Thursday, April 9, 2009

April 9 2009 2: The periphery of concern

Detroit Publishing Co. Coming or going? 1900
Harbor entrance and light house, Charlevoix, Michigan

Ilargi: As the criticism of all the doomed to fail from the outset Obama financial plans reaches a first crescendo, here come the propaganda police troopers. And you still think Goebbels was devious. A lovely portrait of Ben Bernanke "revolutionizing" the Federal Reserve in the Washington Post makes me think the average IQ of the readership has tanked towards a fathomless and unfathomable bottom. Come on, Washington's happiest buy into that?

New York Magazine has a piece on the man who made Tim Geithner "telegenic". Excuse me? Larry Summers was sent out to do a speech, in which he claimed that we will recover in a few months. His terms are vague, but we can still nail him on that one (preferably by his ears) come fall.

We have entered surrealism of a size and grandeur nobody would have thought possible until recently. Average initial jobless claims were down 750 in eth past 4 weeks, while continuing claims were up 146.750. Guess what made the headlines.

Bank stress test results are not published, but they are commented on by Federal Reserve regional presidents. They tell us all 19 banks tested are fine, though they need more money, though not all of them. Publish the numbers, I warn you, guys, people don't believe you anymore because you have such an honest face.

Then again, people do still trust Obama. God only knows why, but they do. If there's anything that keeps us from working to solve this crisis, that's probably it, that's the biggest reason of all, that Obama can say whatever his crew write for him, and it’s swallowed hook line sinker as some sort of new evangelism.

And everyone's looking the other way, where the Dow gains a percent or two surrounded by mass foreclosures and lay-offs. Salvador Dali would have left this theme alone; no amount of acid ever gave him visions that far removed from what he saw sober.

Me, I’ll have a stiff drink a reader sent me, mille grazie, and see what tomorrow brings. But the disconnect, I must admit, throws me off at times. I want Obama to visit the tent cities, to go see those who stand in a 3000 man long line for one job. Because that is what's real. Not Bernanke and Geithner and Summers claiming that they see recovery without having anything to show for it. Get out there and be with the people you have been elected to represent. Be a mensch or get the fcuk out of here. This is no time for a political spiel, or theater, no spins or PR plays. Get down there where it matters. Or get out. You may fool a lot of people, but you can't fool them all.

Game Theory Exposes PPIP As Fraudulent
Game theory tells us that a risk neutral gambler would pay $50 dollars for a coin flip that paid $0 for Heads and $100 for Tails. Game theorists would call $50 the value of the bet. Suppose someone is willing to fund your gambling problem, and lend you $80 at zero interest. Better still, if you lose the bet you don’t have to pay him back. Under that scenario, the same gambler would pay $90 for the bet, giving him an even chance of winning or losing $10. This is a microcosm of what the Public-Private Investment Program (PPIP) is intended to do: create an incentive for investors to pay $90 for a bet that is only worth $50. It is bad economics and bad public policy and it is probably fraudulent. Congress should act pre-emptively to halt Treasury Secretary Tim Geithner’s latest scheme.

In the gaming example above the lender has a bet where he gets $80 or zero with equal odds. The value of that bet is $40. Since he paid $80 for it, he has an expected loss of $40. The PPIP puts the taxpayer, via the Federal Deposit Insurance Corporation, in a similar position. The details are only slightly more complicated. A full analysis would include the diversity in the pools of loans, the interest rate charged by the lender, and the opportunity cost to the lender for a similarly risky bet. We don’t have enough information from the FDIC about what it intends to charge for the 84% of the PPIP it is guaranteeing and we don’t know the exact mix of assets. But once these are revealed, the analysis becomes straightforward, and the expected loss to the FDIC can be estimated with a reasonable degree of certainty.

Why is this particularly interesting? Many commentators have pointed out the obvious: that the PPIP is another welfare program for the big banks, funded by the taxpayer. It is interesting because the legislation governing the FDIC does not allow it to take expected losses above its capital base, and that capital base is now just $30 billion. Against a $500 billion PPIP, it only requires a 6% overpayment to wipe out the FDIC’s capital. The New York Times’ Andrew Ross Sorkin pressed the FDIC’s Shelia Bair on this point and she apparently claimed that the accountants “signed off on no net losses.” But we are now in zero sum territory. There are only the assets, the banks, and the government. The windfall to the banks is offset by the expected loss to the government. Convincing one’s accountants that a transaction with a high expected loss has no expected loss is fraud.

Here is where the over-engineered PPIP begins to raise troubling questions. Recall that in the initial announcement of the PPIP in March, Geithner made much of the auction process that would be used to price the assets. This auction, where five of the top asset managers in the country would bid against each other, was meant to ensure the fairness of the process. In his Wall Street Journal editorial announcing the program on May 23, Geithner assured us that “private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.”

One suspects that the accountants for the FDIC were convinced that the loans would be purchased at a fair price because they would be sold through an auction mechanism. But if every bidder in the auction has the same incentive to overbid, it is no longer a fair auction. A naïve accountant might equate “auction” with “fair” and ignore the distortion built in to the process. Jeffrey Sachs did a fine job pointing out that the incentive is actually to massively overbid, and perhaps even collude. Paul Krugman pointed out that the plan is a “disguised way to subsidize purchases of bad assets.” Josef Stiglitz commented that Geithner’s plan “only works if the taxpayer loses big time.” Against Sachs, Krugman and Stiglitz, in a straightforward exercise in game theory, who is on the side of government accountants?

“No net losses?” The most likely outcome for PPIP is expected losses to the FDIC. In fact, game theory can be used to predict what the expected losses will be. One simply has to work the game backwards. Once we know the clearing price of the auction, we can calculate how much the government overpaid. In our example above, if we know the auction cleared at $90, we can demonstrate the fair price was $50. If the auction cleared at $85, the fair price was $25. It’s a form of price discovery, but probably not what Geithner had in mind. It is disturbing that the Treasury Secretary’s long awaited plan to solve the toxic assets dilemma relies on an overly contrived scheme to obscure its risk to the taxpayer. Either the disguise is intentional or it has not occurred to the Secretary that the plan jeopardizes the soundness of the FDIC. Neither answer is acceptable.

Obama Stakes His Fortunes on Failed Banksters
Now that we have a rough idea how President Barack Obama and his lieutenants plan to prop up insolvent financial institutions using taxpayers’ money, we’re left with a more difficult question: Why? Why doesn’t the Obama administration force insolvent banks and insurance companies to come clean about their losses first? It’s the "why" that’s so vexing. The who, what, when, and how are mere details, by comparison. More than anyone else’s, it should be in Obama’s political self-interest to accelerate the worst of the financial crisis and get as much of the inevitable pain behind us as quickly as possible. Every day he waits is one less day he will have between the time we hit rock bottom and the next election. And yet, Obama and his minions are doing all they can to delay the reckoning, which only will make it worse.

When publicly owned companies change management, often the smartest thing a new chief executive officer can do is clear the decks and take a "big bath" charge to earnings. In other words, the company writes off all its worthless assets and reports huge losses, pushing every conceivable drop of red ink into the past. The new CEO gets to blame his predecessor’s dumb mistakes. The company gets a fresh start with the investing public. Obama could have taken the same approach with the banks the moment he took office, while he still had standing to blame the financial crisis on George W. Bush’s administration, stupid regulators, and corrupt lawmakers -- that is, everyone but himself.

He could have ordered all U.S. financial institutions to immediately confess whatever losses they hadn’t yet recognized. And he could have backed that up by vowing to prosecute every officer, director and auditor the Justice Department could find who had approved numbers they knew to be wrong. Obama didn’t do that. And now, six months into the government’s Troubled Asset Relief Program, his administration’s approach to the financial crisis is largely indistinguishable from its predecessor’s. The only objective, it seems, is to buy time, in hopes that an economic recovery somehow will materialize and lift the financial system back to health.

The Obama administration’s "strategy," for lack of a better word, is to keep plying broken financial institutions with as much taxpayer money as the government can print. And so the government will keep subsidizing failed mega-banks indefinitely, rather than placing any into receivership or liquidating them. The latest iteration of this policy is the Treasury Department’s Public-Private Investment Program. In short, struggling financial institutions will be encouraged to swap their most toxic mortgage-related assets with one another at inflated prices. The purchases will be financed by big government loans, so that taxpayers are at risk for the bulk of any losses. If the government wanted transparency, it would force financial institutions to write down their bad assets now, and figure out afterward which companies deserve taxpayer support. Instead, the Treasury plans to recapitalize them first, keep their current financial condition hidden, and let their failed managers stay in their jobs.

The key assumption underlying this plan is that the declines in the values of these companies’ toxic assets are the result of private investors’ temporary reluctance to buy them, and that prices will rebound if Treasury can revive the markets where these assets trade. The Treasury hasn’t explained why it believes the assets’ proper values are their original book values, rather than the prices unsubsidized investors are willing to pay for them. (This is one of the points made in an April 7 report by the U.S. bailout program’s Congressional Oversight Panel.) If Treasury’s hunch proves wrong, the government will need to rely on something other than a rising economy to restore the banks to solvency.

So why don’t Obama, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke force the banks to write down their troubled assets first, as a condition of government assistance? We can only speculate, because their explanations so far have made no sense. Perhaps they’re scared the markets would panic if large, insolvent financial institutions started telling investors just how undercapitalized they are. There’s the distinct chance some of Obama’s advisers are beholden to failed banksters, because they used to work for them and may want to do so again someday. There also could be a manpower problem. The government might not have enough employees to seize all those sickly banks and supervise the process of winding them down. Probably, it’s some combination of those and other factors.

Why else would the Treasury tell the 19 biggest U.S. banks to undergo "stress tests" of their financial health, and then put the banks in charge of performing the tests on themselves? Those reasons also might help explain why regulators pressured the board that sets U.S. accounting standards to weaken the rules on mark-to-market accounting, so the banks could hide their losses and show more capital. Whatever the case, as long as the government refuses to remove the cancer of zombie banks from our financial system, there’s little hope the U.S. will return to robust economic growth anytime soon. And the longer our wounded banks are allowed to stagger along with no end-game in sight, the greater the risk for Obama that voters will conclude he’s as responsible for blowing the cleanup as others were for causing the crisis. He’d better act soon. Time may not be our side any longer.

Banks Said to Hold Up in Stress Tests, but May Still Need Aid
For the last eight weeks, nearly 200 federal examiners have labored inside some of the nation’s biggest banks to determine how those institutions would hold up if the recession deepened. What they are discovering may come as a relief to both the financial industry and the public: the banking industry, broadly speaking, seems to be in better shape than many people think, officials involved in the examinations say. That is the good news. The bad news is that many of the largest American lenders, despite all those bailouts, probably need to be bailed out again, either by private investors or, more likely, the federal government. After receiving many millions, and in some cases, many billions of taxpayer dollars, banks still need more capital, these officials say.

The federal "stress tests" that the examiners are administering are the subject of fierce debate within the banking industry. Regulators say all 19 banks undergoing the exams will pass them. Indeed, they say this is a test that a bank simply will not fail: if the examiners determine that a bank needs "exceptional assistance," the government, that is, taxpayers, will provide it. But the tests, which are expected to be completed by the end of this month, are being conducted out of public view. Federal law prohibits the unauthorized disclosure of the results of any bank examination, including the stress tests. Some investors wonder if the new tests are rigorous enough, given the potential problems lurking inside the banking industry.

