according to Fitch.

Pemex May Seek $10.5 Billion to Finance Projects
Petroleos Mexicanos, the state-owned oil company, may seek as much as $10.5 billion in financing this year to pay for record spending on exploration and production. As much as $6 billion may come from issuing debt in local and international markets, $2.5 billion in loans from financial institutions and $2 billion in loans from export-import agencies, Chief Financial Officer Esteban Levin said today on a conference call with analysts, without giving a time frame.

Pemex, as the company is known, plans to spend $19.5 billion this year on exploration, refining and chemicals production to offset the fastest decline in oil output since 1942. Competitors such as Petroleo Brasileiro SA, Brazil’s state-controlled producer, are entering debt markets after a 73 percent plunge in oil prices since a July record eroded profit. "The idea is to raise net debt to $2.5 billion to $3 billion this year," Levin said on the call. Total debt fell 6.3 percent in 2008 to $43.2 billion, the company said. About 16 percent of it was in Mexican pesos. Pemex has 91.2 billion pesos in debt maturing within 12 months.

The peso fell 20 percent against the dollar in the fourth quarter, contributing to Pemex’s fourth-quarter net loss of $7.5 billion. Pemex took foreign-exchange losses on debt denominated in foreign currency as the peso lost ground against the dollar. Pemex sold $2 billion of 10-year notes at 8.25 percent in January to "test the waters," Chief Executive Officer Jesus Reyes Heroles said last month. The bonds sold at more than 200 basis points above notes sold by Mexico in December.
Pemex registered to sell 70 billion pesos ($4.6 billion) of local bonds during the next five years.

Company output fell 9.2 percent to 2.799 million barrels a day in 2008, costing Pemex $20 billion in lost sales, according to the Energy Ministry. Daily production will be 2.7 million barrels to 2.8 million barrels this year, the company said. Production at Cantarell may fall to 700,000 barrels a day in 2009 and 400,000 barrels during the period of 2009 to 2017, the company said. The field, the third-largest field in the world when it began operating in 1979, once accounted for about 65 percent of Mexico’s oil output. Pemex pumped 772,000 barrels of oil from Cantarell in January, down 38 percent from a year earlier and more than twice as fast as government estimates. Oil for April delivery rose 31 cents, or 0.77 percent, to $40.46 a barrel at 2 p.m. on the New York Mercantile Exchange.

Ukraine May Miss Deadline for Gazprom Gas Payment
Ukraine may miss a March 7 deadline to pay OAO Gazprom for last month’s natural-gas imports after the main offices of state-run energy company NAK Naftogaz Ukrainy were raided by armed men, the first deputy prime minister said. The Ukrainian security service is seeking an original of this year’s gas contract between Naftogaz and Russia’s Gazprom, Oleksandr Turchynov told reporters in Kiev today. About 20 men, some armed, entered the Naftogaz building today seeking documents on gas accords and customs clearance, Dmytro Marunych, a Naftogaz spokesman, said by phone. The state security service said earlier it had started a probe two days ago into the acquisition of 6.3 billion cubic meters of gas worth 7.4 billion hrynias ($884 million) for transit across the country.

"The main aim of the security service’s attack is to seize the original gas contracts with Gazprom," Turchynov said. "It may impede gas payments because they are made using the original contracts." Security service officers are attempting to gain access to documents held in the Naftogaz building, Ukraine’s 5 TV channel said, citing the service’s press office. Armed people are "guarding" investigators, the channel said. Gazprom, supplier of a quarter of Europe’s gas, and Naftogaz signed accords on Jan. 19 that ended a supply cut since the start of the year after talks on a new contract collapsed. The spat disrupted deliveries from Russia via Ukraine to the European Union for about two weeks. Russia sends 80 percent of its European exports via Ukraine. U.K. natural gas for April delivery rose as much as 4.8 percent to 36.25 pence a therm in London and was at 35.5 pence as of 12:55 p.m. local time, according to ICAP Plc. A therm is 100,000 British thermal units.

Ukrainian Prime Minister Yulia Timoshenko hammered out the Jan. 19 agreements, which doubled the price of imports for Ukraine this year, with her Russian counterpart, Vladimir Putin. Ukrainian President Viktor Yushchenko, who picks the head of the security service, called the accords a capitulation.
Larysa Mudrak, a spokeswoman for Yushchenko, didn’t answer her mobile phone when Bloomberg called. Timoshenko said Ukraine purchased 11 billion cubic meters of gas held by Swiss-registered RosUkrEnergo AG, the sole importer of gas into Ukraine from 2006 through 2008, after the accord was signed. Dmitry Firtash, who owns about half percent of RosUkrEnergo, said the trader made no sale to the government and the gas is contracted for delivery to Poland, Romania and Hungary.

"That gas was and is for transit," said Valeriy Horoshkovskyi, the deputy head of the security service, told Ukrainian lawmakers today. Russia’s gas exporter owns 50 percent of the trader. A Gazprom official, who requested not to be identified in line with company policy, declined to comment on today’s developments. The security service has "arrested all gas that’s in Ukrainian storages," Turchynov said.

Hidden Pension Fiasco May Foment Another $1 Trillion Bailout
The Chicago Transit Authority retirement plan had a $1.5 billion hole in its stash of assets in 2007. At the height of a four-year bull market, it didn’t have enough cash on hand to pay its retirees through 2013, meaning it was underfunded to the tune of 62 percent. The CTA, which manages the second-largest public transit system in the U.S., had to hope for a huge contribution from the Illinois state legislature. That wasn’t going to happen. Then the authority found an answer. "We’ve identified the problem and a solution," said CTA Chairman Carole Brown on April 16, 2007. The agency decided to raise money from a bond sale.
A year later, it asked Illinois Auditor General William Holland to research its plan. The state hired an actuary, did a study and, on July 17, concluded that the sale of bonds would most likely result in a loss of taxpayers’ money.

Thirteen days after that, the CTA ignored the warning and issued $1.9 billion in bonds. Before the year ended, the pension fund was paying out more to bondholders than it was earning on its new influx of money. Instead of closing its funding gap, the CTA was falling further behind. Public pension funds across the U.S. are hiding the size of a crisis that’s been looming for years. Retirement plans play accounting games with numbers, giving the illusion that the funds are healthy. The paper alchemy gives governors and legislators the easy choice to contribute too little or nothing to the funds, year after year. The misleading numbers posted by retirement fund administrators help mask this reality: Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 percent less than that, at $2 trillion. With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion.

That lack of funds explains why dozens of retirement plans in the U.S. have issued more than $50 billion in pension obligation bonds during the past 25 years -- more than half of them since 1997 -- public records show. The quick fix for pension funds becomes a future albatross for taxpayers. In the CTA deal, the fund borrowed $1.9 billion by promising to pay bondholders a 6.8 percent return. The proceeds of the bond sale, held in a money market fund, earned 2 percent -- 70 percent less than what the fund was paying for the loan. The public gets nothing from pension bonds -- other than a chance to at least temporarily avoid paying for higher pension fund contributions. Pension bonds portend the possibility of steep tax increases. By law, states must guarantee public pension fund debts.
"What appears to be a riskless strategy is actually very risky," says David Zion, director of accounting research for New York-based Credit Suisse Holdings USA Inc. "If the returns on the pension bond-financed assets don’t exceed the cost of servicing the debt, the taxpayers bear the brunt."

With the recession that started in December 2007, cities and states are running huge deficits, which they’re closing by cutting services and firing employees. The economic downturn gives state legislatures another reason to cut back on funding pensions. Government retirement plans nationwide don’t calculate their shortfalls based on market values of their assets and liabilities, says Orin Kramer, chairman of the New Jersey State Investment Council, which oversees that state’s pension fund. Fund accountants resort to a grab bag of tricks to get by. They set unrealistically high expected rates of return to reduce governments’ annual contributions. And they use smoothing techniques to paper over investment reverses so they make losing years look like winners. Accountants do that by averaging gains and losses, usually over a five-year period -- sometimes for as long as 15 years of investment returns. That means actual results of any one year aren’t used to calculate how much a state legislature contributes, which can delay governments catching up with losses for more than a decade. This ruse can pass the buck to future taxpayers, who will pay for the retirement benefits of today’s government workers. "There are accounting gimmicks in pension land which create economic fictions and which disguise the severity of the real problem," Kramer says. "Unfortunately, pension board members don’t have much of an appetite for disclosing inconvenient truths."

