April 2 2009 2: Über Gräben weht der Wind

National Photo Co Pete Seeger on his father's lap May 23, 1921
Professor Charles Louis Seeger, wife Constance de Clyver Edson and their 2-year-old son Pete, of future folk fame

Ilargi: Sometimes emotion speaks louder than numbers, and a few rhyming words can easily outweigh a million pages of data, without even having to make an effort. In the face of today's absurdity, and its obvious outcome,which makes me yearn for times gone by that I never even knew, I’ll leave you with Pete Seeger and Marlene Dietrich, the first at age 89, the latter long gone with the wind she owned. Nothing like Dietrich's version of 'Sag mir wo die Blumen sind'. You don't need to speak a word of German. Over graves the wind blows.

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Pete Seeger (age 89) performing July 10, 2008 in Ottawa Canada along with his grandson Tao Rodriguez-Seeger and Guy Davis.

"On July 26, 1956, the House of Representatives voted 373 to 9 to cite Pete Seeger and seven others (including playwright Arthur Miller) for contempt, as they failed to cooperate with House Un-American Activities Committee (HUAC) in their attempts to investigate alleged subversives and communists. Pete Seeger testified before the HUAC in 1955. In one of Pete's darkest moments, when his personal freedom, his career, and his safety were in jeopardy, a flash of inspiration ignited this song. The song was stirred by a passage from Mikhail Sholokhov's novel "And Quie Flows the Don". Around the world the song traveled and in 1962 at a UNICEF concert in Germany, Marlene Dietrich, Academy Award-nominated German-born American actress, first performed the song in French, as "Qui peut dire ou vont les fleurs?" Shortly after she sang it in German. The song's impact in Germany just after WWII was shattering. It's universal message, "let there be peace in the world" did not get lost in its translation. To the contrary, the combination of the language, the setting, and the great lyrics has had a profound effect on people all around the world.


Where have all the flowers gone
Pete Seeger

Where have all the flowers gone, long time passing?
Where have all the flowers gone, long time ago?
Where have all the flowers gone?
Young girls picked them, ev'ry one.
When will they ever learn? Oh, when will they ever learn?

Where have all the young girls gone, long time passing?
Where have all the young girls gone, long time ago?
Where have all the young girls gone?
Gone to the young men, ev'ry one.
When will they ever learn? Oh, when will they ever learn?

Where have all the young men gone, long time passing?
Where have all the young men gone, long time ago?
Where have all the young men gone?
Gone for soldiers, ev'ry one.
When will they ever learn? Oh, when will they ever learn?

Where have all the soldiers gone, long time passing?
Where have all the soldiers gone, long time ago?
Where have all the soldiers gone?
Gone to grave yards, ev'ry one.
When will they ever learn? Oh, when will they ever learn?

Where have all the grave yards gone, long time passing?
Where have all the grave yards gone, long time ago?
Where have all the grave yards gone?
Gone to flowers, ev'ry one.
When will they ever learn? Oh, when will they ever learn?

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Sag Mir Wo Die Blumen Sind
Marlene Dietrich

Sag mir wo die Blumen sind,
wo sind sie geblieben
Sag mir wo die Blumen sind,
was ist geschehen?
Sag mir wo die Blumen sind,
Mädchen pflückten sie geschwind
Wann wird man je verstehen,
wann wird man je verstehen?

Sag mir wo die Mädchen sind,
wo sind sie geblieben?
Sag mir wo die Mädchen sind,
was ist geschehen?
Sag mir wo die Mädchen sind,
Männer nahmen sie geschwind
Wann wird man je verstehen?
Wann wird man je verstehen?

Sag mir wo die Männer sind
wo sind sie geblieben?
Sag mir wo die Männer sind,
was ist geschehen?
Sag mir wo die Männer sind,
zogen fort, der Krieg beginnt,
Wann wird man je verstehen?
Wann wird man je verstehen?

Sag wo die Soldaten sind,
wo sind sie geblieben?
Sag wo die Soldaten sind,
was ist geschehen?
Sag wo die Soldaten sind,
über Gräben weht der Wind
Wann wird man je verstehen?
Wann wird man je verstehen?

Sag mir wo die Gräbe sind,
wo sind sie geblieben?
Sag mir wo die Gräbe sind,
was ist geschehen?
Sag mir wo die Gräbe sind,
Blumen wehen im Sommerwind
Wann wird man je verstehen?
Wann wird man je verstehen?

Sag mir wo die Blumen sind,
wo sind sie geblieben?
Sag mir wo die Blumen sind,
was ist geschehen?
Sag mir wo die Blumen sind,
Mädchen pflückten sie geschwind
Wann wird man je verstehen?
Wann wird man je verstehen

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Markets rally on tidings of success at G20 summit

Global stocks rose sharply on Thursday and the price of government debt fell on optimism over efforts by world leaders meeting in London to solve the economic crisis and a change in U.S. accounting rules that will help troubled banks. Oil prices surged more than 8.0 percent to above $52 a barrel after world leaders at the G20 summit agreed to pump an additional $1 trillion into the ailing global economy through extra funding for groups like the International Monetary Fund. The positive tone coming from the G20 summit raised the risk appetite for many asset classes by raising hopes among investors that a coordinated effort was underway to tackle the worst economic downturn since the Great Depression.

U.S. government bonds extended losses as investors piled into equities while euro zone government bonds slid after the European Central Bank cut interest rates a less-than-expected one-quarter percentage point to 1.25 percent. The euro soared to nearly $1.35 after the ECB confounded expectations for a deeper cut to 1.0 percent. But the euro eased a bit after ECB President Jean-Claude Trichet refused to rule out additional rate cuts in the future. The G20 news and the change in FASB accounting rules more than offset data which showed the number of U.S. workers filing new claims for jobless benefits rose to the highest in more than 26 years in the latest week.

Stock markets in Europe, on Wall Street and an index for global stocks all rose more than 4.0 percent and an equities index for emerging markets surged more than 6.0 percent. Financial shares, a sector that led stocks deep into bear territory but a key driver behind a recent equity rally, surged on bets for an improving global economy and the easing of U.S. accounting rules that have battered their balance sheets. "Relaxing mark-to-market does give the banks a little more flexibility that they can perhaps mark a few things up," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "It's also the symbolism of the G20 that there will be coordinated efforts to stimulate the world economy."

The Dow Jones industrial average <.DJI> rose 306.80 points, or 3.95 percent, at 8,068.40. The Standard & Poor's 500 Index gained 33.77 points, or 4.16 percent, at 844.85. The Nasdaq Composite Index climbed 70.96 points, or 4.57 percent, at 1,622.56. The pan-European FTSEurofirst 300 index of top shares surged 4.9 percent to 781.48 points, leaving the index still down about 6 percent for the year. "Generally there have been positive noises coming out of the G20, and Trichet at lunch time was talking about the likelihood of a recovery in 2010," said Jim Wood-Smith, head of research at Williams de Broe. The euro was strengthened after Trichet said officials had yet to decide on "non-standard" policy measures and would offer more details at the central bank's next policy meeting in May.

"The ECB is still concerned about preserving the integrity of its currency," said Boris Schlossberg, head of FX research at GFT Forex in New York. "They do not want to debase it in any way, shape or form by doing radical unconventional measures." The euro jumped 1.91 percent at $1.3484, while the dollar was down against a basket of major currencies, with the U.S. Dollar Index off 1.45 percent at 84.185. Against the yen, the dollar rose 0.88 percent at 99.41. U.S. government bonds extended losses. The benchmark 10-year U.S. Treasury note fell 30/32 in price to yield 2.76 percent. The 2-year U.S. Treasury note fell 5/32 in price to yield 0.89 percent.