Regulators recognize that for the tests to be credible, not all of the banks can be winners. And it is becoming increasingly clear, industry insiders say, that the government will use its findings to press certain banks to sell troubled assets. The hope is that by cleansing their balance sheets, banks will be able to lure private capital, stabilizing the entire industry. In some cases, however, the investments of existing shareholders could be severely diluted by large sales of new stock. Some of the banks could also face more stringent restrictions on employee compensation or be ordered to change their boards or management. In extreme instances, the government could wind up taking larger, perhaps even controlling, stakes.

The state of the industry will come into sharper focus next week, when big banks like Citigroup and JPMorgan Chase start reporting first-quarter results. Many analysts predict the reports will show banks are on the mend, with help from low interest rates, fat lending margins, dwindling competition and profits from trading in the financial markets in January and February. In the last six weeks, financial shares have soared on hopes that the worst for the industry is over. But some analysts say investors’ hopes are misplaced. With the recession, banks are likely to record further large losses on credit cards, corporate loans and real estate. "Nothing has changed with the fundamentals," said Meredith A. Whitney, a prominent banking analyst who has been bearish on most financial institutions.

The stress tests are playing a pivotal role in the Obama administration’s sweeping plan to shore up the financial industry. Forcing many banks to raise capital might undermine the still-fragile confidence in the industry. But if only a few banks raise more money, the test might lose credibility with investors. "Clearly there is a desire to put a seal of good bookkeeping on these banks," said Lou Crandall, the chief economist at Wrightson ICAP. "Whether they will use this to select a couple of sacrificial lambs is unclear. It’s a big uncertainty hanging over the system right now."

The tests, led by the Federal Reserve, rely on a series of computer-generated "what-if" projections in the event the economy deteriorates. Those include unemployment rising to 10.3 percent by next year, home prices falling an additional 22 percent this year, and the economy contracting by 3.3 percent this year and staying flat in 2010. Top regulators say the effort could signal a new approach to supervising the risks that banks take. While federal regulators routinely monitor the financial condition of banks, one goal of the tests is to devise a common set of standards for judging losses across all 19 institutions. Examiners are also considering instruments that are not carried on banks’ balance sheets. They long escaped tough scrutiny.

As part of the tests, the banks analyzed each category of loans they held and compared their results with the "high" and "low" range of government loss estimates. If a bank expected fewer losses than the government, the regulators asked the institution to explain why. The banks were also asked to project their earnings over the next two years to give the regulators a better sense of how much capital they would have to absorb the coming losses. Several people involved in the process say there is a wide range of results among the institutions. Those that fall short will have six months to raise capital from private investors; if they are unable to do so, the Treasury Department has said taxpayer money will be available. Some federal and industry officials say regulators may use the results to prod reluctant banks to sell assets under that program.

Michael Poulos, a director at Oliver Wyman, the consulting firm, said many big investors were burned after investing in financial companies last year and are averse to doing so again. The stress test findings, he said, could "make private capital more eager to come in because they will get a view of the bottom." At a recent breakfast with a dozen or so corporate and banking executives in New York, Treasury Secretary Timothy F. Geithner warned he would take a tough stance. Many banks, he suggested, believe the investments and loans on their books are worth far more than they really are, according to a person who attended the meeting. Mr. Geithner said that was unacceptable. The banks, he said, will have to sell these assets at prices investors are willing to pay, and so must be prepared to take further write-downs.

Fed's Hoenig Says 'Few' Large Banks Are Likely to Need More Bailout Funds
Government stress tests of U.S. banks’ ability to withstand a deeper recession are likely to indicate that most don’t need more taxpayer money, Federal Reserve Bank of Kansas City President Thomas Hoenig said. "I would point out, first, that although the United States has several thousand banks, only 19 have more than $100 billion of assets, and that after supervisory authorities evaluate their condition, it is likely that few would require further government intervention," Hoenig said in the text of a speech in Tulsa, Oklahoma. The remarks came while stocks rallied worldwide today as better-than-estimated earnings at Wells Fargo & Co. boosted confidence in the financial system and speculation that American banks will pass stress tests. Federal Reserve Bank of Minneapolis President Gary Stern said that while "appreciable strains" remain in credit markets, the resumption of U.S. economic growth "should not be too far off."

President Barack Obama will get a progress report on stress tests at the 19 biggest U.S. banks when he meets tomorrow with his economic team. The exams, to conclude by the end of April, are designed to show how much extra capital banks may need to survive a deeper economic downturn. Hoenig didn’t discuss the current U.S. economic outlook or interest-rate policy in his speech. Speaking in Sioux Falls, South Dakota, Stern said, "while it is still far too early to fully tally results, there has been progress and I anticipate more to come." In his speech, Hoenig repeated his view that the government shouldn’t prop up failing financial institutions. Instead, officials should take over institutions temporarily and wind them down, as they did with the takeover of Continental Illinois National Bank & Trust Co. in 1984.

"There has been much talk lately about a new resolution process for systemically important firms that Congress could enact, and I would encourage this be implemented as quickly as possible, but we do not have to wait for new authority," Hoenig told the Tulsa Metro Chamber of Commerce. "We can act immediately, using essentially the same steps we used for Continental." Treasury Secretary Timothy Geithner and Fed Chairman Ben S. Bernanke last month called for new powers to take over and wind down failing financial companies after the government’s rescue of American International Group Inc. Bernanke and Geithner also called for stronger regulation to constrain the risks taken by firms that could endanger the financial system.

"An extremely large firm that has failed would have to be temporarily operated as a conservatorship or a bridge organization and then reprivatized as quickly as is economically feasible," Hoenig said. "We cannot simply add more capital without a change in the firm’s ownership and management and expect different outcomes." While the Federal Deposit Insurance Corp. has the power to take over failing deposit-taking firms and wind down their assets, no such authority exists for financial firms that aren’t classified as banks, such as AIG or a hedge fund with extensive links throughout the banking system. Hoenig said calling a firm "too big to fail" is a "misstatement" because a bank deemed insolvent "has failed." "I believe that failure is an option," he said.

Answering questions from the audience after his speech, Hoenig said the Fed must be prepared to remove its stimulus in a timely manner to ensure the economy doesn’t face a period of high inflation similar to the early 1980s. " You cannot wait until you know for sure the economy is recovering," Hoenig said, adding that "employment growth tends to lag" and may not be the best indicator of recovery. "We will watch every indicator of data that suggests we have a recovery under way." Hoenig also said if the U.S. manages its economy well, the U.S. dollar should remain the world’s reserve currency. "It is a matter of running your economy properly," he said. "When the U.S. does that, and I think we will, I think we will remain the largest, most successful reserve currency on the face of the earth."

Fed says plan now to avert inflation
The United States economy will skid more deeply into recession in coming months, Federal Reserve policy-makers warned on Thursday, but it is time to start planning how to wind down spending to avert an inflationary surge. The president of the Kansas City Federal Reserve Bank, Thomas Hoenig, said that hard as it was to predict when the winding-down process must be initiated, it will happen. "We know it has to happen, but the timing I can't tell you. Nobody knows. We will watch every indicator of data that suggests a recovery is on the way," Hoenig said in response to audience questions after a speech in Tulsa, Oklahoma.

"Failure to do that at the right time means you risk a much higher inflation environment," he added. Hoenig acknowledged the economy remains "under significant stress" from the ongoing banking crisis. But he said the U.S. central bank cannot wait until it is well into recovery and the job market is strong before acting. The Fed's second longest-serving policy-maker added that he expects resistance "almost immediately" to any move to raise interest rates or, for example, to start selling off its stash of mortgage-backed securities. Hoenig and a second regional Fed bank president, Gary Stern of Minneapolis, said there were still significant credit strains holding the economy back and cautioned that an eventual rebound likely will be mild.

"The recession is likely to persist for some time longer, and the initial stage of the recovery seems likely to be subdued," Stern said in remarks prepared for the South Dakota economic summit in Sioux Falls. "In view of the state of the credit markets, it seems a fair bet that it will take time for momentum to build. But ... as we get into the middle of 2010 and beyond, I would expect to see a resumption of healthy growth," he added. A third speaker, White House Economic Adviser Lawrence Summers, told the Economic Club in Washington that there were "substantial downdrafts" hindering a U.S. recovery. "Economies don't go from losing 600,000 jobs a month to a terribly happy path overnight," he said.

But Summers added that overstocked inventories were being drawn down and "the sense of a ball falling off a table, which is what the economy has felt like since the middle of last fall, I think we can be reasonably confident that that's going to end within the next few months." Hoenig said getting the banks back into good health was vital for a sustained recovery. "The restoration of normal financial activity depends on how we deal with the problems of our largest financial institutions," he said, and policy-makers need to be mindful of public dissatisfaction with costly taxpayer-funded bailouts. Even at larger institutions, "failure does have to be an option in an economic system such as ours," he said, adding that as part of the resolution process, senior management at the failed firms should be replaced.

Summers said there was little choice now but to do everything possible to stimulate economic activity. But he said the Fed must be ready to act decisively in the medium term to restrain spending so that inflation is contained. "The thing about an inflation is that ... the moment it's absolutely clear you have the problem is a moment when you may have been too late in addressing it," Summers said. "So I think it's a very difficult balance the policy is going to have to walk."

Stern said the risk of a jump in either inflation or deflation could not be dismissed out of hand but doubted either would become a huge problem. "If economic growth resumes in the United States as I expect, the threat of deflation should diminish commensurately," he said, while expressing skepticism that a big increase in the Fed's balance sheet was sowing the seeds of inflation. "The relation between growth in the money supply and the path of prices holds in the long run, over periods of at least five and more likely 10 years. Thus, there is ample time to withdraw excess liquidity as appropriate," he said.

Summers Sees Economic 'Free-Fall' Ending in a Few Months as Credit Eases
White House chief economic adviser Lawrence Summers voiced confidence that the U.S. economy will soon get over what he called its "sense of a ball falling off a table." "We can be reasonably confident that is going to end within the next few months and you’ll no longer have that sense of free-fall," Summers, director of the National Economic Council, told a luncheon meeting of the Economic Club of Washington, D.C. While substantial strains remain in the credit markets, conditions have eased, Summers said. Inventories have also been slashed below the level of sales, setting the stage for an eventual rise in production, he added.

His comments came in the wake of a series of economic indicators that suggest the rate of decline in the economy is slowing, including a rise in consumer spending in the first two months of the year and an increase in both home sales and housing starts in February. "There are some indications that things may not be getting any worse," agreed Jonathan Basile, an economist at Credit Suisse Holdings Inc. in New York. Summers said it was less clear how strong and sustainable the recovery will be. "You may get some inventory cycle but that doesn’t mean you’ve reestablished strong sustainable growth," he said. "That’s difficult to judge."

Among the imponderables he cited in the outlook were the health of the global economy and the psychology of consumers and investors. He said unemployment would rise further after hitting a 25-year high of 8.5 percent in March. Summers saw risks of deflation in the short-term and inflation in the longer-run. "I don’t think that concern about deflation in the nearer term can be entirely discounted," he said. Yet he added it would be a mistake to see the current low level of inflation expectations as a reason for complacency about price pressures two to three years out. Figures to be published on April 15 will probably show that the consumer price index hasn’t risen at all over the past year, thanks to a steep fall in energy costs, according to economists surveyed by Bloomberg News. Summers’s appearance at the Economic Club was interrupted for several minutes by protesters criticizing the government’s bailout of financial institutions.