The Teacher Retirement System of Texas, the seventh-largest public pension fund in the U.S., reports each year that its expected rate of return is 8 percent. Public records show the fund has had an average return of 2.6 percent during the past 10 years. The nation’s largest public pension fund, California Public Employees’ Retirement System, has been reporting an expected rate of return of 7.75 percent for the past eight years, and 8 percent before that, according to Calpers spokesman Clark McKinley. Its annual return during the decade from Dec. 31, 1998, to Dec. 31, 2008, has been 3.32 percent, and last year, when markets tanked, it lost 27 percent. "It’s pitiful, isn’t it?" says Frederick "Shad" Rowe, a member of the Texas Pension Review Board, which monitors state and local government pension funds. "My experience has been that pension funds misfire from every direction. They overstate expected returns and understate future costs. The combination is debilitating over time." Rowe, 62, is chairman of Greenbrier Partners, a private investment firm he founded in Dallas 24 years ago. Texas teacher retirement fund spokesman Howard Goldman and Calpers’s McKinley declined to comment on Rowe’s views.

Most public pension funds, like the one in Chicago, were already treading water before the 2008 stock market crash. Now they’re closer to sinking. State government pension fund assets in the U.S. fell 30 percent in the 14 months ended on Dec. 16, losing $900 billion, according to the Center for Retirement Research. Fund managers don’t have many options for increasing assets. They need adequate funding from state legislatures, which in many cases they don’t get. Beyond that, they’re at the mercy of financial markets. Typically, public pension funds put 60 percent of their assets in stocks, 30 percent in fixed income, 5 percent in real estate and the rest in riskier investments such as hedge funds and commodities. That mix requires the nonbond assets to earn double-digit gains in order to reach expected rates of return. The easiest way for retirement plans to increase cash is to issue pension obligation bonds. For the funds, that means borrowing money at no risk -- because the bonds are backed by taxpayers. A government retirement plan can’t go bankrupt, even if it’s insolvent; state treasuries must put up the money if a fund runs dry. What for retirement plans in the U.S. has been a simple solution -- issuing $50 billion in pension bonds --has become a growing headache for the public.

"When the actuary is finished with his magic, where did the money go?" asks Jeremy Gold, who was one of the first actuaries to work for a Wall Street firm when he joined Morgan Stanley in 1985. The answer, he says, is that future taxpayers may cover what fund administrators had hoped to get from investment returns.
For investors, these debt sales are similar to ordinary municipal bonds. Because both forms of debt are ultimately backed by taxpayers, credit rating firms give them high grades for safety. The difference for bondholders in states is that pension bonds aren’t tax-exempt. General obligation bonds are typically used to pay for construction of schools, hospitals and other public works; pension bonds just fund needy retirement plans. For that reason, Congress decided in 1986 that pension bond income should be subject to federal income taxes. Government officials say they issue pension bonds believing that their fund managers can earn more money from investing the proceeds than what they have to spend in interest payments to bondholders.

The government of Puerto Rico borrowed $2.9 billion through pension bonds in 2008, betting that it could reap annual returns of 8.5 percent investing the money, while paying its bondholders 6.5 percent. "The risk is minimal," says Jorge Irizarry, who was chairman of the Employees Retirement System of Puerto Rico from August 2007 through December 2008. A political appointee, he departed after his party lost the governorship in November. Before working for Puerto Rico, Irizarry was an executive on the island at PaineWebber Group Inc., now UBS Puerto Rico, from 1986 to 1998. So far, Puerto Rico’s wager isn’t paying off. The 8.5 percent expected rate of return has instead been a loss of more than $200 million, according to a Dec. 12 presentation by fund administrators to legislators. "It was an arbitrage transaction, and the market has turned against us," says Carlos Garcia, former president of Banco Santander Puerto Rico, who replaced Irizarry as chairman of the pension fund in January. "I don’t know if the benefits intended will be realized."

Actuaries consistently permit public pension funds to report artificially high expected rates of return -- most often 8 percent and as much as 8.75 percent. That’s more than the 6.9 percent billionaire investor Warren Buffett sets for his Omaha, Nebraska-based Berkshire Hathaway Inc.’s pension fund. "Public pension promises are huge and, in many cases, funding is woefully inadequate," Buffett wrote in his 2008 letter to shareholders. "Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that the problems will only become apparent long after these officials have departed." Determining how much expected rates of return should be isn’t complicated, says Rowe, who oversees Texas pension funds. "Why do they choose high expected rates of return?" he says. "The only reason is to sneak through promising a lot to pensioners -- which means worrying about it later. It’s madness." The Governmental Accounting Standards Board, a nonprofit group that provides guidance for accountants, has rules for financial reporting by public pension funds. A study commissioned by the U.S. Senate Finance Committee, released on July 10, 2008, found that GASB guidelines could be meaningless.

"GASB operates independently and has no authority to enforce the use of its standards," the report said. Each state sets its own rules. The GASB rules don’t mention pension bonds. Illinois sold the largest pension bond issue ever, $10 billion in 2003, to shore up its state pension funds. In 2007, former Governor Rod Blagojevich proposed an even larger, $16 billion pension bond issue, as the state’s unfunded pension liability exceeded $40 billion. The legislature impeached Blagojevich in January after he allegedly sought bribes in return for filling President Barack Obama’s vacant U.S. Senate seat. When the Chicago Transit Authority decided to issue debt in 2008, it did its own calculations. The CTA concluded it could borrow $1.9 billion, paying an interest rate of 6 percent to bondholders, and invest the proceeds to receive its expected rate of return of 8.75 percent. Such an annual return would add $52 million a year to bolster the fund. The CTA chose to ignore not only Illinois’s auditor general but also its own actuarial firm, Detroit-based Gabriel Roeder Smith & Co. The company had determined there was just a 30 percent chance of earning 8.75 percent. "We executed the best transaction we could, given the legislative and political restraints," says CTA Chairman Brown, who is also co-head of municipal finance at Chicago-based Mesirow Financial Inc.

Since the bond sale, the authority has held the money as cash, earning 2 percent. And, with the credit crunch forcing municipal bond interest rates up to attract buyers, the CTA wasn’t able to sell bonds with a 6 percent return. A team of underwriters, including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, sold the CTA bonds in August 2008, at a yield of 6.8 percent, so the fund had to pay bondholders more than it had expected. "There is negative arbitrage," Brown says. "It’s better than having dumped the money into the equity market." The one group that benefits from the pension bond sales is the CTA’s retirement plan members. The authority is responsible for contributing more than twice as much to the fund as its employees. Thus the retirees are virtually certain to enjoy pension contribution savings from the pension bonds, the auditor general’s report says. Neither workers nor the government are thrilled with the public pension system in Puerto Rico. As of 2005, the Caribbean island’s government pension, with 278,000 participants, had assets that totaled just 19 percent of its long-term liabilities. That made it less funded than any state retirement fund in the U.S., public records show.

Puerto Rico’s pension system is a model for common mistakes made by public funds across the U.S. Puerto Rico, a U.S. commonwealth with a population of 4 million, has underfunded its main public pension fund since 1951 to save cash. The island, whose capital building in Old San Juan is as close to the turquoise ocean waves as are the tourists taking photos on the edge of the beach, is far from being a financial paradise. The legislature has repeatedly ignored annual suggested contributions calculated by its own actuaries, according to the Employees Retirement System’s records. Puerto Rico’s legislature raised pension benefits without funding the increased expense 30 years ago. Edmund Garza, the retirement system’s administrator from 1992 to 1996, says pensions were boosted from 45 percent of average salary to 75 percent after 30 years of employee service. "They didn’t prepare a detailed actuarial analysis to see the financial impact of this decision, but definitely it was huge," Garza, 47, says. The government skipped nearly $2 billion in contributions urged by its actuaries from 2000 to ‘05, according to fund records. The pension system continued a course toward insolvency as it paid out more in benefits than it took in.