U.S. light sweet crude oil rose $4.02 to $52.41 a barrel. Gold accelerated losses after British Prime Minister Gordon Brown said the G20 countries will ask the IMF to bring forward gold sales to finance help for the poorest. Spot gold prices fell $24.75 to $901.65 an ounce. Overnight in Asia, stocks shot to a three-month on hopes the U.S. downturn has bottomed. Japan's Nikkei share average rose 4.4 percent while the MSCI index of Asia Pacific stocks outside Japan firmed 5.8 percent after the G20 news.

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G20 increases IMF firepower and boosts funds

The G20 on Thursday tripled the International Monetary Fund's resources, adding $500 billion (340 billion pound) for a total of $750 billion, giving it more firepower and putting it centre stage in the battle against global financial crisis. A G20 summit of developed and developing countries also agreed to support a general allocation of $250 billion worth of IMF Special Drawing Rights (SDRs) to IMF member countries to boost liquidity at a time when credit markets are frozen. IMF Managing Director Dominique Strauss-Kahn declared the G20 decision to boost resources and support more economic monitoring by the IMF meant that the Fund would play a bigger role as guardian of the global financial system.

Just a year ago, the IMF was struggling f relevance and respect for failing to sound the alarm on lax oversight and reckless lending by the United States. Many developing countries also complained that the IMF did not publicly reprimand rich countries for the sort of poor oversight that would probably have drawn stern rebuke, had it taken place in an emerging market. "The IMF is back," Strauss-Kahn declared. "Today you see the proof," he said, adding that the Fund was back not only as an economic forecaster but also as an institution that provides policy advice and monitors member countries' economies.

The increase in IMF resources includes money from the European Union, Japan, the United States, Canada and Norway. There was no formal breakdown provided of resources and which countries had committed funds. British Prime Minister Gordon Brown said China would contribute $40 billion to the IMF, but did not say whether Beijing would lend through an IMF-issued SDR bond. Meanwhile, Saudi Arabia said it had not committed funding but was studying options to support the Fund. The G20 communique said it was essential that the new resources should be "used effectively and flexibly to support growth," to lend to countries facing balance of payments needs and difficulties accessing credit.

Strauss-Kahn said the increase in resources to a total of $750 billion "is about the size that the world may need" as countries deal with the worst economic downturn since World War Two. He said the added $250 billion of IMF SDRs agreed by the G20 will boost global liquidity and could be used by one member state to lend to others, as well as increase the reserves of a country, thereby providing more financial stability. The IMF created SDRs in 1969 as a way to support its 185 member countries and are allocated according to members' IMF quotas, which are broadly based on a country's relative size in the world economy and which determines its voting power.

Strauss-Kahn said about $90 billion of the $250 billion SDR allocation was for developing countries, which would be allowed to increase their SDR share by using those of another country which may not need them. In addition the G20 communique said additional resources for low-income countries would be raised through already agreed IMF gold sales of 400 tonnes, which would provide about $6 billion over the next 2 to 3 years for low-interest loans for the IMF's poorest borrowers.

The IMF last year approved the sale of 403 tonnes of its 3,217 tonnes (103.4 million ounces) gold stocks as part of a plan to put its finances on sounder footing and create an endowment with the profits. But the G20 dismissed that plan and instead said the profits from the gold sales should be used for needy countries. Selling IMF gold requires ratification by member countries' legislatures, including the U.S. Congress, which is expected to take at least several months or longer.

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Brown dismisses IMF bailout talk

Gordon Brown has rejected speculation the UK might have to seek a bailout from the International Monetary Fund. The G20 summit in London agreed to increase resources available to help troubled economies to $500bn (£340bn). Treasury minister Stephen Timms and Business Secretary Lord Mandelson said this would remove some of the "stigma" of using the facility. Asked whether the UK would go to the IMF, the prime minister said he was "not proposing to do so". The Conservatives seized on the ministers' remarks about "stigma".

During a Commons debate on the G20, shadow chancellor George Osborne asked: "What exactly did the financial secretary [to the Treasury - Mr Timms] have in mind when he said it?" The Tories have warned that spiralling state debt could force the government to follow in the footsteps of Labour former chancellor Denis Healey, who approached the IMF for a bailout as the economy struggled in the 1970s. Questioned on Channel 4 News over whether the UK might access this funding again, Lord Mandelson replied: "I don't think we are going to be first in the queue." He added: "I don't think we are going to be in the queue."

At the G20's closing press conference, Mr Brown said: "Countries have offered that they will take up the IMF facility - I think Mexico has yesterday - but we are not proposing to do so." Mr Timms was quoted as telling a meeting earlier at the G20 that Mexico's move showed "we have gone beyond the era of stigma." The remarks echo those he gave in a Commons debate on 17 March, when he said that "there needs to be reform of the instruments through which the IMF can lend. "In those ways, we want to overcome the problem of stigma that has been attached to IMF programmes in the past, to the extent that some countries feel it is politically impossible to contemplate approaching the fund."

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G20 summit: Sun setting on tax havens

The threat of sanctions from the G20 Summit against offshore havens is finally pulling them into line. Fighting at the G20 summit has not been confined to London’s streets. German Chancellor Angela Merkel and French President Nicolas Sarkozy delivered blows of their own in the past few days by objecting to Gordon Brown’s fiscal stimulus plans and attacking the “Anglo-Saxons”. But if there is one subject on which the Prime Minister is likely to claim unity, and possibly success, it is tax havens. “For the first time we are on the verge of an agreement which will mean that every country that was previously a tax haven will have to exchange tax information on request,” he said on Wednesday. “For 20 years we’ve been trying to get agreement and we will get agreement at this summit.” Flying into London, a belligerent President Sarkozy agreed: “I will not associate myself with a statement of hollow compromises... Now is the time for action. We have said very clearly that we want lists of financial centres that do not co-operate with OECD criteria, and to draw the consequences of that.”

Switzerland, Monaco, the Cayman Islands and the other 35 countries identified as havens by the Organisation for Economic Co-operation and Development (OECD) have reason to be worried. Not even the September 11 terrorist attacks galvanised political will so firmly. “More progress has been achieved in the fight against tax havens in the last few weeks than over the past decade,” OECD Secretary-General Angel Gurría said this week, adding that the economy should take the credit. “At a time when governments need every tax dollar legally due to combat the world recession, such practices can no longer be tolerated.” The issue has come to a head due to the sheer amount of tax evaded through offshore havens whose banking regimes are cloaked in secrecy. According to a report by international management consultancy Oliver Wyman last year, the value of assets held offshore totals $7 trillion (£5 trillion). Pressure group Tax Justice Network estimates the world’s leading economies lose £180bn a year to tax havens. What defines a haven, the OECD explains, is not a competitive tax rate but “a refusal to provide information to foreign tax authorities”. That “refusal” clearly pricks the hairs on President Barack Obama’s neck. In 2007, he filed a Stop Tax Haven Abuse Act with fellow senator Carl Levin, who said at the time: “Offshore tax havens have declared economic war on honest US taxpayers by helping tax cheats.”

On the campaign trail, President Obama cited a single building in the Cayman Islands called Ugland House, which notionally houses 18,000 corporations but employs just 241 people. “That’s either the biggest building or the biggest tax scam on record,” he said. Under mounting pressure, offending countries are finally being pulled into line. Six months ago, according to the OECD, 46 countries had no bilateral tax information exchange agreements – in other words complete banking secrecy. Now, there are only about 15. This “blacklist” has been given to the G20, which may name and shame the offenders on Thursday. Switzerland may be on the list but, in a historic move last month, it promised to co-operate with countries investigating tax evasion. “Banking secrecy does not protect any form of tax offence,” the Swiss government said in an attempt to marry its historic banking principles with the climbdown. Switzerland, Monaco, Jersey, Guernsey, the British Virgin Isles, the Cayman Islands, Belgium, Luxembourg, Hong Kong, Singapore, and all the many offshore centres that have recently signed bilateral agreements are not doing so out of a sense of public spirit. “Victim” countries are fighting back.