Ilargi: A big cheerleading WaPo article on Bernanke below. But first, as a prologue, Mike Shedlock's take on the man from 2 days ago. That, I think, will give a you a much better perspective when reading the "main" piece.

Bernanke's Deflation Preventing Scorecard
In case no one is keeping track, Bernanke has now fired every bullet from his 2002 "helicopter drop" speech Deflation: Making Sure "It" Doesn't Happen Here.

Bernanke's Scorecard

Here is Bernanke’s roadmap, and a "point-by-point" list from that speech.

1. Reduce nominal interest rate to zero. Check. That didn’t work...
2. Increase the number of dollars in circulation, or credibly threaten to do so. Check. That didn’t work...
3. Expand the scale of asset purchases or, possibly, expand the menu of assets it buys. Check & check. That didn’t work...
4. Make low-interest-rate loans to banks. Check. That didn’t work...
5. Cooperate with fiscal authorities to inject more money. Check. That didn’t work...
6. Lower rates further out along the Treasury term structure. Check. That didn’t work...
7. Commit to holding the overnight rate at zero for some specified period. Check. That didn’t work...
8. Begin announcing explicit ceilings for yields on longer-maturity Treasury debt (bonds maturing within the next two years); enforce interest-rate ceilings by committing to make unlimited purchases of securities at prices consistent with the targeted yields. Check, and check. That didn’t work...
9. If that proves insufficient, cap yields of Treasury securities at still longer maturities, say three to six years. Check (they’re buying out to 7 years right now.) That didn’t work...
10. Use its existing authority to operate in the markets for agency debt. Check (in fact, they "own" the agency debt market!) That didn’t work...
11. Influence yields on privately issued securities. (Note: the Fed used to be restricted in doing that, but not anymore.) Check. That didn’t work...
12. Offer fixed-term loans to banks at low or zero interest, with a wide range of private assets deemed eligible as collateral (…Well, I’m still waiting for them to accept bellybutton lint & Beanie Babies, but I’m sure my patience will be rewarded. Besides their "mark-to-maturity" offers will be more than enticing!) Anyway… Check. That didn’t work...
13. Buy foreign government debt (and although Ben didn’t specifically mention it, let’s not forget those dollar swaps with foreign nations.) Check. That didn’t work...

Bernanke has failed. "It" has happened. The proof is irrefutable. What now Ben? More of the same stuff that failed miserably before, only on a grander scale?

Ilargi: Read the above? Then here's the propaganda machine.

How Bernanke Staged a Revolution
This chairman set out to lead as a civil servant rather than a celebrity economist. Facing a thundering financial collapse, he has reinvented the Federal Reserve.

Every six weeks or so, around a giant mahogany table in an ornate room overlooking the National Mall, 16 people, one after another, give their take on how the U.S. economy is doing and what they, the leaders of the Federal Reserve, want to do about it. Then there's a coffee break. While most of the policymakers make small talk in the hallway, their chairman, Ben S. Bernanke, pops into his office next-door and types out a few lines on his computer. When the Federal Open Market Committee reconvenes, Bernanke speaks from the notes he printed moments earlier. "Here's what I think I heard," he'll say, before running through the range of views. He sometimes articulates the views of dissenters more persuasively than they did. "Did I get it right?" he says.

The answer, in recent months, has been a resounding yes. And Bernanke's ability to understand and synthesize the views of his colleagues goes a long way toward explaining how he has revolutionized the Federal Reserve, which under his leadership has deployed trillions of dollars to try to contain the worst economic downturn in 80 years. Famously soft-spoken, Bernanke is an unlikely revolutionary. He is, after all, a career economics professor who lacks the charisma of a skilled politician. He also happens to run an organization designed for inertia: Decision-making authority is shared with four other governors in Washington appointed by the president; the heads of regional Fed banks in 12 cities who answer to their own boards of directors; and a staff of 2,000 that is led by economists who spent decades working their way through a rigid hierarchy.

Yet in the past 18 months, Bernanke has transformed that stodgy organization, invoking rarely used emergency authorities. His decision to do so has drawn criticism -- he has transcended traditional limits on the role of a central bank, stretched the Fed's legal authority and to some, usurped the responsibility of political authorities in committing vast sums of taxpayer dollars. The Fed's actions put the economy on a "perilous" course, said James Grant, editor of Grant's Interest Rate Observer. "The real risk is that he will wind up instigating rampant inflation" once the recession has passed, he said. "A related possibility is that the Fed has created incentives to overdo it in borrowing and lending . . . which is what got us into this mess in the first place."

What strikes many who have worked with Bernanke, though, is that he has pulled it all off without grand speeches, arm-twisting or Machiavellian games. Rather, according to interviews with more than a dozen current and former Fed officials and others familiar with the workings of the central bank, he has enacted bold policy moves through measured, intellectual debates and by making even those who are resistant to some of the new actions feel that their concerns are understood. To many Fed veterans, his leadership style is a stark contrast with that of his predecessor, Alan Greenspan, whose tenure was characterized by tightly controlled decision-making with only rare open disagreement. "It's not Ben's personality to pound the table and scream and say you're going to agree with me or else," said Alan Blinder, a former Fed vice chairman and longtime colleague of Bernanke's at Princeton University. "It's not his way. I've known him for 25 years. He succeeds at persuading people by respecting their points of view and through the force of his own intellect. He doesn't say you're a jerk for disagreeing."

In other words, Bernanke has remade the Federal Reserve not in spite of his low-key style and proclivity for consensus-building. He has been able to remake the Fed because of it. More than a few times over the past year, senior Fed staff members have logged into their e-mail accounts to find an unusual message. Subject: Blue Sky. Sender: Ben S. Bernanke. The point of the e-mails has been to encourage them to think of creative ways that the Fed can guard the economy from the downdraft of a financial collapse. This is an institution that not long ago could spend the better part of a two-day policymaking meeting deciding whether its target for short-term interest rates should be 5.25 percent or 5 percent. But in this crisis, rate cuts, the most common tool for helping the economy, have lacked their usual punch. The Fed already has dropped the rate it controls essentially to zero, meaning there is no room left to cut.

That's why Bernanke's Fed has been trying to dream up ideas out of the clear blue sky. The result has been 15 Fed lending programs, many with four-letter acronyms, most of them unthinkable before the current crisis. Under one unconventional program, the Fed is providing money for auto loans and credit card loans. Under another, it is making money available for home mortgages. Many of the programs have required legal and financial gymnastics to enact, with the central bank being forced to invoke an emergency authority that allows it to lend to most any institution in "unusual and exigent circumstances." In the end, though, they have allowed the Fed to effectively create money to keep lending going. Bernanke, 55, has said his academic research, especially about the Great Depression, convinced him that the Fed has no choice but to move forcefully during a financial crisis, even if doing so means it crosses conventional boundaries.

"Everyone is encouraged to come up with ideas that are a little bit out of the ordinary, to try to encourage creative approaches and to think outside of the box, which is not the usual central bank approach," Bernanke said in an interview. "But in the current climate I think it is necessary." Dozens of staff members have been involved in figuring out how to execute the programs, but for many, Bernanke has been the catalyst. In November, for instance, the Fed moved to push down mortgage rates by buying $600 billion in mortgage-related securities; in March, it increased that number by another $850 billion. But sources said Bernanke raised the possibility internally more than a year ago, and he pushed to make sure the Fed was prepared to act. "For many months, the chairman was asking 'how can we escalate?' " said William C. Dudley, president of the New York Fed. "There was a general consensus that we were getting to the point where traditional monetary policy tools might not be sufficient."

The decision to flood money into the mortgage market was not Bernanke's alone; the power to do so belonged to the Federal Open Market Committee, which he leads. The four other governors serve on it, as does a rotating group of five of the 12 presidents of regional Fed banks. In November, Bernanke called individual committee members to see whether they would be open to the Fed inserting itself into the mortgage market. At the time, some committee members viewed the purchase of mortgage securities as a way to lower mortgage rates, encourage home sales and thus find a bottom for the housing market. Others said that buyers were irrationally avoiding even safe mortgage assets and that the Fed needed to act to make the markets to function more normally. Still others wanted the Fed to boost confidence in Fannie Mae and Freddie Mac by making more explicit the idea that the U.S. government stood behind the mortgage finance giants.

There were worries, too, that buying mortgage-related securities could make it hard for the Fed to suck money out of the economy once it began to recover, which could lead to inflation, or that doing so could put the government in the role of favoring housing over other sectors. Bernanke guided the group toward a conclusion. Even though members had differences, most agreed that the economy was in bad shape and that the Fed's purchase of mortgage debt would likely help matters. "The chair of any committee can respond to comments that challenge his view in ways that essentially inform the committee that the issue isn't worth discussing. This chairman doesn't do that," said Jeffrey M. Lacker, president of the Richmond Fed, who worried that the Fed was putting itself in the uncomfortable position of allocating capital in the economy. "He takes other views seriously."

At the Federal Open Market Committee meetings, after reading from his notes that synthesize the views of participants around the table, he turns to a second sheet of paper. "Having heard that," he might say, "let me add some thoughts of my own." In December, Bernanke came into the meeting looking to take steps to indicate to the world that the basic framework of policy had changed. Cut the interest rate the Fed controls to roughly zero, he argued. And lay out publicly the options the Fed could exercise to support the economy further, such as buying long-term Treasury bonds. He also promised to involve the Fed leaders broadly in future decisions. Given the Fed's peculiar structure, some decisions involving its emergency efforts to expand credit are made by the full FOMC while others are made by the Board of Governors in Washington. When the Fed decided to bail out Bear Stearns last spring and American International Group in the fall, presidents of regional Fed banks found out not long before the public did.

Bernanke essentially promised to engage senior officials across the Fed in that decision-making process, even in areas where they have no official say. In recent months, sources said, he has conducted a videoconference every couple of weeks with members of the FOMC, briefing them on the latest Fed programs. Bernanke has also adjusted the schedule to make all FOMC meetings last two days, instead of alternating between one- and two-day meetings. One-day meetings follow a rigid schedule, leaving little time for more open-ended discussion. "He tries to bring as much input as possible," said Kansas City Fed President Thomas Hoenig. "He's always been willing to ask questions, accept input and be responsive to that input."
That strategy has paid dividends. At the December meeting, Dallas Fed President Richard Fisher didn't want to cut rates and initially dissented from the decision, sources said. At the last minute, in the spirit of public unanimity, he changed his vote.

Leaders of regional Fed banks aren't the only constituency Bernanke has rallied around a set of bold actions. Staff members at the Fed in Washington are known for their high-octane intellects and spirit of political independence. But they also tend to be insular and disinclined to rush into decisions. One midlevel staffer working on financial rescue issues said recently, "I've been here 20 years, and before the last few months never really dealt with anyone outside this building." One Fed governor, when he began, was expected to go through layers of bureaucracy just to get a daily update on the Treasury bond market; now he calls directly the lower-level staff who monitor those markets. From the day he became chairman three years ago, Bernanke has tried to make the culture less hierarchical. Senior staff members now commonly refer to governors by first names, instead of addressing them with the title "Governor," as they did previously. (The big boss is still Chairman Bernanke.)