By 2005, the Employees Retirement System had $12.3 billion of pension obligations with just $2.3 billion of assets. Puerto Rico itself has a BBB- credit rating, one notch above junk, from Standard & Poor’s. "We are very near bankruptcy," says economist Jose Villamil, speaking of the commonwealth. He is founder of Estudios Tecnicos Inc., a San Juan-based economics consulting firm. "The budget is out of control; the treasury is in sad shape." In 2007, the actuary for the Puerto Rico fund, Hector Gaitan of Buck Consultants LLC, recommended that the legislature make an annual contribution of $564 million. "The financial status of the System will continue to deteriorate," Gaitan said in a Feb. 12, 2007, letter to the pension board that urged a boost in commonwealth contributions. The legislature ignored Gaitan’s warning. It chose to put $398 million into the pension fund. Just months after Gaitan suggested bigger government contributions to the retirement system, the pension board dismissed Gaitan and his firm. "Those comments may have gotten us in trouble," says Gaitan, seated at his desk in a small cramped office in a San Juan business park landscaped with palm trees. "We were terminated shortly thereafter." Irizarry, who chaired the fund’s board until Dec. 31, declined to say why the board dismissed Gaitan.

Gaitan says the retirement system’s underfunding may actually be an additional $1 billion or more than the fund reports, because the board relies on outdated mortality tables based on 1960s statistics to compute its future obligations. The shorter life spans in those outdated tables reduce the apparent size of the fund’s liabilities. The legislature has taken one step to improve pension funding -- on the backs of employees hired after Dec. 31, 1999. New employees are denied fixed annual pensions. They must self- fund their retirement accounts. The legislature diverts 9.275 percent of salary pension contributions for new workers to help scrape together the money needed to provide pensions for pre-2000 employees. By not making pension payments to employees hired after 1999, the pension fund will cut future liabilities. The states of Alaska and Michigan, like Puerto Rico, have eliminated traditional public pension funds for new employees in the past 12 years. Ana Reyes, an attorney in Puerto Rico, decided to take a job with the city of Caguas in 2008 so she could lock into a government pension. "I wanted to have a good life when I get old," Reyes, 33, says. "That was my insurance." Reyes, who lives in the island’s Central Mountain Range 20 miles (32 kilometers) south of San Juan, says she didn’t know that new employees get no retirement payments funded by the government. "If I’d known this, I might have made a different career decision," says Reyes, who is the mother of a 2-year-old girl. "When I started here, they didn’t explain that."

Even states that have had fully funded pensions --such as New Jersey in the 1990s -- now have retirement plans with fewer assets than future liabilities and aren’t moving to plug the gaps. New Jersey Governor Jon Corzine, a former co-chief executive officer of Goldman Sachs, has proposed allowing government pension funds to put off half their pension contributions because of the state’s growing deficit during the recession. Corzine’s suggestion follows a recent New Jersey pension track record of mistakes. When the state’s pensions were healthy in the 1990s, the state legislature eliminated nearly all of its annual pension contributions for almost a decade, while adding $4.6 billion of benefits. New Jersey sold $2.75 billion of pension bonds in July 1997. Then-Governor Christine Todd Whitman said at the time that the bonds would save taxpayers $47 billion and make the system fully funded. "You’d be crazy not to have done this," Whitman said in a Bloomberg News interview in June 1997. "It’s not a gimmick. This is an ongoing benefit to taxpayers." Whitman’s prediction hasn’t held up. While the state pays pension bondholders a fixed 7.64 percent interest rate, the fund has earned 4.8 percent annualized since the bond sale, according to Tom Bell, spokesman for the New Jersey Treasury Department.

New Jersey’s pension bonds haven’t saved taxpayers $47 billion. To date, the state has lost more than $500 million on those bonds, according to state records.
"Governor Whitman came up with this outrageous gimmick in order to give people tax cuts," says Kramer, chairman of the board that oversees New Jersey state pension funds. As the global economic crisis deepens, public pension funds will lose more money. The solution shouldn’t be more accounting tricks, Kramer says.
"Virtually every pension system has suffered losses in excess of 20 percent since they created the last set of artificial numbers," he says. The best step forward would be for states to negotiate benefits down, increase pension contributions and reduce the expected rate of return, Texas pension oversight board member Rowe says. Public pension funds have to stop pushing the costs of retirement benefits for current workers into the future, actuary Gold says. "You’re putting a bigger burden on your children," he says. "It amounts to a transfer from tomorrow’s taxpayers to today’s employees."

German 'Pot of Gold' Lies in 24 Million Mobile Phones Tossed in the Trash
One man’s waste is another’s gold. Or so Germany’s Norddeutsche Affinerie AG has discovered. Germans throw away about 24 million mobile phones each year, almost one for every three residents, violating a federal law against electronic waste. Added up, it’s almost a half-ton of gold that can be melted out of the circuitry of discarded cellphones and computers. That means the precious-metals refinery that Norddeutsche Affinerie operates in Germany, where Europe’s largest economy is suffering from its worst recession since World War II, is running at full speed forging gold bars out of the carcasses of German mobile phones and PCs.

"Electronic waste is a tremendous resource but it’s not being managed nearly as effectively as it could be," Kevin Brigden, a scientist at Greenpeace in the U.K., said in an interview. Phones and computers need to be designed so recyclers can easily extract the "pot of gold" in the waste, he said. The Hamburg-based refiner, one of a handful of precious- metal recycling firms in the world, recovers about 3.5 tons of gold worth some $110 million each year from mobile phones and other electronic scrap. Similarly, Umicore SA near Antwerp, Belgium, recovers about 6 tons of gold a year from waste. Their business prospects are helped by stepped-up recycling campaigns at Royal Philips Electronics NV, Europe’s largest television manufacturer, and Nokia Oyj, the world’s biggest mobile-phone maker. Amsterdam-based Philips is investing 1 billion euros ($1.25 billion) until 2012 designing products to be recycled more easily that contain fewer chemicals and feature other "green" innovations.

Nokia tells customers how to discard phones at service centers and online. The Finland-based company also offers such incentives as free ring tones in China and donations to favorite charities in Europe to encourage recycling. Only one in six cellphones that Germans toss away get dropped off at recycling centers. "It’s only a matter of time before customers become familiar with recycling," Nokia spokeswoman Susan Smith said. With more gold from waste likely, that’s offering a growth opportunity for companies and investors even as the German economy contracts this year. "There is an abundance of raw materials and the processing capacity is very tight," said Michael Landau, management board member responsible for Norddeutsche Affinerie’s metal recycling operations. "The amount of raw material has risen over the past few years and we’re trying to take on more and add capacity."

Umicore also said it is seeing a "steady increase" in the amount of electronic scrap for recovering precious metals. Other companies that refine gold and precious metals from electronic waste include Xstrata Plc and Sweden’s Boliden AB. The process used by these refiners is "good" at recovering the metals without damaging the environment like it does in some developing countries, the Greenpeace group’s Brigden said. Norddeutsche Affinerie, which is also Europe’s largest copper refiner, uses a three-stage electrolysis process that collects precious metals in a "dark sludge" of fine particles, Landau said. From there, the metal is made into bars of gold or powder for industrial processes. A metric ton of electronic waste contains as much as 347 grams of gold, according to researcher Perrine Chancerel of Technische Universitaet Berlin. Almost all of which can be recovered if the waste is delivered to processing facilities instead of dumped in the trash.

Even with a law against electronic waste, Germans toss out 438 kilograms of gold with their old phones and computers every year along with 191 kilos of palladium, also used in catalytic converters, and it’s likely there’s more in landfills, she said. "There’s enormous potential to recover these precious metals," Chancerel said. None of that matters if the junk isn’t collected and sorted properly, said Maria Elander, who investigates waste at the environmental organization Deutsche Umwelthilfe in Berlin. Electronic waste is growing three times faster than regular household garbage, according to the Environment Ministry. Manufacturers failing to collect their used electronic equipment, poor enforcement of waste laws and consumers who don’t know what to do with used equipment are responsible for the rising volume of waste, she said. Recycling companies that fail to separate the electronic waste from other garbage or transport it safely face fines of as much as 50,000 euros.