According to Jeffrey Owens, director of the OECD’s centre for tax policy, countries are taking “defensive measures to protect their tax base”, which include the threat of rescinding existing treaties and denying the deductability of interest payments to non-co-operative jurisdictions. For countries like Singapore, which has 50 tax treaties with OECD countries, banking secrecy would be very expensive. Stefan Jaecklin, a partner at Oliver Wyman, says: “There is a realisation that retaliation can go beyond the financial sector. As countries are more globalised now, there are areas where their economies are open to retaliation.” Enforcement will be key. Seven years ago, 35 countries – including Switzerland – made a “commitment to implement the OECD’s standards of transparency and exchange of information”. “A lot of them did not act on their words,” a spokesman said. “G20 countries are now saying, 'Enough is enough – you made the commitment and now you have to live up to it’.” Sceptics still need convincing that the bilateral agreements will work. The burden of proof rests with the claimant country and “often it can be very difficult to prove there has been tax avoidance before you get access to the offshore accounts”, says Matti Kohonen, a project co-ordinator at Tax Justice Network. History suggests it is not easy to ensure countries’ actions match their words.

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Merkel and Sarkozy Sharpen Their Tone in London

In the morning, Barack Obama and Gordon Brown were conciliatory. In the evening, Nicolas Sarkozy and Angela Merkel went on the war path. The two said they would accept no compromises when it came to financial market regulation. Such an impolitic press conference hasn't been seen at an international summit for a long time. From the very first moment, both German Chancellor Angela Merkel and French President Nicolas Sarkozy made it clear that they would accept no compromises at the G-20 meeting in London. "The time of useless summits has passed," intoned Sarkozy. When it comes to the regulation of the financial markets, he said, there will be no room for negotiation. Merkel seconded her French counterpart, saying that "nothing can be swept under the rug." For Germany and France, she said, regulation is not up for debate. "Whoever doesn't understand that is paving the way to the next crisis," she warned.

Sarkozy had already made headlines in recent days with his threat to leave the summit early should his wish list not be adopted. On Wednesday evening in London, Merkel threw her weight behind him. It is a "decisive summit for the future of the world," she said. The German chancellor is concerned that, if a consensus isn't reached in London, it could be years before an agreement is hammered out. As such, she pledged that she would fight hard, right down to the details. The abrasive appearance of the German-French duo on the eve of the G-20 summit was nothing less than a provocation. The British and the Americans, said one member of the German delegation, were "extremely concerned" about this press conference. And it turned out they had reason to be. It was a barely veiled challenge issued by the continental Europeans to the US and Great Britain. It was particularly notable for its contrast to the tone adopted by US President Barack Obama and British Prime Minister Gordon Brown earlier in the day. The two seemed intent on de-escalation after weeks of barbs being fired across the Atlantic. Indeed, Obama called reports about differences of opinion between the US and Europe "vastly overstated." He insisted that, in essence, everyone agreed on how to confront the crisis -- when it came to both stimulating the economy and increasing the regulation of financial markets. Berlin too had adopted a conciliatory tone.

On Wednesday evening, though, that changed. But why did Merkel suddenly go on the attack? "This is about the weighting of the message of this summit," the chancellor explained. The German government feels that tighter regulations are given short shrift in the draft of the closing statement the British government presented to participants. In some areas it remains too vague -- on issues like tax havens, hedge funds and ratings agencies, for example. And in others Merkel feels it is too concrete -- like on the issue of further economic stimulus. Germany and France want to see the pledges that were made at the G-20 summit in Washington in November be implemented, Merkel said. At the time, an action plan was agreed to that would see improved oversight of financial markets. "That cannot just be left in general terms," Merkel said; instead, "very concrete considerations" are necessary. Sarkozy added that there is no time left for "grand speeches," an apparent reference to Brown and Obama. "The decision must be made today and tomorrow. The day after is too late." In the existing draft of the statement, the details about regulating financial markets are hidden in an appendix. And German government sources already say that lobbyists in London and New York are working hard to water down the language of the international consensus.

But this concern alone wouldn't be enough to risk a major breech of summit etiquette. With their uncompromising approach, Merkel and Sarkozy were ultimately indicating that they wanted to put their stamp on the summit. Often, though, such a flexing of muscles on the international stage backfires, generating resistance from the other participants. Merkel and Sarkozy went ahead anyway in the knowledge that they hold the better cards. Their main adversaries, Brown and Obama, have more to lose. The host has tied his political future to the summit, and Obama can't begin his first trip to Europe as president with controversy. That, at least, is what Merkel and Sarkozy are banking on. They're also willing to hazard the consequences of collateral damage. Indeed, the myth that there are no fronts at this summit has been dismissed for good. Brown had already tried in the morning to contain the imminent Sarkozy disaster. He called for tighter regulation as the first of five goals that the summit must reach. But it didn't work. Merkel and Sarkozy made their ill-humor known before going to the official start of the G-20 summit, the opening reception at Buckingham Palace.

The duo is taking a lot of risks with their aggressive rhetoric. One of those is that the demand for more economic stimulus measures from France and Germany will now become louder -- forcing Merkel to begin horse-trading after all. To independent observers, the German critique of the closing statement seems strangely stubborn. In particular, the total rejection of further economic stimulus seems "very defensive," said Henrik Enderlein, a professor of political economics at the Hertie School of Governance in Berlin. "They don't seem to want any mention of economic stimulus measures," said Enderlein, explaining that, if necessary, Berlin would prefer a vague statement of intention. The reason, said the professor, is the upcoming national elections: "The chancellor doesn't want to commit herself to anything in the summit document that could be held against her later during the election campaign."

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Geithner's Plan: Loopholes Galore

It has been a little less than two weeks since Treasury Secretary Timothy F. Geithner unveiled the details of his project to restore banks to financial health. But analysts say hedge funds and investment banks are already looking for ways to exploit the complex web of auctions, public-private partnerships, and government guarantees proposed by Treasury to cleanse banks' books of toxic assets. "It's a highly gameable system," says H. Peyton Young, an Oxford University economist and a senior fellow at the Brookings Institution in Washington. "It's very difficult to write rules that are going to prevent self-dealing behavior."

Geithner's goal: entice investors to buy up the billions of dollars' worth of subprime mortgages, underwater commercial property loans, and other shaky securities that weigh down the banks' books. The partnerships will bid at auction for the dodgy parts of the banks' portfolios, hoping to get a big enough bargain that they can resell the assets later at a profit. With their balance sheets restored to health, goes the theory, the banks will lend again. Investors who team up with Uncle Sam get a chance to make a fortune with very little risk: The government will provide half the equity, and the partnerships can juice returns by borrowing more funds on attractive terms from the Federal Reserve or by securing private-sector loans whose repayment is guaranteed by the Federal Deposit Insurance Corp.