And whereas Greenspan once was briefed before policymaking meetings in ritualistic sessions with staff, Bernanke presides over sessions with more debate and discussion, often involving anyone on the staff with expertise on an issue rather than just top-level directors. A decade ago, when the Fed wanted to know how it might deal with technical issues created by the government's need for fewer Treasury bonds, a study of the issue took 18 months and involved 73 economists across the Fed system. The result was a 165-page report. This year, the Fed has made decisions of similar complexity and importance over a single weekend. The pressure to act fast has, by all accounts, come from Bernanke himself. His relationships with staff members are warm, dating to his days as a Fed governor when he ran the equivalent of faculty seminars to help young economists develop their research. But sources who have been in contact with Fed staffers also say that he has prodded economists and lawyers to move faster and think more creatively to execute new programs being enacted.

The Fed's actions have not gone unquestioned -- its inspector general is reviewing all the programs it has launched under its emergency lending authority, and members of Congress have become increasingly skeptical toward the central bank. "In a crisis, the task a chairman assigns is 'Find a way to do this.' It's not a question of 'Can we do this?' " said Vincent Reinhart, who was a senior Fed staffer until 2007 and is now a resident scholar at the American Enterprise Institute. In developing responses to the crisis, Bernanke collaborated extensively with the Bush administration, and has done so under the Obama administration, even though the Fed traditionally maintains its distance from political authorities. His inclination to build consensus has extended internationally as well. In October, he played a leading role in engineering a joint global interest rate cut with the European Central Bank and the central banks of Britain, Canada, Switzerland and Sweden. He is particularly close with Bank of England Governor Mervyn King, who shares his academic background, and has quietly urged European Central Bank President Jean-Claude Trichet to move more aggressively to stimulate the economies of Europe.

Bernanke came into office aiming to depersonalize the role of Fed chairman. As Greenspan's successor, he aspired to be more anonymous bureaucrat than celebrity economist. But people who have worked with him say he has become more politically savvy over the past 18 months, developing a better sense for what's palatable to Congress. In the early days of the crisis, sources said, he suggested solutions to the foreclosure problem that would have been more expensive than lawmakers would have ever considered. He has also learned how to make his case publicly. In a first for a Fed chairman, he appeared at a de facto news conference, responding to questions from reporters at the National Press Club after a speech. Then, in another first, he sat for an interview with "60 Minutes," arguing that the biggest risk to the economy would be a lack of "political will" to solve the financial crisis. Fisher, the president of the Dallas Fed, said the television interview was important. It gave Americans some reassurance about the economy, and Bernanke came across as thoughtful and deliberate. "We all know Ben is not a publicity seeker," Fisher said. "All of us, in the world of central bankers, are meant to be felt but not seen. But these are unusual times."

Geithner’s Guru
The turnaround artist who made the Treasury secretary telegenic.

The rehabilitation of Timothy Geithner continued apace last week, a development that provoked smiles of satisfaction and sighs of relief inside the White House in roughly equal measure. For any Treasury secretary, there are two constituencies that matter: the markets and the media, both of which had brutally panned Geithner’s performance out of the gate. But then the secretary released the administration’s plan to drain the toxic assets drowning the country’s banks, and the Dow promptly spiked. And he followed that with a full-blown media relaunch—first a rare Sunday-show doubleheader on March 29, then an even rarer Brian-Katie-Charlie network-news trifecta on April 1 from London, where the secretary was accompanying President Obama at the G-20 meeting—that had a similarly salutary effect on his own stock, as he displayed a degree of clarity and self-assurance that had been notably lacking before.

No doubt experience in front of the cameras, a place Geithner had spent precious little time prior to his elevation by Obama, accounts for much of his improvement. But not all of it. Indeed, many Democratic insiders point to another factor behind Geithner’s marked betterment in the public-presentation department: the Sheehan effect. The Sheehan effect refers to Michael Sheehan, the media-training guru who has served as the speech coach at every Democratic convention since 1988, laboring in a windowless room beneath the stage to tune up speakers before their podium turns, and has worked on countless campaigns. Among Sheehan’s most prominent clients have been Bill and Hillary Clinton, and also the current president—whom Sheehan prepped for his star-making 2004 convention keynote and last year’s nomination acceptance as well as his televised debates with John McCain. (At one point Sheehan told Obama that their goal was to make McCain come across like Mr. Wilson from "Dennis the Menace.")

Sheehan’s reputation is so stellar that even his competitors can’t help but sing his praises. "Mike has an intuitive feel for the performer and for the performance on television," says David Dreyer, a Democratic consultant who worked in the communications shop of the Clinton White House and then in the Treasury, as an adviser to Bob Rubin and Larry Summers. "He has a glandular understanding of words, how they sound and what they mean, and teaches people, very effectively, how to deliver the words so that their bodies, their voices, and their overall appearances are emotionally consonant with the medium and the message. He has an unmistakable gift for wringing better performances out of his speakers, no matter how shy or introspective or simply not cut out for the public role they may be."

All of which—particularly that last sentence—makes Sheehan an ideal match for Geithner, whose raw performance skills are, shall we say, not exactly Obamaesque. That Sheehan was put on the case is no great surprise: His relationship with Obama is terrific, and he’s close to the president’s senior adviser, David Axelrod. Sheehan, not surprisingly, doesn’t like to talk about his clients or his methods—which include, according to someone who’s seen him work up close, "a seven-word sentence (an exercise to get trainees to say it seven times, emphasizing each word) to demonstrate how intonation and emphasis affect meaning, and using the ‘Wimbledon analogy’ to stop the most common form of Teleprompter error (the tendency to move the head from screen to screen)"—in detail. But the fruits of his efforts are already apparent.

"The words haven’t changed much since his confirmation," observes Dreyer of Geithner, "but he sounds and looks more confident. The climate is getting better—meaning he has a program, Obama’s steadfast support, and somewhat steadier markets—and these give him a bit of wind at his back." Indeed, beyond his plan for the banks actually working, what Geithner could use most right now is a bit of gravitas-generating gray hair. Not the kind of thing that Sheehan can provide, but that a few more months in the Washington snake pit almost inevitably will.

You Can't Rush a Recovery
The U.S. has already committed nearly $3 trillion to rescue the financial system and domestic auto makers, according to a recently released report by a special inspector general.
Treasury alone has announced plans to fork over more than $600 billion in TARP funds, and Treasury Secretary Timothy Geithner seems to announce a scheme a week to jump-start the economy. Unfortunately, just as vigorous thumping won't accelerate -- and can even disrupt -- the rebooting of a computer, unpredictable interventions and improvised initiatives jeopardize rather than hasten robust economic recoveries. Sustainable recoveries cannot be rushed because individuals and firms can't instantly pick the best possible alternative. We can't immediately auction off our labor to the highest bidder, for instance. Rather we must devote time and effort to finding a suitable job. Once we find a position that satisfies us and learn to do it well, we are loath to leave.

But miscalculations may end presumptively permanent arrangements: We may be laid off from a job we thought was safe because our employer built a new plant to satisfy demand that did not materialize. Then we not only have to search for a new job but also unwind old arrangements -- negotiating severance or selling our home if we have to move to a new city. Similarly, our employer has to figure out how best to downsize or redeploy excess capacity. And in a recession, searching for new arrangements and the unwinding of old ones -- and anxiety that our turn may be next -- is widespread. Our government plays an important ameliorative role. Unemployment benefits stop major dislocations from creating the widespread hunger and homelessness experienced in the Great Depression. They also prevent the anxiety of more than 90% of the workforce that remains employed from turning into a panic.

Bankruptcy laws and courts facilitate the orderly unwinding of obligations that individuals and businesses can no longer meet or easily resolve through bilateral negotiations (as is often the case when a troubled business faces many creditors with different kinds of claims). A bankruptcy code that quickly salvages the greatest possible value from failure is crucial for our economic dynamism. The Federal Deposit Insurance Corporation (FDIC) immediately assumes the liabilities of failed banks and then gradually disposes of their assets -- a process that has ended the bank runs that used to trigger depressions until the 1930s. But beyond amelioration and providing the judicial (or in the case of the FDIC, quasi-judicial) procedures for reorganization, there is little more that the government can do to accelerate the unwinding and renewal necessary to put the economy back on an even keel.

The process involves a sequence of negotiations and experiments that cannot be truncated by throwing in more resources. As Frederick Brooks wrote in his celebrated book on software development, "The Mythical Man-Month: Essays on Software Engineering": "When a task cannot be partitioned because of sequential constraints, the application of more effort has no effect on the schedule. The bearing of a child takes nine months, no matter how many women are assigned." "Brooks's Law" suggests that increasing the size of software teams may delay development. The wide variety of problems and circumstances in an economic downturn precludes the effective use of a single solution. And the federal government doesn't have the capacity to determine adjustments on a case-by-case basis. The late Nobel Laureate Friedrich Hayek taught that the "man on the spot" with the appropriate local knowledge was much more capable of making good investment decisions than a central planner.

Similarly, the men and women who are closest to the situation have a huge advantage in unwinding the consequences of past miscalculations. The terms of a problem loan are best renegotiated by the borrower and the bank that made the loan. How to cut costs and excess capacity in the automobile industry is best figured out by management, the UAW, bondholders and creditors, under Chapter 11 if necessary. Ad hoc interventions in the financial markets by the executive branch and Federal Reserve that override private renegotiations and judicial procedures have done serious, long-term harm. Brokering the bailout of Long-Term Capital Management in 1998 by invoking the specter of systemic collapse encouraged banks to ignore the risks of trading with overextended counterparties and laid the groundwork for our current debacle.

The folly was compounded by the bailouts of Bear Stearns and AIG. The bailouts also undermined vital public confidence in the fairness of our system. While small businesses struggle to recoup bills owed by failed customers, the likes of Goldman Sachs, which miscalculated the creditworthiness of AIG, were made whole -- and could thus pay bonuses amounting to many times the incomes of most taxpayers. Former Treasury Secretary Henry Paulson's Super-SIVs and TARPs eroded rather than helped restore confidence by promoting the belief that things must be really awful for the government to suspend due process and operate in secrecy. The schemes also delayed the actual cleaning up of the balance sheets of large banks. It did so by insulating them from FDIC discipline, and by creating the expectation that the next taxpayer-funded initiative would offer even more cash for their trash.

Mr. Geithner, who was closely involved with the AIG bailout, offers no change we can believe in. His latest scheme is called the Public-Private Partnership Investment Program. But there is actually very little private skin in this game: It gives a handful of wealthy financiers huge nonrecourse loans to enable them to purchase toxic assets that the market supposedly won't buy at a "fair" price. As the housing crisis has shown, providing subsidized nonrecourse loans creates asset bubbles, not true price discovery. And bribing buyers to ramp up prices smacks of market manipulation. Suppose that, when the financial crisis broke two years ago, our leaders had shown a Churchillian steadfastness and allowed the normal realignment to play out under a predictable judicial and regulatory regime. The prices of stocks, bank debt and houses would still have crumbled and unemployment risen. Although recovery wouldn't have been immediate, we'd at least have progress, instead of a sullen paralysis and futile efforts to turn the clock back.

More loans would have been renegotiated and foreclosed properties auctioned off. The FDIC would already be engaged in finding a good home for the loans and deposits of a megabank or two. That agency, now operating with about one-third the staff it had in the 1980s, could also have used some of the bailout money that helped pay for bonuses at AIG and its counterparties to recruit, train and retain more employees. Best of all, more entrepreneurs and innovators, who capitalize on the opportunities to be found in the midst of turmoil, could have been building the foundations of a prosperous future.