Germany passed a law in 2005 based on a European directive stipulating that electronic waste be recycled -- not just thrown away. The law requires manufacturers to finance the collection and recycling of discarded electronic equipment. Germans disposed of 750,000 tons of old electronic equipment in 2006, the most recent figures, of which 102,000 tons was phones, computers and printers. The success of battery disposals shows it’s possible to significantly increase the recycling rate of non-household garbage, Elander of the DUH said. Gold, meanwhile, topped $1,000 an ounce on Feb. 20 for the first time in 11 months. Policy makers will need to spend more money designing a recycling system if they want to pollute less and recover more material, said Thierry Van Kerckhoven, Umicore’s global sales manager for electronic scrap. The Belgian company gets much of its scrap from outside its domestic market and expects more electronic waste in the coming years as regulations get stiffer. Melting former electronic parts down and applying chemical processes to extract the metals, though, is not the only way to re-use gold. Norddeutsche Affinerie’s Landau showed off a circuit board made with gold that he keeps in his office. "It’s like a work of art," Landau said. "It’s almost a shame to melt it down. It looks fantastic."


FB said...

@ VK and Aitrader

Scary graph #2 simply shows the U.S. deficit for 2009 as a percentage of the GDP of each country. It does not show the debt or deficit of each country with respect to the GDP of that country.

For example, the U.S. deficit is 1 752 G $. The GDP of France is 3 011 G $. The ratio of the first to the second is 58.2%, as shown in the graph.

The utility of the graph escapes me.


centiare said...

The next stage is politicization. Right now, these complex issues remain very abstract to the average "man-on-the-street".

However, every mass movement needs concrete images, not only in which to paint convenient scapegoats, but to define its very raison d'être with direction & positive reinforcement.

There's a battle brewing, and it would behoove sensitive intellectuals to review a little history. Remember who pays the bills and who can engineer a take down.

The reptilian brain is going to reassert its dominance, just as it has every two generations throughout human history.

aitrader said...

So ilargi, let me first say that I'm a fan. If not I wouldn't bother posting here.

We know it's bad in the USA. To sum the obvious, in 2005 you were guessing, in 2006 you were prescient, in 2007 you were fringe, in 2008 you were mainstream. We've tumbled into 2009. Your street cred is covered for the next couple o' years.

In the midst of the current depression, with oil declines around the corner, and the crux of modern life on the edge of massive change: where do the facts lead us from here my friend? You say that nuclear and electicity are the stuff of the delusioned mind. Ok, I would beg for facts but who am I to demand..? But that's minor stuff.

The real question is where do we arrive from here? And I do mean arrice. If your message is "extinction, enjoy it". So be it. You're documenting the apocalypse. I get it. All ego and no wego. A journalist from the nihilst school. Ouch, but the pain will be over soon.

But if you intend to make a difference. To rise above the also rans. Sur les blogs ordinaires (oui, je comrends la belle langue, je sui francophone!) You need to look beyond 2009 and let see the reality *based on fact*.

I think I know what they are. I think you do to. If your only aim is to document then, please excuse for I am truly in the wrong place, but, if your aim is to improve, then burst forth with the facts. Show them in all their horror. Do you want to rest on the laurels of "what have you done for me lately", or doyou want to lead? If so lead us forward and help those ho want to meet the next challenge with eyes open and life prepared.

Mais peut-etre suis-je touts maladroit. Peut-etre il-n'y'a un rasion d'ecrire ici. Je ne sais pas. Peut-etre je suis l'elephant qui se trompe. Je suis Barbar. Sans savior, perdu ici avec eux.

V said...

Stoneleigh and Ilargi,

Great comments from you and others at TOD - thanks! I just read the Daily Kos as well. Do you agree with the time frame of rallies/crashes? Any other thoughts of timeframes?

jal said...

Hi Stoneleigh and Ilargi!
You said
I read Wall Street is up today because China will "stimulate" its economy with another $500 billion.
I heard on BBC that the employers are now offering starvation wages to applicants for jobs.

Q.: Don't the people need money to be able to buy the products?
Wasn't that Ford's reasoning ... give them good wages so that they can buy a car.


brendan said...


I've been reading the blog for several months, and I think you've been an invaluable addition. I'd be interested in knowing what the world will be like beyond 2009 based on fact. But although you seem very clever, it's hard for me to believe that you can deliver here. I mean, please spill the beans if you have some set of facts that point the way to coordinated & useful preparation going forward.

I've often been frustrated that TAE does not concern itself with organized (read: political) preparation for the disintegration of the political and economic order, and the coming resource shortages. But I myself can't begin to conceive of what sort of organizing should be going on, or could go on, so I can't really blame I&S here. I mean, where's the historical analogue for these events? What is the organizing ideology poised to be in ascendence?

I'm thankful to I&S for opening my eyes to the reality of what's happening, and I think that there's value in their teaching, quite apart from whatever it does for their egos. But if you really have more to offer, please stop beating around the bush and let us know what it is.


Anonymous said...

"...all ego, no wego." - aitrader

we go we go
yes but you don't go
we go we go

Go ye heroes, go to glory!
Though you die in battle gory,
you'll live on in song and story!
Go ye heroes, go and die!

Greenpa said...

Ilargi- I also found the statements on the Chinese stimulus; and the alleged response of the stockmarkets to it immediately hilarious. Ah, what fools these mortals be.

For any remaining "rally deniers" - today was a perfect example of a mindless mini-rally. 2 bits of "good" news (highly questionable) - and simultaneously 700,000 jobs lost, etc, etc, - result? Stocks go up. There really are still billions floating around waiting for their turn to vanish.

aitrader- the future? far too many variables for sane prediction at this point.

And endless possibilities that are not even on the public's mind- like the never-mapped city-killer asteroid that passed between the Earth and the moon a couple days ago. And bird flu- which is a totally realistic nightmare.

The best answer I'm aware of is the Transition Towns movement. Government independent; build your local community- towards resilience.

A good community might save your life- nobody else is going to.

Anonymous said...

Geography of a Recession


jal said...

Hi Greenpa !

It looks like gambling not investing in the market.


Anonymous said...

With all of the recent declarations vowing to hold executives accountable I had to do a double take after reading the below from a link provided by Ilargi:

" The Federal Reserve and U.S. Treasury eliminated executive-compensation limits for companies that bundle loans accepted under a new $1 trillion program, indicating the rules may have hampered efforts to start the plan. "


They wouldn't really do that, would they?

John Hemingway said...

@ aitrader
Where are you from? quebec? Louisiana?

It probably is, as Greenpa says, too early to make any predictions, but there will be political change, you can count on that.


scandia said...

Aitrader, Early on Ilargi and Stoneleigh stated their goals. One was to inform people of the broken financial system, to warn of the possible outcomes,to prepare for survival in uncertain times. The second goal was to teach readers to think for themselves, to practice connecting the dots, practice forming a conclusion. I don't want Ilargi and Stoneleigh to lead me. I appreciate their compassion and knowledge but I have no intention of making them responsible for an unknown future or to carry me. In a healthy community all are prepared to lead when it is their moment to do so.
Ilargi and Stoneleigh are natural born teachers.Perhaps you no longer need a teacher, that you have another need? May I add that I have learned a lot from your postings.

Persephone said...

Good evening Ilargi, Stoneleigh, and all

Today's Excitement: The "Trans-Pacific Partnership" FTA

Socrates 469 BC–399 BC: "A system of morality which is based on relative emotional values is a mere illusion, a thoroughly vulgar conception which has nothing sound in it and nothing true."

Aristotle 384 BC – 322 BC: "Inferiors revolt in order that they may be equal, and equals that they may be superior. Such is the state of mind which creates revolutions. "

John Locke 1632 – 1704 AD: "The improvement of understanding is for two ends: first, our own increase of knowledge; secondly, to enable us to deliver that knowledge to others."

Anonymous said...

I dig Jim Kunstler. He gets it on so many levels. I especially appreciate his thoughts on the deplorable state of American architecture. A hyper-aesthetic such as Kunstler might be misunderstood, but his vision for America certainly would be a healing one--elevating the importance of beauty. Thanks for providing the JHK link Ilargi and Stoneleigh, and thanks for your own efforts as well.

Kunstler has an "Eye sore of the Month'" link on his web site. The two examples below illustrate how far American society has degenerated in terms of aesthetic sensibility. When art, culture and beauty are marginalized as a result of bottom-line only considerations, the erosion of the human soul will soon follow.