Besides the generous terms, the partnerships have loopholes big enough for an investment banker to drive his Ferrari through. The basic problem: Everyone gets to play. Banks selling dubious assets can finance their sale to the partnerships, investors can buy debt from banks in which they own shares, and on and on. Strictly speaking, there's nothing wrong with much of this. But many of the strategies to exploit the partnerships increase the chance that the feds will overpay for the debt, sticking taxpayers with the bill. Government officials say they plan to head off abuses as they iron out the program's final rules and argue that competition will also play an important part. "When programs are competitive, it becomes more difficult to game, because the outcomes are more uncertain," says Jim Wigand, the FDIC's deputy director of resolutions and receiverships. But with so many twists, gaming the system may prove hard to block completely. Here are five possible tricks:

Banks may be able to finance the sale of their own troubled loans, lending money to the public-private partnerships that buy the assets. A bank's loan to the partnership would be buttressed by an FDIC guarantee. Administration officials confirm that the Treasury may allow such seller financing. The move essentially replaces junky mortgages on the bank's books with an FDIC-guaranteed loan. With its risks so limited, the bank has every reason to pass off its weakest assets as better than they are, argues Fuqua School of Business finance professor Campbell R. Harvey. "They will want to unload the worst possible things at the highest possible price," he says. "And if they're doing the financing, it's even more likely that they will be able to do that." Government officials say they will charge more for loans used to buy the riskiest assets.

Say a private investor in one of the partnerships owns big stockholdings in a bank putting assets out to auction. By overbidding for the bank's sludge loans, the investor could help drive up the banks' shares and make a tidy profit. His stake in the partnership might take a hit if the assets eventually aren't worth what the auction price suggests. But the government would shoulder most of any big losses. As long as the private investor's stock market gains exceed his loss in the partnership, the deal's a winner. Government officials see this ploy as too risky for most investors to try. But the Treasury would be hard-pressed to prevent such maneuvers, short of barring a slew of hedge funds and other big bank investors from bidding in the auctions at all. Besides, it's impossible to disentangle all the connections between banks and money managers. "How do you find a private money manager that doesn't have a relationship with a bank?" asks Albert "Pete" Kyle, a University of Maryland finance professor.

In the public-private partnerships, the private partners are supposed to figure out how much to bid for assets, keeping the government well away from the business of pricing deals. But the way the deals are structured, the FDIC and Treasury will absorb as much as 93% of any losses, while getting to keep just half of any profits. "The government's going to be on the hook for the [deals] that are bad," says Brookings' Young. With their own downside so limited, the private partners are likely to be drawn to the riskiest deals, which offer the highest potential payoffs—and the government the biggest potential losses. One option under consideration is including multiple private partners in each partnership as a check on one another's excesses.

For all the talk of toxic assets, some banks may want to hold on to their suspect loans in the belief that they will eventually pay off. The Treasury and the Fed, however, are breathing down the banks' necks to unload problem debts. What to do? A bank could effectively swap its existing portfolio of junky loans for another one very similar—only this time limiting the downside by using government loans and guarantees. The bank would auction off its loans to a public-private partnership. Then, using a portion of the auction proceeds, it would set up a different public-private partnership that would of course have access to government loan guarantees and matching funds. The bank would use the new partnership to buy a portfolio of similar problem assets twice the size of its old portfolio. The bank would then split any gains from the new portfolio 50-50 with the feds—but risk no more than the sliver of equity it contributed to the deal. The Administration may seek to block such maneuvers.

Perhaps the most intricate maneuvers will likely stem from "layering" the government's many programs of the last six months. Starting with some of the capital infusion received last fall from the Treasury, a bank could invest in a private partnership that buys toxic assets using a loan guaranteed by the FDIC. Those assets could then be chopped up and sold as securities to other investors—who put together the financing for the deal by availing themselves of another program of low-risk loans from the Federal Reserve. Thus the original bank's capital at risk in this web of deals would be almost nil. "[This] is going right back to the practices that got us into this problem—except using government leverage," Young says. "It might lead to an even wilder party than we saw before."

How much leverage could investors or banks pile up? "As much as you can get away with, of course," says the bank analyst at one investment management firm. He thinks the recent outcry over bonuses at American International Group may promote some self-restraint. "You're going to get caned in public these days, rather than getting caned in private," the analyst says. "There's not much appetite for that." One government planner counters that if each program's safeguards are good, layering "shouldn't be a problem." Final rules are expected in the next several weeks. Banks and investors, meanwhile, will keep trying to get the most out of Washington.

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A bear's bear

Anyone wondering what a bear's bear sounds like need only spend some time with Ian Gordon, a Vancouver-based investment adviser and market historian whose genial nature seems at odds with his decidedly grim outlook. Basing his views on an interpretation of market cycles going back more than 200 years, the president of Long Wave Analytics has been consistently accurate in his forecasts in recent years. And if he is right now, much worse is yet to come.

Can you explain how your thesis works?
I sort of extended Kondratieff's economic cycle into something far bigger than he had ever intended. [Nikolai Kondratieff was a Soviet economist who concluded in the 1920s that capitalist economies endure recurring booms and busts over long cycles running up to 60 years.] I quickly discovered that it was very easy to recognize exactly where you were in the cycle.

You divide the cycle into the four seasons of the year and say that right now we're at the beginning of a long winter. Why is that?
I consider the seasons to be very appropriate. The present cycle started in '49. The spring started with the bear market ending that year. Spring ended in '66, when that bull market topped in June, with the Dow just under 1,000. ... Spring is the rebirth of the economy, and stocks perform as the economy performs.

And what happens when spring turns to summer?
We have always had an inflation in the summer of the cycle. The reason is that there was always a war. And it was always financed through paper money printing. In the first cycle - and I'm using the U.S. - it was the War of 1812. In the second cycle, it was the U.S. Civil War. In the third, it was the [First] World War and in the fourth cycle, it was the Vietnam War. When I started to write about this in '98, I knew exactly that we were in the autumn bull market [which always follows], and I knew that, given the massive increase in stock prices up to that point in time, we were much closer to the end than the beginning.

Which obviously leads us to winter. When the stock market peaks - you can go back to the 1873 stock market peak or 1929 or 2000 - you go into the Kondatriev winter. The winter is really the death of the economy, because debt has to be taken out of the system. And that's what's occurring now. I could anticipate all this simply by looking at all the previous cycles, knowing that the stock market peak would be the indication that we were going into the winter and that the debt bubble would burst.

So why didn't this happen back in 2000 when tech stocks blew up?
Because [then Fed chairman Alan] Greenspan wouldn't let it. He brought interest rates down to 1 per cent [by 2004] and flooded the banking system with money.

Where do we sit now?
We're only really at the beginnings of this massive collapse of the debt structure. Much as the central banks are trying to feed money into the system, the collapse basically takes money out faster than they can put it in.

So all those government efforts to remedy the problems are going to come to naught?
My own feeling is it could be the end of paper money. ... The central banks and the treasuries' response to all this is to just continue to increase the debt. They're trying to get the credit lines open again, but I ask myself: Who's there who can actually take up the loans?

But the markets appear to be rebounding. How do you explain this?
In '29, the [market] peak was on Sept. 3, when the Dow hit 381. The first crash bottomed on Nov. 14, 48 per cent below the point from whence it had begun. Then you got a massive rally [because of government monetary intervention]. Into April, 1930, it recovered [almost] 50 per cent.

I think we're very much at that same point again ... where people think that the government is starting to control the problems.
What about the argument that another depression is unlikely, because of all the economic, fiscal and social measures designed to prevent such a nightmare from reoccurring?
I just don't think that those measures are going to work. The U.S. consumer is absolutely tapped out, and that's who you have to depend on for your economy.

So it would be wrong to assume you're advocating a heavy weighting in stocks?
There's a time to be in stocks and there's a time to be in gold. When you're in one, it's because the other doesn't work. In this kind of environment, the only thing that has ever made sense is gold, because people will be so scared of anything else.

Based on your interpretation of Kondratieff theory, when do we see spring again?
The last spring really only started after the [Second World] War, and the war basically stopped the Depression. This time, the United States is in a much more difficult position. Going into the last Depression, it was far and away the world's largest creditor nation. Today, it's the world's largest debtor nation. So its efforts to try to overcome the effects of the Depression are going to be offset somewhat by its ability to borrow.