Jump-Starting Securitization
If there is a supreme irony in this financial crisis, it may be this: The complex money games that helped sink the U.S. economy are actually crucial to any sustainable recovery. In March the Federal Reserve kicked off a $1 trillion campaign to resuscitate the securitization, or structured-finance, markets. This is where Wall Street firms pool and repackage all manner of cash-flow-producing financial assets—from mortgages to credit cards—into securities, which are then sold to investors. During the boom, Wall Street stretched to dangerous extremes the system of bundling mortgages and other loans into bonds for investors. The securities are still blowing up and damaging the economy.

While a lot of attention has rightly focused on the health of the U.S. banking system and its ability to lend, reviving the securitization market is probably even more important at this stage of the game. Bank lending is actually on the rise—if at a much slower pace than in the past. The securitization market, which once accounted for a third of lending in the U.S., is all but dead. Banks and other financial firms sold $152 billion in asset-backed securities last year, down from a high of $906 billion in 2006, according to trade publication "Asset-Backed Alert". So far this year, only $16 billion of deals have been done. "The closing of securitization markets has added considerably to the stress in credit markets and financial institutions generally," Fed Chairman Ben Bernanke said in an Apr. 3 speech. The new plan "is aimed at restoring securitization."

Success is far from assured. But if the Fed can fine-tune the details of its current program, the plan might just help thaw the credit markets, the lifeblood of the economy. The government needs to lure investors back into the market, pumping more money into the system. "The government can't let the economy go cold turkey on the securitization market," says Frederick Cannon, the chief equity strategist at investment bank Keefe, Bruyette & Woods. The federal efforts to revive this critical market center on the inelegantly named Term Asset-Backed Securities Loan Facility, or TALF. Uncle Sam has promised to lend up to $1 trillion to private investors to buy newly issued securities. The Fed also intends to let investors purchase existing securities to help create a market for these moribund bonds—an expansion that could happen this summer.

So far, the impact has been minimal. Credit spreads have narrowed somewhat, a sign that the debt markets are improving. But the interest of hedge funds, private equity, and other big firms has been waning. Investors applied for only $1.7 billion in TALF funds in the second round of financing that closed on Apr. 7, a quarter of the amount in the previous round. The tepid reaction is understandable. Many worry that asset prices will continue to tumble. Others fear the government will interfere in their operations, later deciding to recoup what's seen as excessive pay and profits or restricting participants' ability to hire foreign workers. But TALF is also a work in progress, and the program may ultimately entice investors and jump-start securitization. Among the kinks: the list of eligible assets that investors can purchase.

Under the current TALF rules, new securities backed by auto loans, credit-card debt, student loans, small-business loans, and other marginal loan categories qualify for government aid. But such asset classes have historically made up a small piece of the overall securitization market, so hedge funds and the like traditionally don't find those sorts of securities all that appealing. Meanwhile, there aren't that many loans to securitize. Cars aren't selling, and consumers are cutting back on their credit cards. Plus, banks are tightening their lending standards, says Rod Dubitsky, an analyst at Credit Suisse. "It's a new program; these things take time to work out," says one regulator involved with TALF. With one big deal, "the market could ramp up quickly."

To ensure that happens, the government is crafting TALF 2.0. The new incarnation of the program likely will include commercial and residential real estate debt. Those two categories are crucial, since they represent a significant part of the securitization market. There's also pent-up demand for those types of loans. Consider commercial mortgages. Some $37 billion of such loans are due this year, with an additional $85 billion due by 2011. With the securitization market stalled, those assets can't be refinanced, leaving many analysts fearful the economy could suffer another blow if those loans aren't rolled over. TALF could help alleviate that looming problem by attracting more investors. "Over time, [TALF] will have a far greater impact," says Jean-Francois Tremblay, a vice-president at credit rating agency Moody's.

Money managers are gearing up for the new-and-improved version of TALF. NewOak Capital, an asset manager that specializes in commercial and residential mortgage securities, has created a TALF fund for big investors. Clients haven't signed on yet, but NewOak Managing Director Andrew Akers is confident there will be interest once the government tweaks the program. "We are ready to provide this for our customers," says Akers. NewOak isn't alone. In the past month more than a dozen entities have been incorporated with "TALF" in their names, including the TALF Opportunities Fund and TALF Catalyst Partners. A handful of big banks, including Barclays, JPMorgan Chase, and Deutsche Bank, are putting together investments pools that would allow wealthy clients to profit potentially from TALF. The banks are waiting for the Fed to greenlight the deals. Says KBW's Cannon: "If the stars line up, TALF will help."

Obama Plays Chicken With GM Bondholders
Somehow in all its rhetoric about saving the Detroit-based auto industry, the Obama administration forgot about all the parties it needs on board in order to make that happen. Only after committing itself to this undefined task did it began to do the math and find its error. On the one hand, the industry is burdened with mandates to produce more efficient and greener cars that few want to buy. On the other hand, General Motors is being asked to honor an overwhelming legacy cost burden to its union workers while disavowing its obligations to its bondholders.

Since the White House has decided to take the lead in restructuring GM, having thrown CEO Rick Wagoner and most of the board of directors out, they have been busy putting out strong rhetoric about seeing a bankruptcy filing as the most likely route to pursue in order to restructure GM. As a matter of fact, it probably would be the best route, but since when has best ever outweighed political expediency in Washington? Aside from this, Chapter 11 bankruptcy means the government relinquishes control of the restructuring process to a judge and to a voting process that they cannot control. Sure, they say they will go into court with a pre-packaged plan that they will ram through in short order, but this is pure fantasy. First of all, you need majority agreement by the affected parties in order to even have a plan to present. This is unlikely to be achieved in the next six months, never mind 60 days.

Second of all, the fastest a complex pre-packaged plan has ever gotten through bankruptcy court is seven months, and this plan will be very complex. All this talk about a bankruptcy filing is pure posturing. The real goal is to scare enough bondholders into accepting as low a settlement payout as possible. With $28 billion in bonds, if they can scare even 60% of the bondholders into taking the rumored 8 cents cash, 16 cents of new debt and 90% of the equity (worth maybe 12 cents), they will have converted $16.8 billion of debt into equity at a cash cost of $2.2 billion. That would be the best-spent money in this entire government bailout. Would they really forgo this sure thing for the uncertainties of the alternative?

And let's not lose sight of some of the other hazards of a bankruptcy filing. President Obama personally assured the public that the government would stand behind all car warranties in order to defuse the argument that no one would buy a car from a bankrupt company. Here's a news flash for you: Ssangyong, which is South Korea's smallest automaker, said its vehicle sales plunged 75.5% last month as consumers shunned buying vehicles from the bankrupt company. What the president cannot assure is that after a bankruptcy there will still be a dealer you can take your car to who is within 50 miles of your home and is not scheduling warranty work into next month.

Let's not forget the auto workers union who are the main people Obama wants to please. They hate bankruptcy because their contracts can be canceled, and more onerous terms are then sure to follow. Another problem with bankruptcy court is that once in court, bondholders stand on par with the unions as to the seniority of their claims. Hence, in court, you can't screw over the bondholders without doing equal damage to the $30 billion in union health care claims. This is the political element in the GM story that, in the end, will override mere common-sense arguments. But just to round out the common-sense arguments, a bankruptcy filing would trigger $37.4 billion in payments on GM credit default swap contracts currently outstanding.

Many of those were bought by people who also hold bonds and would actually welcome a bankruptcy filing. They could then collect money on the default contracts, that would otherwise expire worthless, and still have a claim in bankruptcy court. Good luck, Mr. Obama, negotiating a voluntary settlement with those folks. Here's my advice to the White House: Call in the dummies who wrote those $37.4 billion in default swaps and offer them a guarantee you won't force GM into bankruptcy in return for $10 billion. Now there's a game of chicken the government deserves to win. This would be a lot fairer and more constructive than asking bondholders to take a huge haircut or filing Chapter 11. But then again, maybe not. I fear that when you call in the parties who wrote the swaps, the dumbest guys in the room will be from AIG.

Activists protest JPMorgan stance on Chrysler debt
US social activists have called for a boycott of JPMorgan Chase to protest the bank’s opposition to government demands it forgive a large portion of its Chrysler debt to keep the embattled Detroit carmaker afloat. The activists, led by the Washington-based Firedoglake blog and Progress Michigan, an advocacy group, argue that as a recipient of billions of dollars in taxpayers’ money, JPMorgan has a duty to help save jobs at Chrysler, The activist groups have urged JPMorgan clients to transfer their accounts to a local bank or credit union, and to cut up their Chase credit cards. One member of a Facebook group set up by the activists commented on Thursday that "if [JP Morgan] wants our money, they’d better do what they can to save our jobs".

JPMorgan, which is the largest holder of Chrysler debt, declined to comment but people close to the bank said the government’s request for a steep "haircut" in the debt holdings of Chrysler creditors would hurt the company and its shareholders. Chrysler has so far received $4bn in emergency loans from the government, and has asked for more. But Washington has threatened to pull the plug if the company does not finalise concessions from lenders, the United Auto Workers union and others by the end of this month. The government’s auto task force and the 50-strong group of creditors – which also includes other recipients of government aid such as Citigroup, Goldman Sachs and Morgan Stanley – have been locked in talks to resolve the stalemate. The lenders have rejected the government’s initial proposal for a reduction of their combined $6.8bn debt in Chrysler to around $1bn-$2bn, according to people close to the situation.

The government has since sweetened its offer with the promise that some of the debt could be converted into equity but lenders are still pushing for more concessions, bankers said. The banks own high-priority debt backed by Chrysler’s assets. They argue they might recover more money by letting Chrysler slip into bankruptcy and putting its brands and other assets up for sale, rather than accepting heavy losses that they believe are worse than what the union is taking, according to people close to the talks. JPMorgan holds about $2.5bn of Chrysler debt, while Citigroup holds about $1bn, according to people close to the matter. Goldman Sachs sold off much of its exposure to other parties. The governor of Michigan, Jennifer Granholm, stepped up the pressure on the banks earlier this week, saying that "those same bondholders who received Tarp money should be willing to take a haircut in order for this industry and certainly Chrysler to survive".

The banks and the US Treasury hold Chrysler’s "first lien," or highest-priority, debt, while buy-out firm Cerberus and German automaker Daimler hold second-lien debt that they may convert into a combined equity stake of less than 10 per cent, according to people close to the matter. The UAW has a greater relative claim at GM than it does at Chrysler, where its unsecured claims rank below those of the debtholders. A bankruptcy by Chrysler could be disastrous for labour if a judge rules that its claims should remain at the bottom of the heap. For that reason, people close to the Chrysler talks expect the union to try to strike a deal to be given equity in the restructured company before the end of this month. Talks with both the UAW and the banks are likely to come down to the wire, however, as both groups try to discern what the other is willing to accept and then secure a better deal for themselves.

The peak oil crisis: priorities
In the next few years, most of us are going to have to make many important decisions that will profoundly affect the rest of our lives. How soon these decisions come will depend on one's individual circumstances. If you are one of the millions who have lost their jobs or homes in the last year then you already know that something is happening. Returning to the way we have lived for the last 100 years simply is not in the cards. The world is entering a great paradigm shift and our place in it will be markedly different 10 or 20 years from now. The most alarming thing to remember is that 95 percent of us have not discovered that major changes are underway and are waiting for economic recovery and new jobs to open up.