DIYer said...

Thanks for the suggestion yesterday. I slipped out of my shorts and it feels so good :-)

Last Friday, I was chatting with a co-worker and said, "watch the market do a cliff-dive today." ... It didn't actually happen until minutes before the close. But Monday's drop was convincing enough, and Tuesday was short-exit day, simply based on the broad contours described here (selloff followed by a big rally). And yes, I realize there is a lot of room for the decline to continue later.

Like I said, the hardest thing for me to learn about trading has been to sell. I have hoarding instincts, and tend to hang onto things when they are dear, then get my panties in a wad when they are cheap and dump them.

Oh and "airtrader": Peabody Coal is BTU; PCX is Patriot Coal. FWIW, I've been watching them too.

Persephone said...

re: Bank Robbery article

Shock and awe

DIYer said...

Oh, and one more thing: yes, I realize that the pre-big-rally selloff probably isn't even complete yet.

And to whoever said yesterday that the future is '@' shaped, I think maybe it's more sort of * shaped. Make what you will of the character...

Anonymous said...

Wish there was a god, I would thank it for your site. Good luck in the next life ppl, and hug your kid.

Orion said...

@ Noon Summary:

Thank you for your postings. Perhaps it's me, but the past couple of days have been quite amusing, and it's appreciated.

You seem constantly in search of a "Big Daddy". Is it asking too much to actually think for yourself? Granted, it's more effort. But it's also more rewarding. I truly mean no disrespect; it's just an honest impression and question.

Ilargi and Stoneleigh are only human. And, believe it or not, as advertised "The contents of this website should be used for entertainment purposes only..."


I agree with much of what you said. I did want to say that I'm glad that there is no effort with political organization here. That would immediately make everything here suspect and cast in light of the agenda being pushed.

Which is very different than simply publishing things as they are, with their own opinions, and having people think for themselves.

Orion said...

Re: The article "Fresh stimulus in China"

Let us remember the article a few weeks back on how a chunk of China's stimulus was going into their stock market.

It sounds like another pyramid in the making to me.

Greyzone said...


I fear that most people do not have clue number 1 about where this can all end up. There's a chance of extinction but that's not the most likely immediate outcome for homo sapiens even with everything else stacked against us.

But simply swallow this - everything you think is "normal" is abnormal. You were born and raised during an extinction event. You were born and raised near the peak of the homo sapiens population explosion. You were born and raised near the peak of fossil fuel exploitation. You were born and raised just as homo sapiens began to hit resource constraints globally. You were born and raised when homo sapiens and his domesticated species represent over 40% of the entire biomass of the planet.

None of this is "sustainable" and the economy breaking down around you is dying because it's based on myths that say we can do what we are doing forever. S&I have talked about these myths in the past as have others. Ilargi, not being indoctrinated in classical economic "thinking" (aka brainwashing) tends to cut through the crap pretty clearly.

But regardless of whether the world "recovers" this time or not from what is happening, we are getting closer to the edge, when homo sapiens will return to a "normal" place in the biosphere. This economic collapse may be the beginning of that ride from the current abnormal situation to a normal situation. That ride will not likely find completion in your lifetime or the lifetime of your children, but it will be a ride to a completely different world than exists today.


We are going to a place very different than anyone has ever known before. To presume that we could know what will work with absolute certainty in advance seems to me to be the height of foolishness.

While I don't expect it, ideally governments would simply leave people alone to find their own paths through this. Human social systems should be adaptive and different based on environment. Many will undoubtedly fail but some should succeed. Presuming that there is one grand answer that applies to every human across the entire planet is part of the problem, not part of the solution.

aitrader said...

Chuckle, not Quebecois nor Cajun. (My French is more of the Spanish Cow variety, if you speak the lingo).

As for Messiahs I'm self taught and self-led. (Ok, yes, I'm *really* lost in the wilderness).

When I see talent I poke and prod. Genius is 99% persperation, said a wise, wise man once.

Documenting the apocalypse is fine as is resting on your laurels after a good run. I suspect more is in the offing here. But perhaps I'm reaching.

Doesn't really matter. The Internet is a vast place. Cyberspace is ever expanding. The standing man fades to white.

As for the future. Yes, you can predict it. I made my move long over a decade ago. I know why I made it then and it holds today. (Though my young ones still regard me studded with "why". Ah, the folly of youth).

I can tell you my view of the future but this isn't my blog nor my place to do so. Ilargi has peeked. Is he ready to tell? I'm beginning to doubt. As for me? Mr. Twain comes to my defense, "Competence and obscurity. That is the life that is best worth living."

Ever a fan though.

Mark said...

I don't think China's military funding increase announcement is that news-worthy.

As AP notes:

BEIJING (AP) — China announced a nearly 15 percent rise in military spending on Wednesday — a smaller boost than in previous years — as the national legislature prepared to open its annual session with a focus firmly on overcoming the country's brewing economic crisis.

The 14.9 percent increase in defense spending is the lowest in three years, a possible reflection of shifting priorities amid plans for a 4 trillion yuan ($586 billion) stimulus package and a 850 billion yuan ($124 billion) spending boost to expand and revamp an inadequate health care system.

They've announced double-digit spending increases for the military nineteen out of the past twenty years.

AP article can be found here:

aitrader said...


Oh and "airtrader": Peabody Coal is BTU; PCX is Patriot Coal. FWIW, I've been watching them too.

Yeah, flipped them the other day thanks. Picked up PCX for 3.15 a couple of days ago. What a steal. I'll add more on the way down.

Orion said...


Fair enough.

Might I then point you to the discussion on TOD, which Stoneleigh mentioned yesterday?

The link is here

I think that, along with many other things I & S have said, covers what you are looking for. Search for Ilargi and Stoneleigh to get their comments.

Perhaps that might allow you to ask more specific questions, rather than I & S repeating themselves.

I hope that helps.

aitrader said...


Banks create money. You need to understand how the fractional banking system works.

Fractional banking has been around since the gold vaults started issuing more receipts beyond the gold stored.

Debt based money creation is a much newer animal, isn't it?

Maybe I'm confused or just dense...

Orion said...


The person who originally asked the question didn't appear to understand where money came from.

Consequently, I didn't want to confuse him by going into depth on the subject. I thought the other answers assumed more knowledge than I interpreted from his question.

Persephone said...

Study Shows TARP Recipients Lobbied for the Global Financial Meltdown

12 Key Policy Decisions Led to Cataclysm

Financial deregulation led directly to the current economic meltdown. For the last three decades, government regulators, Congress and the executive branch, on a bipartisan basis, steadily eroded the regulatory system that restrained the financial sector from acting on its own worst tendencies. "Sold Out" details a dozen key steps to financial meltdown, revealing how industry pressure led to these deregulatory moves and their consequences:

1. In 1999, Congress repealed the Glass-Steagall Act, which had prohibited the merger of commercial banking and investment banking.

2. Regulatory rules permitted off-balance sheet accounting -- tricks that enabled banks to hide their liabilities.

3. The Clinton administration blocked the Commodity Futures Trading Commission from regulating financial derivatives -- which became the basis for massive speculation.

4. Congress in 2000 prohibited regulation of financial derivatives when it passed the Commodity Futures Modernization Act.

5. The Securities and Exchange Commission in 2004 adopted a voluntary regulation scheme for investment banks that enabled them to incur much higher levels of debt.

6. Rules adopted by global regulators at the behest of the financial industry would enable commercial banks to determine their own capital reserve requirements, based on their internal "risk-assessment models."

7. Federal regulators refused to block widespread predatory lending practices earlier in this decade, failing to either issue appropriate regulations or even enforce existing ones.

8. Federal bank regulators claimed the power to supersede state consumer protection laws that could have diminished predatory lending and other abusive practices.

9. Federal rules prevent victims of abusive loans from suing firms that bought their loans from the banks that issued the original loan.

10. Fannie Mae and Freddie Mac expanded beyond their traditional scope of business and entered the subprime market, ultimately costing taxpayers hundreds of billions of dollars.

11. The abandonment of antitrust and related regulatory principles enabled the creation of too-big-to-fail megabanks, which engaged in much riskier practices than smaller banks.