Getting back to the market, you obviously don't see this as anything more than another bear rally.
Ultimately, the stock market has to reflect the reality of the economy. If we were to emulate 1929-32 in the stock market, that would be an 89-per-cent loss in stock prices. I have a target for the Dow of 1,000 points at the bottom.

Boy, you're going to be a barrel of laughs Tuesday at a Night with the Bears (the Toronto event is sold out).
Having written about this and studied it, I honestly wish it wouldn't happen.

Do you ever depress yourself?
I do. But I hope that I've prepared myself and those that I've advised to basically look after themselves in the best way they can, given what we could see was going to happen.

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Stiglitz: Government Stimulus Plans are 'Not Enough'

Former World Bank economist and Nobel Prize winner Joseph Stiglitz talks to SPIEGEL about the danger of a new Great Depression, a way to reform the American bailout system and struggling nations' urgent need for help.

SPIEGEL: Many people are comparing the financial crisis to the Great Depression. Will it really be that bad?
Stiglitz: It's going to be bad, very bad. We're experiencing the worst downturn since the Great Depression, and we haven't reached the bottom yet. I'm very pessimistic. Governments are indeed reacting better today than during the global economic crisis. They're lowering interest rates and boosting the economy with economic stimulus plans. This is the right direction, but it's not enough.

SPIEGEL: The American government has committed over a trillion dollars to save the banks and $789 billion to boost the economy. Do you think this is too little?
Stiglitz: I do. More than $700 billion sounds like a lot, but it's not. On the one hand, a large part of the money will first be given out next year, which is too late. On the other, a third of it is drained away by tax cuts. They don't really stimulate consumption, because people will save the majority of that money. I fear that the effect of the American economic stimulus plan won't be even half as big as expected.

SPIEGEL: At least governments worldwide are bracing themselves against the recession, as opposed to the global economic crisis where they accelerated the recession through their savings policy.
Stiglitz: That's right. That's why I'm confident we'll get off lighter than during the Great Depression. On the other hand, there's a series of developments that make me very anxious. The state of our financial system, for example, is worse than it was 80 years ago.

SPIEGEL: Hundreds of banks collapsed in the US at that time. Today most of them are being saved by the government. What's so bad about that?
Stiglitz: The banks that survived 80 years ago continued to lend money. Today many banks aren't lending money anymore, above all the large investment banks. This will deepen the crisis.

SPIEGEL: The US government's emergency plan is supposed to prevent this, though. The banks receive money from the state so they can continue to give loans.
Stiglitz: That's the idea, but it doesn't work. We're just throwing money at them and they pay billions of it out in bonuses and dividends. We taxpayers are being robbed for all intents and purposes in order to reduce the losses that some wealthy people bear. This has to be changed.

SPIEGEL: What do you suggest?
Stiglitz: We have to reorganize our bailout system for the financial sector. For one thing, any bank that actually lends should get money from the government; more money to small and medium-sized banks in smaller towns and less to Wall Street institutions. The government must also accept the consequences when banks become insolvent ...

SPIEGEL: … and let them go bankrupt?
Stiglitz: No, they have to be saved, because the consequences to the monetary system would be incalculable. But as a countermeasure, these institutions have to be nationalized, which even Alan Greenspan is now demanding. Then the government can close those business segments that have nothing to do with lending and make sure that the banks no longer organize esoteric stock deals that they themselves do not understand.

SPIEGEL: Today the world is much more intertwined than in the 1920s or 1930s. Does this make the fight against the economic crisis easier?
Stiglitz: On the contrary, it's going to be more difficult. When a country introduces an economic stimulus plan, a large part of the stimulus goes abroad. For instance, a US company receiving a road construction order from the state buys equipment from Germany, concrete from Mexico and engineering services from Great Britain. The incentive to profit from the economic situation of one's neighbor is correspondingly great, while doing as little as you yourself can do. There is only one solution for this: economic stabilization policy has to be coordinated internationally in order to diminish the already dangerous global imbalances.

SPIEGEL: What do you mean by that?
Stiglitz: For years the US was the economic powerhouse of the world. It imported more goods from abroad than it exported, to the joy of manufacturers in Asia or Europe. But this model no longer works. The Americans are completely over-indebted. They can't increase their consumption, instead they have to save. This is why other global growth has to be increased.

SPIEGEL: Washington sees it that way, too. In particular, it wants countries with strong exports, like Germany, to offer further economic stimulus packages. Do you think that's justified?
Stiglitz: Absolutely. Export surpluses are counterproductive in times of economic crisis. They have to be reduced through economic stimulus programs, for example. Economist John Maynard Keynes was even of the opinion that surplus countries should be taxed during times of economic crisis.

SPIEGEL: ... Which might not go over so well.
Stiglitz: That's why we wouldn't go that far. I propose that countries with a positive trade balance should stream part of their surplus to the International Monetary Fund. This can then stimulate the economy in developing countries or prevent the economy from collapsing in Eastern Europe.

SPIEGEL: The global economic crisis following 1929 only really began when governments sealed off their respective countries from international trade. Is there still a danger of this?
Stiglitz: I think it's unlikely that countries will again enter into open protectionism. What I do fear is indirect insulation measures like financial aid or subsidies. The consequences wouldn't be less serious. There is the threat of secret commercial obstacles that could similarly greatly restrain global exchange, like tariff increases.

SPIEGEL: The leaders of the 20 largest industrial nations are meeting in London this week to discuss the regulation of financial markets. Will the meeting be successful?
Stiglitz: I'm skeptical. The American government does talk a lot about stricter regulation of financial markets. I doubt that it's serious, though. The Americans have always been masters at changing a supposed regulation measure into further deregulation.

SPIEGEL: Do you expect this of the new Obama administration as well?
Stiglitz: Obama himself has made clear in many speeches that he wants to prevent prospecting in the American financial industry. But Obama is under pressure from Wall Street. Even within his own administration, there are a lot of officials who are only for cosmetic corrections.

SPIEGEL: The US is against too much regulation in the financial markets, Germany and Japan would prefer no further economic stimulus packages. Can much come out of the G20 summit?
Stiglitz: The governments will find the words to put a positive spin on the conference. If they can do anything, they can do that. Everyone will say that more regulation is necessary and that balance is needed between national sovereignty and common action in a globalized world. But how much substance will lie behind their words? I'm skeptical.

SPIEGEL: The economic crisis has severely damaged the economic model of finance-driven turbo-capitalism. Will this lead to a renaissance in the state economy?
Stiglitz: I don't think so. The fall of the Berlin Wall really was a strong message that communism does not work as an economic system. The collapse of Lehman Brothers on September 15th again showed that unbridled capitalism doesn't work either.

SPIEGEL: Could authoritarian systems like in China be the future?
Stiglitz: Besides the two extremes of communism and capitalism, there are alternatives, such as Scandinavia or Germany. The Chinese model has succeeded very well for their people, but at the price of democratic rights. The German social model, however, has worked very well. It could also be a model for the US administration.

SPIEGEL: The crisis began in America, spread to other industrialized nations and now threatens the emerging and developing countries. Is the target of the community of states to halve global poverty by 2015 still achievable?
Stiglitz: Because we don't know how long this crisis will last, it will become more difficult to keep to this promise. I'm also pessimistic, for example, now that the USA is discussing whether we can still afford development aid during the crisis. But there are countries like Japan and Germany that have raised their contributions to the IMF and World Bank to help the Third World.

SPIEGEL: Will Africa be the big loser in the crisis?
Stiglitz: I'm fearful of that, because even the high growth of 6 percent in Africa in the last few years hasn't been enough to permanently fight poverty. A lot of the countries on the continent which inherited a low standard of education, and no infrastructure from colonialism, have solely focused on increasing commodity prices. That was a risky strategy. The IMF's structural development policies also contributed to deindustrialization. We haven't managed to create a stable foundation for the African economies.