A professor out in California just published a paper concluding that the current economic downturn was caused as much by the $147 oil we saw last summer as it was by the bursting of the housing and credit bubbles. It doesn't much matter if he is right or not. What is important, however, is that hardly a day goes by without another major oil production project being delayed or cancelled due to low prices. The death spiral for the oil age has begun. The U.S. is currently losing about 600,000 jobs a month. If we did the bookkeeping a bit more honestly, to account for the discouraged or those forced into part-time work, the real total is probably closer to 1 million a month. This hemorrhage may slow for a time when our trillion dollar stimulus catches hold, but there is nothing out there to suggest that spending borrowed or printed money for a year or two is going to turn anything around. The trends all suggest that unemployment is going to continue rising and that social unrest is not very far away.

Someday, many years or decades from now, all this is going to stabilize. Just what the world will look like is impossible to forecast. Will there still be 6.7 billion of us around or will the world's population have declined from deteriorating climate conditions and a lack of food. The only thing for sure is that there is going to be a lot less fossil fuel around to do the heavy work for us. The last 100 years, particularly the last 50, have been a magic time. The exploitation of fossil fuels has given mankind an era of incredible riches and, for many, unprecedented freedoms to pursue whatever they choose. Now that time is over and humanity is going to have to reprioritize to the basics of life -- food, warmth, shelter, health care, sanitation, and security.

If the oil age had come and gone in a few decades mankind would not have had the opportunity to reorganize our lifestyles so dramatically from the way we lived in the 19th century, but it is too late now. Recent estimates say that nearly half of the world's population now lives in urban areas where they are dependent on others for food. In America, only three percent of us are left on farms to feed the other 97 percent. This is going to be a real problem for if there is anything we really need to do every day, it is to eat. With shrinking amounts of increasingly expensive fossil fuels, the American way of agriculture is going to be severely tested. Throw in some climate change and our food producers are going to have trouble keeping up with the demand.

Many are worried about depleted soils, and the vast amounts of energy required to grow, store, process, and transfer food raised thousands of miles from the consumer. Then there is the growing problem of paying for food when one does not have a job. For the last 100 years the cost of food was a decreasing part of the average American's budget. That is starting to reverse and it will not be long before the discretionary spending that many have enjoyed in recent decades dwindles as more of our incomes go for the essentials of life. Much food in America currently is being paid for by unsecured credit cards in the hands of people who will never be able to pay. The banks have already reduced the number of open cards from a high of 483 million last July to 400 million. This number will continue to shrink as delinquencies soar and the banks realize they will never be paid back. As with food, the same sort of problems are arising with health care, and housing.

Sanitation and public safety, being largely a responsibility of government rather than individuals is, safe for the minute, but governments are facing growing problems. If, as seems likely, government takes on increasing burdens of feeding and housing people, some new form of social contract is going to have to be worked out. We are already hearing the opening sounds of what may be the greatest political debate of the 21st Century - how do we get out of this mess. On one side are those who continue to believe that free markets, tax cuts, and offshore drilling, will return things to normal. The other side recognizes the magnitude of the challenge we face, but so far have not publically connected the dots. This great debate will continue in the Congress, state houses, and local board rooms for a long while as the balance teeters between maxims of the 20th century and realities of the 21st. The break will come with social unrest.

It has been a long time since mobs took to American streets in protest. Although common in other parts of the world, one has to look back to the 1960's to find serious social unrest in the US. This time riots will be for food and jobs rather than for civil rights and against the draft. The unrest will change everything. Governments will realize that changing times require changing institutions and new priorities. The mix between capitalism and government involvement in the economy is going to change for there no way that our current institutions and economic arrangements are going to get us through the next 40 years.

Author who predicted crisis sees inflation ahead
An author who saw the global financial crisis coming fears the next bubble will come in the form of inflation and has little confidence U.S. President Barack Obama's team is up to the challenge ahead. "The Democrats have replaced the Republicans as the big benefactors to the financial community," said Kevin Phillips, author of "Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism." "The financial community is donating more to Democrats than ever before and you've got more Democrats in the financial community, creating a very powerful pattern there. I don't think you're going to see the Obama administration and Congress willing to be tough enough in dealing with these things," he told Reuters.

Phillips, a former strategist in the Nixon White House who has turned highly critical of the Republicans and voted for Obama in 2008, published "Bad Money," his 13th book, a year ago. The paperback edition came out March 31 with a revised preface and afterward, interpreting the events of the past year, but the prescient body of "Bad Money" remains unchanged. A year ago, he warned of a the pending explosion of a 25-year "multibubble" that started in the 1980s, when the financial sector accounted for 10 percent to 12 percent of the U.S. economy had started metastasizing into an "arguably crippling" 20 percent to 21 percent by the middle of this decade. Overleveraging and easy credit was bound to create disaster, he warned.

Phillips assigns much of the blame to former U.S. Treasury Secretary Henry Paulson, but perhaps even more on Federal Reserve Chairman Ben Bernanke, who he calls a "disaster," and his predecessor, Alan Greenspan. Phillips calls Paulson a Wall Street insider who was looking out for his own, and Bernanke an academic misguidedly trying to refight the 1930s Great Depression. Together they formed the wrong team at the wrong time whose ad hoc approach threw away hundreds of billions of dollars and more than doubled the Fed's balance sheet, he says. "What you're seeing Bernanke do is he's trying to create a bailout reflationary bubble, which he can't describe as a bubble, just as Greenspan couldn't describe the housing mortgage bubble as a bubble. What we're seeing by Bernanke is a covert attempt to rebubble," Phillips told Reuters.

Moreover, a commodities cycle probably started early in this decade and is only being masked now by recession, Phillips says, presaging a repeat 1970s style inflation, he said. "The danger is that the great unwind -- the unraveling of the mammoth buildup of debt -- is under way. If that predominates, Bernanke's theory is you're going to have deflation," Phillips said. "My theory is that if we are in a commodities cycle, what you will get will be more like 1973-74-75 ... where as soon as the recovery begins you get rising inflation because you're going to play havoc with all money supply and liquidity that's been unleashed " he added. Meanwhile, the taxpayer and small investor have little defense. "The average person is going to be on the periphery of concern and I think that's rotten," Phillips said.

Twelve Years Down the Drain
The credit crisis has cost us a dozen years' wealth in a matter of months.

Anyone who toils in the legal-industrial complex -- better known as Big Law -- should be able to tell you how we got here. Corporate attorneys like me, even those with the eyesight and insight of Mr. Magoo, all should have been able to see this financial collapse coming. The market has lost a dozen years worth of wealth in a matter of months. Millions of hours of manpower put in by investment bankers on Wall Street and the lawyers who enabled them -- the kind that brought home those bright shiny bonuses that are now causing a populist uprising in the hinterlands -- have been wasted away by what is kindly called the credit crisis. And whatever lessons the powers that be might learn from this adjustment -- that salary structure should change, or that the billable hour is an anachronism -- it seems no one has stated the obvious: The whole system is warped.

These days, deals are down. It's so quiet that even at mergers-and-acquisitions hothouses like Cleary Gottlieb and Skadden Arps, junior associates have been known to sneak out of the office and head home by six o'clock. Exposed to the sunshine that exists outside of corporate skyscrapers for the first time, these people now know what we've all been telling them for years: The sky is actually blue. But daylight savings time notwithstanding, the traditional life of a law lackey -- even, or especially, a graduate of a fancy law school like Harvard or Yale -- has meant virtual residence at the firm. Meals were delivered by Seamless Web and the roll-top desk was used for catnaps, because whatever it is that had to happen had to happen immediately, or yesterday. The emergency-room atmosphere that permeated the processing of derivatives deals, corporate takeovers, and whatever else has been going on at Goldman, Bear, Citi and Merrill for the past decade, could rival that of an operating room during open-heart surgery. Only, of course, it was a matter of money -- not life or death.

Perhaps money and mortality are all the same to some. But as a way of making the former, this hysterical ER-approach has proved futile. All those lost nights of sleep are now lost 401(k)s. So what was the point? Corporate lawyers could have been sunning in St. Bart's and ended up with the exact same result, plus a tan. Money made the mad hours worth it. This is why the insanity of working as if the very fate of nations were at stake when it was actually just about whether or not to do a leveraged buyout of, say, a company in Decatur, Ill., went unnoticed by an entire industry. Anyone in a position to criticize this inhuman work ethic -- meaning, anyone who liked sleeping, or dating, or occasionally walking his own golden retriever -- opted out instead. These are the people who are now attorneys in the public sector, who run nonprofit organizations, or who simply made what money they could and are now painting landscapes in Taos, or skiing full-time in Sun Valley.

The Wall Street atmosphere -- in both law offices and investment banks -- is not open to dissenting opinion. If you blow the whistle, it's only to hail a taxi to take you away, because complaining is just not tolerated. So anyone sharp enough to say that these deals were a bad idea in the first place didn't stay on long enough to make the point. And we all know that organizations that don't retain thoughtful opposing views are doomed by hubris. Hello, Lehman Brothers! Still, I don't believe any of the major players are re-evaluating their ethos -- only their decision to invest in subprime mortgages. And this is foolish, since the problem is not just that the financial instruments were bad bets, but that the corporate structure and the feverish rush of it all are fundamentally flawed. I would love to call the system despicable or detestable or something evil-sounding, but that would be giving it too much credit. It's really just the march of dunces. A dozen years worth of sleepless nights down the drain like dirty bathwater. Pity these people.

Chrysler and Its Bankers in a Standoff
Chrysler, the U.S. Treasury Dept., and banks are in a standoff befitting one of Clint Eastwood's spaghetti westerns. Last week, Chrysler's lenders rebuffed an offer from the Treasury to take $6 billion of the $7 billion Chrysler owes the banks in stock and the remaining $1 billion in new secured debt, according to people familiar with the situation. If Chrysler can't negotiate its debt down—and obtain further concessions from the United Auto Workers—it can't seal a deal to tie up with Italy's Fiat. And without Fiat in the picture, Treasury won't give Chrysler $6 billion in government loans that the company needs to avoid bankruptcy. Treasury is heavily involved in the talks. Treasury officials made the proposal directly to the banks and drew a hard line that they will not budge on the amount of cash and equity that's offered, say sources familiar with the negotiations.

The parties have the rest of the month to clear the standoff, or Treasury will withhold further funds and Chrysler—if the company runs out of money—could file for bankruptcy. Right now, talks continue between Chrysler, owner Cerberus Capital Management, Treasury officials, and a group of lenders—which includes JPMorgan Chase, Citigroup, Morgan Stanley, and Goldman Sachs—to turn most of their $7 billion in loans into stock in the company. Chrysler needs big union concessions, too. It may take until the end of the month, when all parties face a deadline that could mean bankruptcy. Chrysler is keeping mum on negotiations with the banks or its unions. "We have good discussions going on with all constituents," Chrysler President James E. Press said in an interview. "We're hopeful."

On Mar. 31, the Treasury Dept. gave Chrysler 30 days to seal its deal with Fiat. To do that, Fiat wants Chrysler to clean up its balance sheet. And to do that, Chrysler must negotiate away most of its bank debt and get the union to accept half of the $10 billion the automaker owes the union in stock and the rest in cash. For the banks, the key decision comes down to whether they think they can recoup more of their $7 billion in loans to Chrysler by taking stock in the company or by selling off pieces of Chrysler. If they accept the shares, they would become owners in Chrysler along with Fiat, possibly the federal government, and the union, which would take a chunk of stock to start a trust fund that will pay union health-care benefits. Fiat would own 20% and could take as much as 49% later, once government loans are repaid.