12. Beset by conflicts of interest, private credit rating companies incorrectly assessed the quality of mortgage-backed securities; a 2006 law handcuffed the SEC from properly regulating the firms.

Cui bono?

Persephone said...

Also, in the news, Humanity runs smack into business

Venezuela's Chavez seizes Cargill unit

CARACAS (Reuters) - President Hugo Chavez seized a unit of American food giant Cargill on Wednesday and threatened to take over Venezuela's largest private company, renewing a nationalization drive as the OPEC nation's oil income plunges.

Chavez's clash with the food companies, demanding they produce cheaper rice, came less than three weeks after he won a referendum on allowing him to run for reelection and marked his first nationalization in seven months.
The moves to tighten the government's grip over the food supply were criticized by the private sector and many economists who say the state distorts the supply chain and contributes to food shortages.

Chavez, an ally of communist Cuba, recently seized some rice mills belonging to Polar, Venezuela's largest private business, after accusing the food industry of skirting his price controls and failing to produce enough cheap rice.

Sudan expels aid agencies, defies Hague court

Bashir said the ICC was a tool of colonialists targeting Sudan for its oil, natural gas and other resources.

"We have refused to kneel to colonialism, that is why Sudan has been targeted ... because we only kneel to God," he told the crowd outside the Republican Palace. Cheers of "We are ready to protect religion!" and "Down, down USA!" interrupted his speech.

China urged the U.N. Security Council on Thursday to heed calls from African and Arab countries and suspend the case against Bashir, but the United States has welcomed the action.

The ICC, set up in 2002, indicted Bashir on seven counts of war crimes and crimes against humanity, which included murder, rape and torture. The three-judge panel said it had insufficient grounds for genocide.

Hours after the warrant was issued, Sudan revoked the licenses of several foreign aid agencies.

U.N. and other agencies are running the world's largest humanitarian operation in Darfur, a mainly desert region in western Sudan. International experts say at least 200,000 people have been killed there, while Khartoum says 10,000 have died.

Gravity said...
This comment has been removed by the author.
Gravity said...
This comment has been removed by the author.
Gravity said...

Adapted from Titus Andronicus

Die, Die, Bunny,
and let shame die with thee.

"Now is my turn to speak:
Behold this Eviction;
of this was Timothy delivered,
the issue of an Irreligious Bankster, Chief Architect and plotter of our woes."

"Set him breast deep in earth,
and famish him:
there let him stand, and rave,
and cry for food;
if any one relieves or pities him,
for the offence, he dies.
This is our doom."

"O why should wrath be mute,
and fury dumb? I am no bunny I,
that with base prayers I should repent the evils I have done.
Ten thousand worse, then ever yet
I did, would I perform
if I might have my will."

"If one good deed
in all my career I did,
I do repent it, from my very soul."

"As for that ravenous tiger, Timothy;
no funeral rite,
nor man in mourning weeds,
no mournful bell shall ring
his burial; but throw him forth
to beasts and birds of prey.
His life was beast-like,
and devoid of pity;
And, being dissolved,
let birds on him take pity."

ca said...

Ilargi right again:

"It never made any sense that a new Chinese stimulus would somehow save the world, but for a moment it was something to get excited about. Alas the actual news isn't really that big.

Basically, the country is reaffirming the $586 billion stimulus it announced last November, which it believes will allow the country to grow by 8% this year (doubtful, unless it fudges the numbers big time)."

striker said...

A must watch!

aitrader said...

Good read: Deflationary Depression or Hyperinflation?.

The author underlines points about the above made here by Ilargi & Stoneleigh. He also addresses the PO and energy issues facing the world.

In the second half of the article he goes out on a limb and babbles about some kind of funky energy weirdness. Then stumps a novella he wrote.

First half is worth a read though. The mention of 2 billion Chinese and Indians will be especially relevant in the next couple of years as resource shake-outs accelerate.

VK said...

The Governator says that only little girly men whine about the economy.

More pension bombs going off than you can shake a stick at, this time with funky graphs!

Exploding pension fund shortfalls are blowing billion-dollar holes in the balance sheets of some of the Chicago area's biggest companies, forcing them to make huge contributions to retirement plans at a time when cash flow and credit are already under stress.
Boeing Co.'s shareholder equity is now $1.2 billion in the hole thanks to an $8.4-billion gap between its pension assets and the projected cost of its obligations for 2008. At the end of 2007, Boeing had a $4.7-billion pension surplus. If its investments don't turn around, the Chicago-based aerospace giant will have to quadruple annual contributions to its plan to about $2 billion by 2011.

Ambrose Evans creates more doom at the telegraph with his European Banks in 2 trillion USD hole.

European banks face a US dollar “funding gap” of almost $2 trillion as a result of aggressive expansion around the world and may have difficulties rolling over debts, according to a report by the Bank for International Settlements.

el gallinazo said...


Thanks for the KR Newman article in the Daily KOS. At first I thought that you were the author under your "real" name which I do not know. It was only after you started commenting that I was dissuaded of the idea. Seems like two great minds think alike.

timekeepr said...

Hanging On, or How to Get Through a Depression and Enjoy Life

Though there are many short accounts and (e.g., Studs Terkel's Hard Times), novels (e.g., Grapes of Wrath), movies and historical analyses of how various populations (e.g., migrant workers, Okies, etc.), I’ve seen few interesting, in-depth accounts of how middle class and upper middle class Americans in particular experienced the 1930s depression.

So Edmond G. Love’s 1972 autobiographical novel, Hanging On, Or, How to Get Through a Depression and Enjoy Life was particularly intriguing to me when I found it at a local used bookstore, and his story struck me as an especially timely one given current events. Though the book certainly includes much more then just the depression, relating, for instance, the author’s college experience, it is in large part a discussion of how nation's economic circumstances impacted the author and his friends and family and how they responded to these challenges.

bluebird said...

Thanks timekeeper. That was a most interesting article about the depression, especially to us in the middle class. Even though that was about the 1930's, I can see how many things that occurred then, could be about to happen today.

Bigelow said...

Unwanted futures: Here is one person’s look into it…
“Because Americans are like mushrooms. In general, they like being kept in the dark and fed bullshit. They’re absolutely content to bathe in official PSYOP and .gov will give ‘em what they want.

As long as someone else is willing to buy U.S. Treasuries in ever larger amounts, the vast, dumb horror show will play on.

My guess is that the next major false flag event will occur at some point after U.S. Treasury auctions begin to fail and the Fed starts buying the paper. It’s game over at that point, so why not light off a nuke?

It would be like hitting a reset switch. It would induce total and instant amnesia in the small, neural swellings between the ears of the zombie sheep.

“A catalyzing event that calls on all states to create a New World Order,” or some similar nonsense. There can be camps, two minutes hate, re-education, etc.

I don’t see any breakup of the U.S. into six antonymous regions, and a global nuclear war would engulf the Earth before Alaska returns to Russian control.”
Russian Scholar Says U.S. Will Be Under Martial Law in 2009

bluebird said...

Denninger's latest -
What's Dead (Short Answer: All Of It)

z said...

Guns and Butter - "The Way We Were and What We Are Becoming"

"The Way We Were and What We Are Becoming" with financial economist and historian, Dr. Michael Hudson. We begin with an analysis of the continuing bailout of insurance giant AIG and Monday's stock market selloff; price and debt deflation; the two sectors of the economy; two definitions of 'free markets'; the classical economists; revolution from the right and the former Soviet states; the threat of war; IMF/World Bank resurgence; the dollar versus the euro; analogies to Rome, neo-feudalism.

Frank said...

I wouldn't give long odds on the US holding together. (I wouldn't bet against it either, modulo long odds.) But the regions that dude drew are just bonkers. So is his prediction that they would join other (overseas) countries.

I could see Canada dissolving at the same time and some of the successor states containing both states and provinces.

timekeepr said...

Thanks timekeeper. That was a most interesting article about the depression, especially to us in the middle class. Even though that was about the 1930's, I can see how many things that occurred then, could be about to happen today.

Lessons for us today?

Times were tough, my Dad tells similar stories even though he was very young.

Interest it took some time before people realized things were getting bad.