SPIEGEL: World Bank president Robert Zoellick has said that the industrialized nations should direct 0.7 percent of their stimulus packages to the developing countries.
Stiglitz: That's too little. Take the US example. Each country would receive around $5.5 billion per year from $789 billion. It's a lot more than nothing, but only a drop when compared to what the countries require, namely up to $700 billion in this year alone.

SPIEGEL: The opposition in Germany is already complaining about government stimulus funding for infrastructure in developing countries.
Stiglitz: All the more reason for governments to persuade their people that it is in our own interest that all national economies grow. If banks in Eastern Europe collapse, it weakens Western European banks and then American financial institutions. If we are to learn one thing from the economic crisis, it's this: Globalization can't be stopped. It has to be managed or else the global economy won't work.

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Euro jumps after eurozone rate cut

The euro jumped against other leading currencies after the European Central Bank cut its key lending rate by less than expected. The eurozone bank cut its official interest rates from 1.5 per cent to 1.25 per cent as it steps up its efforts to combat Europe’s recession, but it stopped short of entering zero interest rate territory. The cut to the lowest rate since the euro was launched in 1999 was smaller than financial markets had expected and boosted the eurozone currency. The euro rose 1.2 per cent or more than $0.50 to $1.3384 against the dollar. It climbed 2.2 per cent to Y133.10 against the yen and reversed earlier losses to stand up 0.3 per cent at £0.9123 against the pound. Analysts said the ECB’s decision to ease monetary conditions by less than forecast might have been triggered by growing optimism that the sharp slowdown in the global economy was nearing an end.

The cut sends a signal that the central bank remains wary of following the example of the US Federal Reserve, which has cut official interest rates to virtually zero. The bank cut the “facility rate” or overnight bank lending rate to 0.25 per cent from 0.5 per cent. The deposit facility is used by banks to park funds at the ECB overnight, and with the central bank flooding the market with liquidity, the deposit facility rate has become an important benchmark for market interest rates. The ECB has become increasingly concerned about the likely depth and duration of the eurozone’s recession, already the worst seen in continental Europe since the second world war. Annual eurozone inflation, at just 0.6 per cent in March, is also undershooting the ECB’s target of an annual rate “below but close” to 2 per cent and is likely to turn negative in coming months. But Jean-Claude Trichet, ECB president, has previously voiced the widespread concern among ECB governing council members that zero interest rates create damaging economic distortions.

Mr Trichet will explain the ECB’s decision at a press conference on Thursday afternoon, when financial markets will be listening for announcements on additional measures to boost the eurozone economy. So far, the ECB’s efforts have focused on “enhanced credit support,” which has seen it providing banks with unlimited amounts of liquidity. One option would be to extend the period over which such liquidity is provided from the current maximum of six months. Another possibility, hinted at last week by Lucas Papademos, the ECB’s vice-president, would be to move closer to the outright purchase of corporate debt. Such a step, which would involve circumventing the banking system, would take the ECB into new territory. Since the ECB’s March meeting, eurozone economic data has continued to deteriorate with scant signs of stabilisation on the horizon. Germany’s export-dependent economy has been particularly badly hit – and is widely expected to fare worse this year than either the UK or US, even though its financial system has proved less fragile. Earlier this week the Paris-based Organisation for Economic Cooperation and Development forecast the German economy would contract by 5.3 per cent in 2009. Eurozone gross domestic product was expected to fall by 4.1 per cent.

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Regulators Agree to Create Stricter Capital Requirements for Banks

A group of U.S. and foreign bank regulators has agreed to move towards creating stricter capital requirements for banks around the world, marking a reversal from a push just a few years ago to give financial institutions more flexibility in how they calculate reserves. The Financial Stability Forum Thursday embraced for the first time the idea of a capital floor for banks, referring to it as a "supplementary non-risk based measure to contain bank leverage." "There was a consensus that there was not enough capital in the banking system coming into this," U.S. Comptroller of the Currency John Dugan said in an interview.

The release of the Financial Stability Forum report is designed to coincide with the conclusion of the Group of 20 summit, where financial regulation was a hot topic. The G-20 has in the past called for the Financial Stability Forum to have more power as a global coordinator of banking policy, giving increasing weight to its recommendations. Major changes wouldn't likely happen for months because they require approval by legislatures in multiple countries. But the fact that the Financial Stability Forum is advancing such ideas illustrates the far-reaching nature of the current discussions about overhauling how financial institutions are regulated.
The Financial Stability Forum is expected to be the clearinghouse that vets ideas for global financial regulation.

Banks hold capital as reserves to cushion the impact of unexpected losses. But many banks found ways to exploit existing capital requirements in the lead up to the financial crisis, and weren't prepared for the heavy losses that resulted from bad bets on real estate and other loans. Only a few countries, including the U.S., Canada, and Switzerland, have such simplified capital requirements, often referred to as "leverage" ratios, which attempt to put a floor on their activities. In recent years, several people, including then-Federal Reserve Chairman Alan Greenspan, thought that new global capital standards known as Basel II would supplant the need for a leverage ratio. The Basel framework gave banks more flexibility to determine their own levels of capital, a concept that's politically discredited following last years markets blowup.

It is still unclear what a new standard might look like. And even stricter models can be exploited. For example, it is easy for banks to get around the U.S. leverage ratio because it doesn't fully account for assets banks hold off of their balance sheets, which proved to be a major area of risk for big banks. The OCC's Mr. Dugan said U.S. and foreign regulators have agreed that no major changes to capital requirements will take place until after the financial crisis subsides, because it's difficult for major banks to raise capital in this environment. The simplified capital requirement could be a percentage of the total assets that a bank has, or it could be based on its revenue. Larger banks could face tougher capital requirements.

U.S. and foreign regulators said the new standards should "complement" the risk-based requirements of Basel II. The report said it "should be transparent and simple to implement; limit the build-up of leverage in the banking system during booms; put a floor under the risk-based measure that becomes binding if firms take on excessive leverage or attempt to arbitrage the risk-based regime; and not produce adverse incentives." Federal Deposit Insurance Corp. Chairman Sheila Bair pushed for an international leverage ratio a few years ago but made little progress with skeptical foreign officials. The financial crisis has breathed new life into the idea. Canadian officials have pushed aggressively for it, too.

The Financial Stability Forum called for other changes on Thursday, including one recommending "principles" on compensation for bank executives, notably the idea that compensation practices align incentives with long-term profitability. Compensation "has become more of a global issue just as it has become much more of a pronounced issues in the United States," said Mr. Dugan, a member of the Forum. "Everybody around the world is concerned with alignment of compensation standards and that's why the Financial Stability Forum took on this notion of trying to get some sound principles in this area," Mr. Dugan said. "It's a part of regulator's world now in a more prominent way than I would say it has ever been before because of all we've gone through."

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Citigroup Says Buy Bank Puts Because Rally Will Fade

Investors should buy put options on financial companies because derivatives-market trading suggests the industry will retreat after a 43 percent surge since March 6, Citigroup Inc. said. “Despite the rally, credit and option markets are pricing in increased downside risk,” New York-based Citigroup strategist Alvin Wang wrote in a note sent to clients today. He recommended puts giving the right to sell the Financial Select Sector SPDR Fund, an exchange-traded fund that tracks a basket of bank stocks, for $8 before May 15. The XLF, as the ETF is known, added 5.5 percent to $8.81 in New York, bringing its gain since March 6 to 43 percent. The May $8 puts fell 25 percent to 70 cents today.