Cerberus has offered to write down its equity stake, and the private equity giant would then no longer own the carmaker. For the banks, both options are dicey. If the banks take stock, they are gambling that a Chrysler-Fiat deal will work and that the two regional carmakers can thrive with a successful merger. The banks could let Chrysler enter bankruptcy and try to get proceeds from selling the Jeep brand and other Chrysler plums, such as its minivan and Dodge Ram pickup businesses, as well as the factories. But that's a tough sell when automakers around the globe are reeling from a plunge in auto sales and have neither the cash to do deals nor the need for more factories and brands.

"They have to choose the least bad option," says John A. Casesa, principal of Casesa Shapiro Group, an auto consulting firm in New York. "That may be taking equity in Chrysler. You'd probably have a higher chance of recovery in a combined Chrysler-Fiat than in liquidation." With few buyers for auto companies or assets, it's tough to say how much the banks could get. "No one knows in this market what these things are worth," says Thomas T. Stallkamp, former Chrysler president and a partner in private equity firm Ripplewood Holdings. "There is still way too much manufacturing capacity, so these are not terribly attractive assets in this economy."

Even though there's no certainty of a deal, Chrysler is in the early stages of brainstorming which Fiat cars it could sell in the U.S. and under what brand names. Chrysler would also give Fiat some of its trucks, SUVs, and minivans to sell overseas, Press said. At the New York Auto Show on Apr. 8, Press drove onstage in a Fiat 500, a tiny car that competes with BMW's Mini Cooper in Europe. Chrysler could sell the pint-size ride at its dealerships and just call it the 500—without a Chrysler or Fiat brand name, Press says. Chrysler is also eyeing Fiat's stylish Alfa Romeo brand for the U.S. Alfa cars would probably be sold under the storied Italian brand, he said. "It's a great name," Press said. "Regardless of what we do with branding, the Alfa cars would keep the name and be sold at specialized dealers." It all sounds good on paper. But first, Chrysler and the Treasury need to get the union and banks to budge.

Remember the three-day week? It's worse than that
It says something for the state of British manufacturing when a monthly fall in output of 0.9% is greeted by the City as good news. Life has become so tough for UK producers that there were fears that short-term working and temporary plant closures might have led to a decline of 1.5% in February. Some analysts now believe the recession in industry is starting to flatten out. Let's hope so, because the official data makes sad reading. Output from factories has fallen for 12 months in a row and is now 13.8% lower than a year ago. That represents the steepest pace of decline since the wipeout of manufacturing in 1981 – a period that saw the UK's industrial capacity shrink by one sixth.

The collapse in production since last autumn has been so rapid that the quarterly fall in manufacturing output is the worst since modern records began, in 1968. Put into context, that means we are currently performing even worse than we were in early 1974, when the miners were on strike, the lights went out and the country was put on a three-day week. It was easy to explain away the industrial grief of the early 1980s. Too much British manufacturing was unproductive and uncompetitive; an overvalued pound and sky-high interest rates meant the stragglers went out of business. This time, though, the pound has depreciated by almost a third during the past two years and interest rates are below 1%. Those companies that survived Mrs Thatcher in 1980-81 and the second Conservative recession of 1990-92 were supposed to be leaner, fitter and better able to cope with difficult trading conditions.

That, though, is not the way it has turned out. Those analysts who predicted that the recession would hit the financial sector hardest have been proved wrong; once again the country's industrial heartlands have felt the full impact of the downturn. Leaving to one side the depressing fact that Britain's industrial base is too small and too specialised, there are three immediate reasons for this performance. The first is that world trade has nose-dived since the Lehman Brothers bankruptcy last September. Britain has seen manufacturing output fall by 9.9% in the subsequent five months, but other countries have seen similar – and in some cases bigger – cuts in production. World trade is expected to contract by at least 10% this year – the biggest drop since the second world war – and that has wiped out any beneficial impact from a fall in sterling.

The second factor is that firms – even the viable, going concerns – have been having trouble securing working capital. The dearth of credit has forced companies to cut back and in some cases it has put them out of business altogether. Finally, just-in-time production means that firms can respond to changes in demand quickly. Car companies like Honda shut down production lines in the knowledge that finished stocks of goods were adequate to meet customers orders. Once inventories have been run down, there will be a pick up in output. It is, however, clutching at straws to imagine that this will happen any time soon. This looks like being the worst manufacturing recession since the 1930s.

Britain facing another fall in production
Fears that Britain is in the grip of an industrial slump as brutal as that of the early 1980s were highlighted by one of the country's leading thinktanks today as it warned that deep cuts in factory output had left the economy poised for a second successive quarter of sharp decline. With manufacturing battered by the twin impacts of the credit crunch and a collapse in global trade, The National Institute for Economic and Social Research (NIESR) said the 1.6% drop in gross domestic product in the final three months of 2008 would be followed by a further 1.5% reduction in the first three months of 2009.

The pace of decline will force Alistair Darling, the chancellor, to produce much gloomier forecasts for growth and public borrowing in this month's budget than he delivered in last autumn's pre-budget report. At that time, the Treasury expected the economy to shrink by 1% in 2009, but City analysts believe Britain's economic output this year could be up to 4% lower than it was in 2008. Martin Weale, NIESR's director, said the small reduction in the economy's rate of contraction in the first quarter was not a sign that the worst was over. He said the fall in output so far mirrored that which began in the summer of 1979 and which developed into the biggest industrial collapse since the Great Depression. "While there is no obvious reason why the profile of the current recession should match that of the early 1980s, the rate of output decline so far has been very similar."

The NIESR forecasts followed the release yesterday of official figures for industrial production, which showed that the 12th monthly drop in factory output in a row had returned manufacturing production to levels last seen in 1992. Industrial production - manufacturing, mining and quarrying, and energy supply - was down 5.9% between the latest two quarters, a pace of decline unmatched since the three-day week of early 1974. Although February's 0.9% monthly fall in manufacturing production was smaller than the City had feared, the Office for National Statistics (ONS) said the 6.5% drop between the three months to February and the previous quarter had been the steepest since records began in 1968.

Car production has seen the biggest drops, with plant closures and short-term working leaving the quarter's output down 45% on last year, but the ONS said there had also been hefty declines in metal goods and among firms making machinery. Peter Dixon, economist with Commerzbank, said there had been a marked deterioration in the manufacturing outlook since the intensification of the financial crisis last autumn. But although production had dropped 9.9% since the collapse of Lehman Brothers in September, Dixon said there "were indications that the pace of decline is beginning to level off". Manufacturing cuts have come despite a 30% boost to exports from the depreciation in sterling. Firms are struggling to sell goods into a global market contracting at a pace not seen since the second world war.

David Kern, chief economist at the British Chambers of Commerce (BCC), said: "Although manufacturing did not fall as sharply as feared, this should not obscure the seriousness of the problems facing the sector. Over the past year, we have witnessed a severe decline in output, made worse by the collapse in world trade. "The sector's skills base is facing real threats. UK manufacturing is already too small and avoiding further irreversible losses must be a national priority. We urge the chancellor to take corrective measures in the budget." Vicky Redwood, analyst at Capital Economics, said the first quarter had "set the UK up for a [GDP] contraction of 4% or so in 2009 overall".

District Attorneys Can Keep Cashing In On Check Fees
It looks like district attorneys will be able to stay in the debt collection business. Last month, our investigation showed how prosecutors’ offices in 150 counties were cashing in from a private firm that kicks back a portion of fees it charges for collecting bounced checks. The tactics used by American Corrective Counseling Services, such as sending threatening letters on DA stationery, caused plaintiffs’ attorneys and consumer advocates to file a series of class-action lawsuits. They were poised for a key ruling when ACCS suddenly filed for bankruptcy in late February, effectively stifling the litigation. Now it looks as though ACCS will be reborn, free of legal baggage.

A Delaware bankruptcy judge’s decision (PDF) last week allows ACCS to sell its assets to Levine Leichtman Capital Partners, one of the company’s financial backers, "free and clear of all liens, claims, interests, and encumbrances." The ruling came despite a written objection (PDF) from the Office of the United States Trustee, a division of the Department of Justice that enforces bankruptcy laws. "[I]t appears that the sale process will do nothing more than allow the Debtors to cleanse or launder its assets and its business free of the claims of the various class action plaintiffs," the trustee’s office said. Now, the company is changing its name to American Corrective Group but otherwise will emerge from the bankruptcy virtually unchanged. "All indications are that the same management team will remain in place," said Charles Jenkins, a lawyer for ACCS.

Jenkins said the bankruptcy filing was a reasonable legal strategy to ward off the consumer suits. "A great deal of money was being spent defending these same claims being brought over and over again," he said. This is not the first time ACCS has gone the extra mile to sidestep the class-action litigation. In 2003, with legal fees mounting on several fronts, ACCS hired a lobbying firm to push Congress for a federal barrier against such lawsuits. The company spent more than $660,000 lobbying over the next three years, according to lobbying disclosure reports. The lobbyists and local prosecutors persuaded Rep. Barney Frank (D-MA) to offer critical support for an amendment exempting the program from regulation under the Fair Debt Collection Practices Act. The exemption didn’t immediately halt the class-action cases, which are ongoing in four states.

Frank, now the chairman of the House Financial Services Committee, said in a February interview that ACCS's practices deserve to be looked at, but his office has not responded to repeated attempts to find out whether or when the congressman will follow through. ACCS contracts with DA offices to offer counseling services for people who write bad checks. The company reimburses merchants when it collects, but it also charges fees of up to $200 dollars beyond the amount of the check. The company typically splits administrative fees with prosecutors’ offices; over the past four years, Los Angeles County has received $1 million. Jenkins said ACCS only sends letters to people who have repeatedly refused to make good on bounced checks. The DAs say the practice frees up resources to handle serious crimes.

The Delaware bankruptcy judge approved the sale of ACCS to Levine Leichtman but issued a temporary stay, which leaves time for the plaintiffs’ attorneys to file an appeal. Deepak Gupta, director of the Consumer Justice Project at Public Citizen, which is a party to the class-action litigation, says lawyers are hoping the Office of the U.S. Trustee will sign on. The office declined to comment. Gupta also says new litigation against the reorganized company is an option. "The minute they run these programs, they are going to be subject to new lawsuits," Gupta says. "We’re looking into doing that ourselves."


Persephone said...

So, the banks declare the toxic assets are worth a make believe value, suddenly they are all solvent!

It makes me want to pull out my princess costume and wand - well, if we're playing "Pretend."

I'm thinking I should vacation in Zimbabwe - just to get a taste of what we can expect.

Ilargi, thanks for the Bernanke preamble. He and Geithner seem to have acquired a good PR team.

getyourselfconnected said...

A special blog.
Long time reader, first time poster and all that. I just get this sick feeling in my stomach that with all the rallies and smoke and mirror stick saves we have seen over the last 2 weeks we have missed any chance to make any real reforms. Not promoting, but my blog post tonight echoes much of what you are saying. I do not want our country to fail, I hate being "bearish" if that is what some call it, I just want some clarity, honesty, and freedom for our markets. I believe in America. I think given a fair shake our populace would do well. Its the games played to keep some in the seats of power/profit that lessens us all.