Anonymous said...

Denninger is all over the map. He was predicting a Dow over 10 000 recently. And now he's predicting the end of the world.

Ahimsa said...

Good article by Newman and thought-provoking comments at DailyKos. I liked the video on how to eat weeds. I love purslane, rich in omega 3s.

This morning while chatting with my Miami-based, neoconservative sister, I suggested that her family might want to get their money out of the stock market before they lose it all. She replied that they already lost $100,000, but that her husband who is very "knowledgeable" (worked in a bank trust department all his life and holds a degree in finance) and her have decided to keep their stocks for another 3 or 4 years. I guess she considers me a nut case because she won't read or consider anything I suggest.

It is so difficult to help some people, especially relatives. Sigh ...

bluebird said...

Anonymous @12:26 - Others have also been predicting a big rally before the 'end of the world'. Maybe the rally was Wednesday 3/4/09?

jal said...

It is so difficult to help some people, especially relatives. Sigh ...
GM auditors raise doubts over viability
GM has received $13.4-billion in federal loans as it tries to survive the worst auto sales climate in 27 years. It is seeking a total of $30-billion from the government. During the past three years it has piled up $82-billion in losses, including $30.9-billion in 2008.
The worst-case bankruptcy scenario would cost the government $100-billion, Mr. Henderson said, because revenue would severely drop due to a lack of sales.
Who are we trying to save? The $82-billion of investor money? Which banks are on the hook? Will there be a bank declaring bankruptcy as a result?

z said...
This comment has been removed by the author.
z said...

Orlov talk on video with Q/A section starting from chapter_16

Being poor takes a lot of practice.

Greyzone said...

Anon@200903051226 said:
"Denninger is all over the map. He was predicting a Dow over 10 000 recently. And now he's predicting the end of the world."

Actually, that's a rather gross misrepresentation of what Denninger said. He's been warning about the potential for sucker rallies of about 50% of the current overall decline for a while now. Of course, Stoneleigh warns about the same things.

So your point is exactly what?

bluebird said...

Thanks Z for your links. Listening to Hudson now, Orlov is next.

Anonymous said...


If I am reading Denninger , Stoneleigh and others correctly, they are not all over the map with up and down predictions. Just as some patients might suddenly spring to life a few moments before their imminent death( this happened with my dying mother), or a warm day occasionally occurs in the middle of a frigid winter, so might the market rebound for a spell. I suppose a real financial person might term it long-term trend pattern, or something along those lines. But this is how I understand it.

Ahimsa said...


My story illustrates the foolishness and arrogance of the so-called knowledgeable. My sister and her husband trust authority and have faith in the system. When they fall, they'll be shocked.

BTW, my sister and her husband (ages 66 and 64) who just retired are not part of the elite, perhaps they aspire to be or delusionally identify with the elites as so many do in our culture. They accumulated their money through hard work and frugality in their 40-year marriage.

I warned them about the collapsing stock market because their two children will need the money they're currently squandering in the casino of the stock market.

Noon Summary said...

* Possible collapse triggers: Major bank run; WTC II; Escalation of violence in Eurasia
* This summer may be last chance to start doomstead
* Obama's advice apparently taken for one day; Those in SDS take it briefly in the shorts; Slipping out of shorts feels good
* Ridley Scott reveals that Deckard and Dick Cheney are Replicants
* Hope is the mind-killer. Hope is the little-death that brings total obliteration. I will face my hope. I will permit it to pass over me and through me. And when it has gone past I will turn the inner eye to see its path. Where the hope has gone there will be nothing. Only I will remain. (Apologies to Frank Herbert)
* Negative and truth are not synonymous; Some use TAE as motivation to keep preparing at full speed
* Illegitimati non carborundum is the first lesson of survival; TAE motto: undertand globally, act locally; Learn to swim in strange waters
* Reptillian brain will soon re-assert itself; Maybe Dick Cheney is not a Replicant
* aitrader asks what will happen next; TOD has such a discussion including comments by Stoneleigh and Ilargi ; Too many variables for reliable predictions; Maybe aitrader knows what will happen; If so he should share; aitrader responds he won't share because this isn't his blog
* Kunstler's Eyesore of the Month recommended
* Hoard canned goods, not stocks
* Anonymous wishes there was a god; If he can't wait for Ilargi's Church of Miracle and Wonder maybe this can help
* Orion accuses Ilargi of being human, undermining Church of Miracle and Wonder
* Abnormal is the new normal (or is normal the new abnormal?)
* aitrader says Ilargi has peeked at the future and is now resting on his laurels i.e. Ilargi has passed Peak Peek and is now in Peek Decline
* China's military budget increase is non-story; It's been done before
* Gravity channels Blinky again;
* @ Anon 7:25:
Though to us it's evident,
These attentions are well meant,
Such expressions don't appear,
Calculated men to cheer
Who are going to meet their fate
In a highly nervous state.
* More pension bombs going off than you can shake a stick at
* Americans are like mushrooms; Like being kept in the dark and fed dung (Note: mushrooms actually grow better on wood chips or possibly milkweed thistle)

Noon Summary said...

* Possible collapse triggers: Major bank run; WTC II; Escalation of violence in Eurasia
* This summer may be last chance to start doomstead
* Obama's advice apparently taken for one day; Those in SDS take it briefly in the shorts; Slipping out of shorts feels good
* Ridley Scott reveals that Deckard and Dick Cheney are Replicants
* Hope is the mind-killer. Hope is the little-death that brings total obliteration. I will face my hope. I will permit it to pass over me and through me. And when it has gone past I will turn the inner eye to see its path. Where the hope has gone there will be nothing. Only I will remain. (Apologies to Frank Herbert)
* Negative and truth are not synonymous; Some use TAE as motivation to keep preparing at full speed
* Illegitimati non carborundum is the first lesson of survival; TAE motto: undertand globally, act locally; Learn to swim in strange waters
* Reptillian brain will soon re-assert itself; Maybe Dick Cheney is not a Replicant
* aitrader asks what will happen next; TOD has such a discussion including comments by Stoneleigh and Ilargi ; Too many variables for reliable predictions; Maybe aitrader knows what will happen; If so he should share; aitrader responds he won't share because this isn't his blog
* Kunstler's Eyesore of the Month recommended
* Hoard canned goods, not stocks
* Anonymous wishes there was a god; If he can't wait for Ilargi's Church of Miracle and Wonder maybe this can help
* Orion accuses Ilargi of being human, undermining Church of Miracle and Wonder
* Abnormal is the new normal (or is normal the new abnormal?)
* aitrader says Ilargi has peeked at the future and is now resting on his laurels i.e. Ilargi has passed Peak Peek and is now in Peek Decline
* China's military budget increase is non-story; It's been done before
* Gravity channels Blinky again;
* @ Anon 7:25:
Though to us it's evident,
These attentions are well meant,
Such expressions don't appear,
Calculated men to cheer
Who are going to meet their fate
In a highly nervous state.
* More pension bombs going off than you can shake a stick at
* Americans are like mushrooms; Like being kept in the dark and fed dung (Note: mushrooms actually grow better on wood chips or possibly milkweed thistle)

Ahimsa said...

From Lao Tsu's Tao Te Ching:


Without going outside, you may know the whole world.
Without looking through the window, you may see the ways of heaven.
The farther you go, the less you know.

Thus the sage knows without traveling;
He sees without looking;
He works without doing.

aitrader said...

OK Nooner, here ya go...

Let’s take a walk down memory lane folks, shall we? The year is 1982. The world has a population of 4.6 billion people. The skies are blue. The spring is cool. Folks are skipping merrily to work and drivin’ at 55. Ronnie Reagan has just moved from B-movies to the big time. We said goodbye to Leonid Breznev and Princess Grace. England beat the pants off of an upstart little third-world country over a bunch of rocks in the middle of an ocean somewhere. The US GDP was 3.2 trillion dollars. And it was distributed among a population of 230 million hard working souls. The average income was $20,00 FRN’s. That’s Federal Reserve Notes. Those funny little pieces of paper that used to buy stuff. You remember. Don’t you?

Oh those halcyon days...