The difference between prices for bullish and bearish options, known to options traders as “skew,” and prices for credit-default swaps, which are used to protect against a default on a company’s debt, both show that investors expect the XLF to reverse gains, the strategist wrote. Put prices rose 35 percent relative to call prices this month, even as the XLF added almost 10 percent before today, the strategist said. That means investors are paying more to use options as protection against a decline at the same time as the ETF’s share price is rising. “This is an interesting reversal,” Wang wrote. “The higher the spread is, the more premium investors are placing on downside protection.”

The XLF hasn’t closed below $8 since March 11. The basket of shares is still down 30 percent this year. Options are derivatives that give the right to buy or sell a security at a set price and date. Puts give the right to sell and calls convey the right to buy. Credit-default swaps, used to hedge against losses or to speculate on a company’s ability to repay its debt, pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent.

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Freddie Mac Economist: Housing, Mortgage Markets Remain Bleak

The U.S. housing market continues to contract as the amount of delinquent loan payments and defaults on mortgages rise, prompted by high unemployment, a Freddie Mac economist said on Thursday. Frank Nothaft, Freddie Mac's top economist, speaking before the National Economist Club in Washington, said that while overall near-term housing market projections remain bleak, sales of existing homes are occurring. However, Nothaft said there is a very high excess inventory of homes and most of the homes being sold are foreclosure properties - about 40%. "But I do think they are near the bottom and we will see some turn up in the second half of the year," Nothaft said.

Still, various measures of U.S house prices will likely decline throughout this year and through 2010, Nothaft said. "It'll be 2011 before we see any improvement or increase in these national U.S. house price measures." According to Nothaft, other trends in the housing and mortgage markets include a direct correlation between unemployment and states with the highest rates of delinquent mortgages, an increase in Federal Housing Administration lending and a two percentage point decline fixed-rate mortgage rates since October. Nothaft, attempting to ease the sour housing data, said to members of the economist club: "The good news is low mortgage rates." "That will help to promote affordability for home buyers and provide refinancing opportunities for many owners who have loans," Nothaft said

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U.S. Home-Equity Loan Delinquencies Climb to Record

Late payments on home-equity loans rose to a record in 2008’s fourth quarter as job losses and the deepening recession put a strain on borrowers, the American Bankers Association reported. Delinquencies increased to 3.03 percent of accounts in the period from 2.63 percent in the third quarter, the Washington- based group said today in a statement. A composite index of eight types of consumer loans, including auto and property improvement, rose 11 percent to a record 3.22 percent, the highest since the ABA began collecting the data in October 1974. “The wheels just fell off the economy in the fourth quarter,” James Chessen, the association’s chief economist, said in the statement.

“The amount of job losses dealt the economy a severe shock, and that continues to be the biggest driver for delinquencies.” A rise in unemployment to 8.1 percent in February, the highest since 1983, adds pressure on consumers seeking to keep up with monthly loan payments, the group said. The number of Americans filing unemployment claims unexpectedly rose last week to the highest since 1982, the Labor Department said today. The government tomorrow may report unemployment rose to 8.5 percent in March as employers shed 660,000 jobs, according to the median estimate of 79 economists surveyed by Bloomberg News.

“You have almost the perfect storm for the economy in the fourth quarter,” said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina. “I would expect delinquency rates to continue to rise well into 2009.” The banker’s survey is based on data from 300 banks, tracking late payments on eight types of closed-end loans that are used as a benchmark for typical consumer delinquencies. “It’s a little surprising that that composite ratio is so high,” Chessen said in a telephone interview. “I think a lot of that is being driven by the auto sector and it all ties back to high unemployment in the country.”

U.S. auto sales plunged to a 27-year low in February and dropped 37 percent last month, extending the auto industry slump into a 17th month. Of the eight loans in the closed-end accounts, delinquencies rose on seven: indirect auto loans arranged through third parties such as car dealerships, direct auto loans, property improvements, home equity, marine, recreational vehicle and personal loans, the group said. Delinquencies on home-equity lines of credit rose to a record 1.46 percent in the fourth quarter from 1.15 percent in the previous period. The index for mobile home delinquencies fell to 3.08 percent in the period from 2.96 percent.

Job losses have eroded consumer credit, the ABA said in its quarterly report. The U.S. has lost 4.4 million jobs since the recession began in December 2007, marking the biggest employment drop in any postwar economic decline. “When people don’t have jobs, they just don’t have the income to pay their debts,” Chessen said. He said it’s unlikely that the trends in loan delinquencies will improve this year. The trade group’s loan index for delinquent credit card accounts rose to 4.52 percent from 4.20 percent. The delinquencies are within the four-year average of 4.47 percent, reflecting borrowers have flexibility to adjust their monthly payments, unlike other loans with fixed payments, Chessen said.

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Did the ECB Save COMEX from Gold Default?

On Tuesday morning, gold derivatives dealers, who had sold short in the face of a fast rising gold price, faced a serious predicament. Some 27,000 + contracts, representing about 15% of the April COMEX gold futures contracts remained open. Technically, short sellers are required to give “notice” of delivery to long buyers. However, in reality, buyers are the ones who control the amount of gold to be delivered. They “demand” delivery of physical gold by holding futures contracts past the expiration date. This time, long buyers were demanding in droves. In normal times, very few people do this. Only about 1% or less of gold contracts must be delivered. The lack of delivery demand allows the casino-like world of paper gold futures contracts to operate. Very few short sellers actually expect or intend to deliver real gold. They are, mostly, merely playing with paper. It was amazing, therefore, when March 30, 2009 came and passed, and so many people stood for delivery, refusing to part with their long gold futures positions.

On Tuesday, March 31st, Deutsche Bank amazed everyone even more, by delivering a massive 850,000 ounces, or 850 contracts worth of the yellow metal. By the close of business, even after this massive delivery, about 15,050 April contracts, or 1.5 million ounces, still remained to be delivered. Most of these, of course, are unlikely to be the obligations of Deutsche Bank. But, the fact that this particular bank turned out to be one of the biggest short sellers of gold, is a surprise. Most people presumed that the big COMEX gold short sellers are HSBC and/or JP Morgan Chase. That may be true. However, it is abundantly clear that they are not the only game in town.

Closely connected institutions, it seems, do not have to worry about acting irresponsibly, in taking on more obligations than they can fulfill. Mysteriously, on the very same day that gold was due to be delivered to COMEX long buyers, at almost the very same moment that Deutsche Bank was giving notice of its deliveries, the ECB happened to have “sold” 35.5 tons, or a total of 1,141,351 ounces of gold, on March 31, 2009. Convenient, isn’t it? Deutsche Bank had to deliver 850,000 ounces of physical gold on that day, and miraculously, the gold appeared out of nowhere.

The announcement of the ECB sale was made, as usual, dryly, without further comment. There was little more than a notation of a sale, as if it were a meaningless blip in the daily activity of the central bank. But, it was anything but meaningless. It may have saved a major clearing member of the COMEX futures exchange from defaulting on a huge derivatives position. We don’t know who the buyer(s) was, but we don’t leave our common sense at home. The ECB simply states that 35.5 tons were sold, and doesn’t name any names. Common sense, logic and reason tells us that the buyer was Deutsche Bank, and that the European Central Bank probably saved the bank and COMEX from a huge problem. What about the balance, above 850,000 ounces? What will happen to that? I am willing to bet that Deutsche Bank will use it, in June, to close out remaining short positions, or that it will be sold into the market, at an opportune time, if it hasn’t already been sold on Tuesday, to try to control the inevitable rise of the price of gold.