Anonymous said...


Hello. I picked up a book from your recommendations on the main page- The Upside of Down by Thomas Homer-Dixon.

I read the Prologue and when I got to the end of the first story about San Francisco (page 3) he states the following: " one could have imagined that such appalling destruction would also produce some good; that it would not only lead to a rejuvinated city but also trigger a wave of events that would sweep around the world and, years hence, help create the Federal Reserve System of the United States- the country's bank of last resort, an essential defense against financial panic, and one of the most important new institutions of the twentieth century."

I just got done my second reading of The Creature from Jekyll Island, so when I read this passage, I was completely taken aback.

Only after three pages I find myself questioning Homer-Dixon. I find it hard to believe that anyone would lavish such praise on the Federal Reserve. I hope he has a good explanation later on in the book. It struck me so hard that for a minute, I was actually wondering if I should even continue.

Am I just overthinking this?

Do you feel the same way?

Stoneleigh said...

Anon @10:23,

I suggest you stick with the book. THD does have a few blind spots, but the book has more than enough interesting insights to make up for this IMO. It's one of the few that really tries to put together a coherent big picture. I've had quite a few chats with THD since I reviewed his book on The Oil Drum in January 2007. His understanding of finance has evolved since then I think.

scandia said...

Anon 10:23P.M. THD"s comment " one of the most important new institutions of the twentieth century."' is, I think, more a statement of fact than approval. The Feds have very much influenced the twentieth century.We may not like them but they do influence events.
I loved the book,by the way.

ca said...

Impact of climate change in Australia,0,65585.story

Anonymous said...

If you tap "anti anxiety" into Google, you will get about 4.5 million hits related to medication/pills/herbs.

Part of the Ministry of Propaganda's mission in the U.S. is to get as many people as possible on 'happy pills' in one form or another.

Hell, friends were joking that some form of anti anxiety meds were probably already in the food supply masquerading as 'artificial ingredients" and that this would help explain the lack luster response of outrage and understanding of the Gang Bankster's Guiness World Record for looting, surpassing even Genghis Khan's.

Chemical mood control is a potent tool in the Kit Bag of the modern mob syndicate. Far more sophisticated than buying the whole bar drinks to vote your way on elction day.

el gallinazo said...

For some reason, I am still on's mailing list. Think I may have contacted them about something in 2005. Never gave them money though. I would only contribute directly to Kucinich and Nader. Anyway, I got this email yesterday asking me to sign a petition directed to Timmy Twolips demanding that he "fire" Ken Lewis of BOA.

I sent them the following comment:


Speaking as an Old Lefty who goes back to the ‘60’s and SDS, I have met cats with more brains than When are you guys going to realize that you were sucker punched and that Obama was a Manchurian candidate, bought and paid for by the banksta mob? And you address your petition to Geithner! The head of the IRS who cheats massively on his own taxes. The President of the NY Fed who did nothing to control the thievery on Wall Street though that was suppose to be his job. He orchestrated the Bear Stearns taxpayer fiasco to protect Morgan Chase against their bad CDS gambles and orchestrated the AIG fiasco along with Paulson to pass tens of billions of taxpayer dollars surreptitiously onto Goldman and UBS. And now he wants the FDIC to front a cool trillion to the Bankstas on their gambling losses as an end run around Congress which is just starting to wake up from its stupor, ignorance, and endemic corruption. Complaining to Tim Geithner about Ken Lewis is like complaining to Adolf Eichmann about Joseph Mengele.

And the Manchurian Candidate’s other economic genius, Summers. The kleptocrat Robert Rubin’s star pupil; the man most responsible for repealing Glass-Steagall which permitted this taxpayer grand theft. A man so obnoxious and obtuse that even Harvard vomited him forth from their presidency. I live in the US Virgin Islands and can’t vote for president, but if I could, I would have voted for Nader again. And I supported his campaign financially.

So what’s’s deal? Are you that freakin’ stupid, or corrupt, or just too proud to admit that you got suckered once again by the banksta kleptocrats? I just stay on your mailing list because I need a sardonic laugh once in a while.

Disrespectfully yours,

Stoneleigh said...

THD is FAR more optimistic than I am, but I still found his analysis very much worth reading. Very few people are looking for the big picture and trying to integrate a wide range of factors. The Upside of Down isn't a finance book or a practical how-to-prepare-for-imminent-disaster handbook, but it's very good at setting various elements in context, and it gets better as it continues. When you add in the finance work we do here, the picture is a scary one indeed.

When I first met THD, he thought we might be in real trouble globally in about 50 years, and not due to finance as he thought the central bankers would simply increase the money supply. I think his views have changed considerably since, as we have headed into the liquidity trap.

I don't think a book exists that really weighs all factors in the best balance and considers the likely time horizon for each impact, and therefore how each aspect of crisis would set the stage for the way that subsequent ones would play out. If I had time to take a year off from everything else I would write one myself. It would certainly be an interesting project, but it would probably come too late to warn people. What we do here is smaller scale, but it's impact can be greater as it's available immediately and can be widely disseminated in time to help people prepare.

John Hemingway said...

If you ever do write that book, I'll have my copy ready for you to sign:-)

el gallinazo said...


It's a shame that there isn't a publisher out there bright enough to give you an advance that would allow you to do both.


Happy Days are coming back :-) I am leveraged long on the S&P500. But I even wear my parachute to the bathroom - somewhat inconvenient.

Reminds me of an article a few months ago on Quirks & Quarks, the CBC weekly science radio show about how stone age North Americans hunted the bison without horses. They cleverly stampeded the herd into jumping off a cliff. Sound familiar?

Anonymous said...

"..stone age North Americans hunted the bison without horses. They cleverly stampeded the herd into jumping off a cliff..."

All the original plot lines for stories were taken a long time ago.

You can only update the classics to your own time and culture.

How about stampeding the SUV's off the cliff by telling them there's cheap gas just over that next ridge line.....

Blue Monday

thethirdcoast said...


Thanks for the historic photograph from the part of the world where I grew up.

Anonymous said...


I think you have summed it up.

In order to get spiraling deflation wouldn't we have to let nature takes its course? Wouldn't we have to adhere to the traditional economic rules and standards.

The dream team has shown that they are not going to play by the rules. That they will indeed make things go poof even if it means they wave a magic wand.

When the people calling the shots are able to suspend reality, how can we analyze the economic picture with the old lenses?

Can they remove all the bad debt right off the books? Viola? Gone forever, as if it never existed? As if the loans never occurred? And the money supply snaps back to reality?

I don't know the answers, but we sure as hell better get used to the fact that our typical tools of analyzing market conditions are being rendered useless as the dream team stuffs the square peg through the round hole.

If they will wave magic wands, inflation waits in its cage, hungry, cornered, and pissed off.

Stoneleigh said...

Anon @1:19,

Your posts reminds me of The Wizard of Oz, where deliberate impression of great power is created, but in reality there's a little man behind a curtain. People believe for a while, but what is coming will strip away the curtain. It is simply a much larger force than any human agency is able to address, even with magic wands ;)

Anonymous said...

Anon @ 8:50

"Part of the Ministry of Propaganda's mission in the U.S. is to get as many people as possible on 'happy pills' in one form or another."

Funny you should mention that. I have a couple of friends in Vancouver, BC and the running joke, which IIRC is actually true, is that the water has a consistent trace level of Prozac in it in order to promote "social stability" or some other orwellian horsepucky.

Then I think about Las Vegas and the circular refeeding of all the drugs and crap that get flushed into the sewers that gets pulled right back into the potable water supply and I wonder how much of that is preventable, and how much if that is intentionally overlooked.


el gallinazo said...

The fascistic capitalism that we know enjoy abhors any deflation and also abhors inflation over the 5% range. It likes inflation in the 2-5% range which allows it to rip off us pissants without self-destructing. Of course this leaves out a lot of other factors like PO, etc. in regards to how easy this is to accomplish for TPTB. Zimbabwe is not a bankers' paradise.

The most instant cause of deflation is debt default. When a debt is liquidated, its money disappears. The poof of Persephone's magic wand that we are now seeing are puffs of debt defaulting and the money disappearing into an alternative universe. The reason the central banks are printing money like crazy is that they are trying to compensate (unsuccessfully I might add) for the money/credit which is disappearing into this alternative universe. No matter how many times I&S explain it, most of us don't get it.

Maybe because it is not intuitively obvious. A person on earth is watching a space ship traveling away from him going 299,700 km/sec or 99.99% the speed of light. Suddenly that space ship fires a projectile in its direction of flight also going 299,700 km/sec. So how fast is the projectile going as figured by the observer? Well, any 5th grader can add - it's going 598,000 km/sec - it's obvious. Sorry, it's going 299,800 km/sec, an almost immeasurably tad faster than the space ship itself.. The universe is not always intuitively obvious.

Anonymous said...

As the comments here are an echo chamber I thought I would just add a cautionary note. I started reading TAE in the middle of last year, during the price shock. I found all the writing here to have value and seemed well considered. I certainly didnt get a partisan vibe.

Today's post - in contrast to then - is illustrative and rather shocking if you compare to last summer. You compare the current administration to Nazis (if they seem that way then your world is orthogonal to mine is significant ways) and your low use of swearing (try DKos for much more witty use of fuck etc), partisan bias, and histrionics is not really something I expected from you all. Its sad. Will be taking a break from TAE and hope things turn around for you.

Persephone said...

@anon 3:11

2+2 does not equal 5 regardless of the administration calling the shots.

Ilargi has made essentially the same claims as Simon Johnson, Stiglitz, and Roubini (though Ilargi may be a bit more passionate about it)

Persephone said...

Humorous Op-Ed (actually sad because it's true)

When you're in, you're in

"But wait ... there's more!
The Associated Press this week reports that "companies that spent hundreds of millions lobbying successfully for a tax break enacted in 2004 got a 22,000-percent return on that investment" — $100 billion in all. That could be you!

Of course, the secret is investing heavily in specific political stocks.

For example, the banking industry recently paid Rahm Emanuel $16 million for about two years of work. That investment was recently paid back when, as President Obama's chief of staff, Emanuel led the January campaign to release another $350 billion in bank bailout funds. Turning a $16 million down payment into a $350 billion payout — that's huge!

Likewise, Goldman Sachs hired former Senate aide Mark Patterson as one of its lobbyists — an investment that proved a huge winner when Patterson became the Treasury Department's chief of staff and the agency subsequently killed proposals to limit executive compensation at bailed-out banks. Cha-ching!"

Anonymous said...

Anon 3:11 PM

"blah, blah...You compare the current administration to Nazis..blah"

I think the general consensus is that the administration's chief players are like gangsters.

It was Bertolt Brecht, not TEA, who first connected the dots by comparing gangsters to fascists.

John Hemingway said...

So tell me, where is the real difference between what the Bush administration did and what the Obama administration is doing now? Obama is supporting the banks and Wall Street as Bush did and he is also waging war in Iraq and Afghanistan just as the neocons did. Obama has even promoted Stephen Kappes and Michael Sulick, CIA officials who were heavily involved in overseeing the Bush administration's torture program (according to a new report from the International Committee of the Red Cross)to the #2 and 3 positions in the agency under Panetta.

As the Italians say, "Stessa faccia, stessa razza", same face, same race.