Well buckle up guys and girls ‘cause we’re in a time machine. That’s right, we’re heading back to 1982. But things aren’t quite what they used to be. We’re going back in time with a population of 300 million people and a national debt of 13 trillion dollars. That’s going to dice up mighty fine into a 1982 sized GDP pie of $3.2 trillion. Let’s do the math shall we? And the answer is…..400%. Yahoo! 400% of the total goods and services produced by all of those hard working folks for one whole year. Now that is a mighty fine pie. And lest you feel all cold and lonely with a measly little 20,000 dollar slice of goodness, well, don’t you fret. You get to divide it up with 70 million more folks! All fighting for their own little slice of the pie. So Alex, tell them what they’ve won. Yep, you've won a yearly annual salary of 15,333 dollars. And you get to spend it all IN 2009 PRICES! Oh you lucky guys and gals. What will you do?

But wait! There’s more! In our little time trip the DOW Jones is all the way down to 772. Now that’s not a typo folks. That is seven-hundred and seventy-two dollars. Yessiree. Now that’s a whopper don’t ya think? It’s a roller coaster ride. No doubt about. And please forget about all of that inflation adjusted nonsense. We’re going cold turkey. 100% right into the blue of nineteen eighty two. No fancy math. No funny dice. No exponents or re-baked equations. We’re heading smack dab into 1982 dollars with no adjustments of any kind. Ain’t that a hoot?

I hope y'all liked this trip down memory lane. Open your eyes now. No more electric sheep. No more lollipop dreams. Scamper off to work…while you can. And when you get there take a good look at one of your co-workers. Can you pick which one of you will still be there in a year? Can you? Just click your heels together and repeat after me. "There's no going home. There's no going home."

‘Cause we’re heading back to 1982. All you can do is buckle up and enjoy the ride.


And how about that herdonomics bounce in the markets today? That rush of swine swelling the air. That gaggle of geese all flapping in the same direction. Could you feel them? No? Me neither. Herds is the kwaziest kweatures. All instinct and no guts. I say we neuter the lot.

This isn’t your normal ‘30’s depression. Throw that old tired rulebook out the window. Toss that baby out along with the bath water. This puppy is heading down and no amount of hob-nobbin forehead-whackin’ knee-slappin’ mind-crappin’ intellect-strappin' soooophisticatin’ is going to make heads or tails of it. No-sireee-bob. You can draw all of the funny shapes you want. It don't matter. You can draw pennants and triangles. You can draw heads and shoulders. Hell, you can even make a balloon animal out of it and wear it for a hat. This puppy isn't making sense nowhere nohow. Just give it up and enjoy the ride.

z said...

@ Ahimsa on LaoZi:

do you know why and how?

how about:


roughly translate:

Nature has no kindness, treat everything the same as straw and dog;
The sage has no kindness, treat people the same as straw and dog.

if one understands this, then there is no need to sit up in the dark.

jal said...

Hi Ahimsa!
I also got a relative as a financial advisor.

Of course ... I'm the one who does not know what is going on....


Penn said...

America has an embargo against Chinese arms so American arms manufacturers couldn't possibly benefit.

The embargo hasn't stopped certain 'independent contractors' (the kind who will benefit under Obama) to ship Chinese weapons anyway.

Indicted Arms Dealer Still Making Millions from the Government

Stoneleigh said...


And how about that herdonomics bounce in the markets today? That rush of swine swelling the air. That gaggle of geese all flapping in the same direction. Could you feel them? No? Me neither. Herds is the kwaziest kweatures. All instinct and no guts. I say we neuter the lot.

I didn't call for an immediate bounce, but said that the market seems to be approaching a bottom that could last for a few months. Right now the herd is clearly still in fear mode en masse, but IMO the bulk of this down phase is behind us, which makes shorting more dangerous for three reasons.

Firstly the remaining downside for this move is probably fairly limited both in magnitude and in time. Secondly, when a rally does begin it is likely to be sharp (fueled by short-covering) so getting out of a position in time could be difficult. Thirdly, rule changes disadvantaging short sellers are most likely to be introduced near market bottoms (temporary though they may be), as they represent a fear response to the preceding decline. Governments and regulators are always behind the curve and always end up locking the barn door after the horse has bolted.

Playing the markets at all right now is risky, which is why I suggest that most people don't even try when sitting on the sidelines in cash is a much safer option. Shorting becomes riskier as a decline proceeds, and in my (risk averse) view the risk is getting to be unacceptably high. Of course aggressive speculators who keep their fingers on the pulse full time may still be able to make a quick gain in the short term, but the opportunities for losing your shirt are increasing. One has to have a very high risk tolerance to play that game right now.

He who loses least in a deflation wins. TAE is about helping people to lose as little a possible.

EBrown said...

Yay! I can't wait to get to 1982 because then it will be Morning in America again! I'll wash off my BO with a little R&R deficit spending coupled with tax raises.

z said...

there is a TA support level of 666 today for SPX, it is only 11 points away now. back a while ago, BDI hit 666 and marked the low (and had since rebound about 2X). could there be an interesting coincidence?

Drew said...

Last night I saw a big FDIC ad on a bus stop with Suze Orman and the reassurance that "as long as your deposits are below the FDIC limit, you can't lose a cent".

Why is everyone so worried, again?

John Hemingway said...

@ aitrader,
1982? Great year, for me at least. I was still at UCLA and California was a great place to be. I could certainly do worse:-)

Stoneleigh said...

1982 is one date (the latest chronologically) given for the beginning of the mania. When bubbles burst they ALWAYS retrace more than the preceding expansion, so the suggestion that we are headed for 1982 is actually quite optimistic. There are other dates one can use for the beginning of the expansion, all of which suggest much lower targets for any kind of lasting bottom. I'm one record here as saying that I'd be surprised if the DJIA was still above 1000 by the end of 2010, and even then I think it'll have a long way to go to the downside.

Granted this is no ordinary recession, but the herding model is grounded in human nature, and that hasn't changed for thousands of years. This collapse will be one for the record books, but there will still be rallies. We're hard-wired to experience collective mood swings.

aitrader said...

Hi Stoneleigh,

It wan't a directed criticism as such. Just a stream of consciousness flow. Noon summary, in all of his humor and wisdom, noted that I had something to say but held back. So there you have it. My no-holds-barred snapshot of where we are headed. FWIW.

Bigelow said...

Tea Leaves: Headed to S&P 580, possibly 532.

rumor said...

Decent report here (relative to most crappy Canadian reporting) about talks between Canadian bankers and the Bank of Canada preparing for widespread intervention. Sounds a lot like what the the US Fed/Treasury Hydra is doing now: buying up or guaranteeing the entire financial and commercial system. This is somehow being peddled in the story as a "unique" "made in Canada" solution. (Forcing me to ask, "What the fuck?")

The little bomb is quietly dropped in the "back story" rider attached to the end of the article:

Canada's top banks already have bigger exposures to single corporate entities than the large U. S. universal banks, with credit commitments to the top 20 companies typically two or three times their reserves, known as Tier 1 capital..

So, with housing prices and unemployment just starting to chomp the bit, and our economy being dependent on export trade, that doesn't sound dangerous at all. Right?

Stoneleigh said...


It wasn't a directed criticism as such. Just a stream of consciousness flow. Noon summary, in all of his humor and wisdom, noted that I had something to say but held back. So there you have it. My no-holds-barred snapshot of where we are headed.

No problem :)

I find dialogues with you very useful. You articulate what many are probably thinking, so in answering I am speaking to a wider audience. It's good to have to explain one's position more fully from time to time.

Ahimsa said...


Thank you.

I (we) must cultivate equanimity in the midst of the evolving chaos.

Persephone said...

@jal and Ahimsa
jal said...
Hi Ahimsa!
I also got a relative as a financial advisor.

Of course ... I'm the one who does not know what is going on....

Makes 3 of us

@aitrader :
Thanks for the time wrap peek

Thanks for the Denniger link

@Ilargi & Stoneleigh
Thanks for sharing your forum and for peeling back the layers.

"The ideal condition
Would be, I admit, that men should be right by instinct;
But since we are all likely to go astray,
The reasonable thing is to learn from those who can teach."

Sophocles, Antigone
Greek tragic dramatist (496 BC - 406 BC)

Persephone said...

Oh and Noon Summary ROCKS!