Circumstantial evidence has always been a powerful force in the law. It allows police, investigators, lawyers and judges to ferret out the truth. Circumstantial evidence is admissible in any court of law to prove a fact. It is used all the time, both when we initiate investigations, and once we seek indictments and convictions. We do this because we deal in a corrupt world, filled with suspicious actions and lies, and the circumstances are often suspicious enough to give rise to a strong inference that something is amiss. Most of the time, when the direct evidence is insufficient to prove a case beyond a reasonable doubt, or even by a preponderance of direct evidence, circumstantial evidence fills the void, and gives us the conviction. We even admit evidence of the circumstances to prove murder cases. In light of that, it certainly seems appropriate to use circumstantial evidence in evaluating possible regulatory violations. The size and timing of the delivery of Deutsche Bank’s COMEX obligation is suspicious, to say the least, when taken in conjunction with the size and timing of the ECB’s gold sale. It is circumstantial evidence that the gold used by Deutsche Bank to deliver and fulfill its COMEX obligations, came directly or indirectly, from the ECB.

I’d sure like to know what the ECB’s “alibi” is. If I were an investigator for the Commodities Futures Trading Commission (CFTC), assigned to determine whether or not gold short sellers are knowingly violating the 90% cover rule, I’d be questioning the hell out of the ECB staffers, as well as employees in the futures trading division of Deutsche Bank. There is certainly enough evidence to raise “reasonable suspicion”. Reasonable suspicion is all that one needs to start a criminal investigation. It should be more than sufficient to prompt the CFTC, as well as European market regulators, to start a commercial investigation of the potential violation of regulatory rules by both the ECB and one of the world’s major banking institutions. That is, of course, if and only if, the CFTC staff really wants to regulate, rather than simply position themselves for more lucrative jobs inside the industry they are supposed to be regulating, after they leave government service.

It is quite important to determine whether or not Deutsche Bank was bailed out by the ECB because that will answer a lot of questions about allegations of naked short selling on the COMEX. If the ECB knew that its gold would be used as post ipso facto “cover” for uncovered shorting, staffers at the central bank might be co-conspirators. At any rate, if the German bank did sell short on futures contracts without having enough vaulted gold it sold a naked short. It also means that the ECB has facilitated a major rule violation in a jurisdiction (the USA) with which Europe is supposed to have extensive joint regulatory agreements, any number of which may have been violated by this action of the ECB. At the very least, naked short selling is a blatant violation of CFTC regulations, which require 90% cover of all deliverable metals contracts. If the delivered gold came directly, or indirectly, from the ECB, it means that Deutsche Bank’s gold short contracts were “naked” at the time they were entered into.

The 90% cover rule is very old rule, designed to prevent fraud on the futures markets. Its origin dates back into the 19th century. Farmers, in that simpler age, were complaining that big bank speculators were downwardly manipulating grain prices on the futures exchanges. Nowadays, the CFTC has a predilection toward categorizing banks as so-called “commercials” or “hedgers”, rather than as the speculators that they really are. Traditionally, only miners and gold dealers whose business involves a majority of PHYSICAL trade in gold should qualify as commercials. However, the CFTC has ignored this for a long time, and qualified numerous banks and other financial institutions, whose main gold business is derivatives, as “commercial” entities, immunizing them from position limits and other constraints. As a result, just like the farmers of the 19th century, today’s gold “cartel” conspiracy theorists revolve their theory around an allegation of downward manipulation, and heavy short selling concentration.

Manipulation can only take place when there is a disconnect between supply, demand, and trading activity on the futures exchanges. The 90% cover rule attempts to force a direct tie between the futures market and the availability of particular commodities, so that supply and demand become primary even on paper based futures markets, just as it is in trading the real commodity. Unfortunately, the modern CFTC has ignored or misinterpreted the purpose of the 90% cover rule for a very long time. This regulatory failure has allowed the current free-for-all “casino-like” atmosphere that now prevails at futures exchanges. It would be helpful if some of my colleagues, within the public prosecutor and securities regulatory offices, in Europe, as well as the CFTC in America, filed complaints for discovery, to ferret out the truth. In the interest of transparent markets, the ECB should be forced to disclose who purchased the gold they sold in the morning of March 31, 2008 and why the sale was timed in a way that corresponded to the exact moment in time that Deutsche Bank had a desperate need for gold bullion.

Was it yet another bank bailout? Has another bank sucked up precious resources belonging, in this case, to the people of Europe? Gold is needed to bring confidence to the Euro currency, as often noted by Germany’s Bundesbank, which seems to be less kind to German banks than the ECB. Why should the ECB be permitted to sell gold to closely connected derivatives dealers, if the primary purpose is to save those dealers from the bad decisions they have made, and the end result is to reinforce moral hazard? Should banks like Deutsche Bank be allowed to take on more derivative risk than they can afford without involving publicly owned assets? Did Deutsche Bank issue naked short positions? Have innocent European citizens now had their currency placed at more risk, and some of their gold stolen from them, simply to enrich private hands? All of these questions are begging for answers.

European regulators are quick to condemn the Federal Reserve for its incestuous relationship to client “primary dealer” banks, special treatment of favored institutions at the expense of other non-favored institutions, propensity toward injecting dollars to artificially stimulate the stock market, seemingly endless bailouts of closely connected banks, and, now, the seemingly unlimited printing of new dollars. I’ll not attempt to excuse the Fed for its failures. Indeed, I believe that it is in the best interest of the American people to close down that malevolent institution, permanently. However, if any of the questions I have posed are answered in the positive, people might begin to understand that special favors, nepotism, corruption, and a failure to properly regulate are not confined to America. The real estate bubble, for example, was allowed to become much bigger in the U.K., Ireland, Spain, and eastern Europe, than it ever was in the USA. The collapse of real estate, in those countries, is going to be more severe, even though it is more recent in origin than the pullback in the USA. America happened to be the first nation affected, but it did not cause the world economic collapse. That was caused by the joint irresponsible policies in almost every major nation in the world.

Those who rely on the good faith of Angela Merkel, to keep the Euro inviolate, certainly have a right to get answers from the ECB and from Deutsche Bank. The answers will tell us a lot about the real proclivities of the ECB. As the U.S. dollar is progressively debased, in coming years, will the Euro be any better? Is the ECB merely a European copy of the Federal Reserve “slush fund”, utilized by well connected European banks, for the purpose of private financial gain, much as the Federal Reserve’s assets are utilized by its primary dealers? If the ECB is willing to bail out a major trading institution from the mismanagement of its derivatives operations, who could honestly claim that it would hesitate to competitively debase the Euro against the dollar? Having the answers to the questions I have posed would give everyone the knowledge needed to make important decisions. That is exactly the reason that, in all likelihood, we will never get these answers. Maybe, Europeans and others ought to be dumping Euros just as fast as they are now dumping dollars, and buy gold and silver, instead.

Aside from the regulatory issues, if we did discover that Deutsche Bank got its gold from the ECB, one glaringly strong inference arises. When a major derivatives dealer goes begging for gold, to the ECB, it is very strong circumstantial evidence that not enough physical gold is available for purchase on the OTC wholesale market. Up until now, bearish gold commentators have steadfastly denied that wholesale gold shortages exist. Instead, they have insisted that all shortages are confined to retail forms of gold. Now, when combined with the circumstantial evidence, however, common sense tells us that they are wrong. Decision: There is sufficient evidence for this case to go to a full scale investigation. The CFTC and similar securities regulators in Europe need to properly investigate the gold conspiracy allegations. That has never been done to date. They must determine who is buying central bank gold and whether or not it is simply being sold into the open market, or channeled into the hands of favored financial institutions who then use it to cover naked short selling. The investigation must include detailed vault audits and explore all paper trails.

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Money as Debt II: Promises Unleashed
7 minute segment

Paul Grignon is still working on part 2. Here's a preview

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