Sunday, May 3, 2009

May 3 2009: Big Cuddly Woolly Words

Russell Lee Spring Stories April 1941
Chicago moviegoers waiting to see "The Philadelphia Story" starring Stewart, Grant and Hepburn

Ilargi: If we allow ourselves for a moment to take some of the higher numbers concerning the still for opaque reasons not published US banking stress test results, numbers floating around as the result of various guesstimates and/or alternative test methods,we're looking at something like this: Paul Miller, analyst at Friedman, Billings, Ramsey Group, said on Tuesday that Bank of America would need to raise $70 billion in new capital. The only way he sees for the bank to do this:" Bank of America should consider converting preferred shares to common stock, including $27 billion in private hands 'as soon as possible...'". Well, that won’t do the trick, if we assume Miller's presumptions are right. It’s pretty widely reported that Citi needs $10 billion, while the same Paul Miller has said that 14 out of 19 stress tested banks need a total of $150 billion. Minus the Citi and BofA amounts, that means 12 banks need $70 billion put together. It's not at all clear where that would come from.

It's interesting to ponder how close government stress test numbers (published on Thursday?!) will be to these estimates. We already know the government's numbers will be wildly different, if only because FBR’s stress test included a 12% jobless rate going into next year, compared with about 10% used by the government test. Criticism of the Washington predictions on job losses has been loud and clear enough lately. Using U3 instead of U6 is a questionable way of going about things, since it paints the portrait of a government all too eager to quite literally write off as many of its citizens as it can, in order to show itself in the best possible light. And if the public image of a government is more important than the welfare of its voters, there is a problem. U3 numbers rose from 8.5% in March to 8.9% in April. It should be clear that at that rate of increase, 10% is not far away, and unrealistic as an assumption for 2010. You can't, after all, base your entire policy-making platform on best case scenario's. Then again, that leads, once again, straight back to Tim Geithner's statement before Congress that a Plan B was not needed, because "this plan (TALF) will work".

As for real unemployment, U6 has surpassed the 16% level. That's one is 6 Americans of working age. And it would be hard to find any serious voices out there who would claim it will not be one in 5 next year. At a certain point you're no longer talking about personal tragedies, you're looking at severe disruptions in society.

The FDIC seized the largest bank of banks in the nation on Friday, Silverton. Where the agaency normally transfers files and assets to anotehr bank, in this case it apparently will handle the mess itself. With more than $4 billion in assets, Silverton was the biggest failure so far this year. It had over 1500 client banks, 400 of which were stakeholders. Word has it that dozens of banks, if not a few hundred, could slip over the proverbial edge on account of their Silverton exposure. From where I’m sitting, it still al looks like a selection and consolidation process tipped in favor of a few favorites. If you look at what's already been injected in the banking system, present numbers don't look all that big. But there is plenty hunger on Wall Street for smaller banks' clients and their deposits. All in all, I expect another week shaped by sleight of hand and big cuddly woolly words.

Shotgun Wedding
Leading a great nation, as Barack Obama confessed in his review of his first hundred days as president, is no piece of cake. Whether it's the Taliban running wild in Pakistan or the Republicans running wild in Congress, the Iraqis shooting each other up in Baghdad or Joe Biden shooting off his mouth in D.C., erstwhile world-class banks begging for handouts, the swine-flu epidemic, the dented remnants of our auto industry desperately embracing bankruptcy or flirting with it -- it's one darn stressful thing after another. And we haven't even mentioned trying to settle into still-unfamiliar digs with both a new dog and a mother-in-law.

The ceaseless pressures, of course, come with the territory, and not only for Mr. Obama. Recession and its attendant miseries are rife around the globe and putting great strain on leaders virtually everywhere. Our new president ought to thank his lucky stars he has a smart and spirited spouse to help meet the monumental challenges confronting him. The importance of such a helpmate is too often neglected in the calculations of political pundits, regardless of whether they lean left or right or simply wobble in the center, as they assess the performance of various leaders. But the leaders themselves, to judge by their actions, are highly conscious of it.

Which explains, for instance, what easily could be misconstrued as the erratic, even naughty, behavior of Silvio Berlusconi, the prime minister of Italy -- behavior, we might add, that prompted his wife to write a scathing letter complaining about it to an Italian news service. More specifically, she objected, and not for the first time in a public forum, of his consorting, as the New York Times put it, "with young and chesty women." Far from acting on any salacious impulses, we're sure it is merely Mr. Berlusconi's way of catching his wife's attention (she, incidentally, is 20 years younger than he and extremely attractive), to remind her how much he needs her to share the burdens of office. We can only infer that the Italian citizenry was quick to grasp his true motives, since the airing of his wife's suspicions hasn't diminished his popularity one bit (eat your heart out, Bill Clinton).

In like vein (or is it vain?), Jacob Zuma, about to become president of South Africa, has gone to great lengths to be prepared for the rigors of his new post by having two wives (the second married only last year) and, according to The Wall Street Journal, is eyeing a third, in keeping with his insightful recognition that you can never have too much help in coping with the multitude of economic, political and social problems that confront a country's leader these days. As the Journal piece notes, there is still the thorny question as to which of the trio will be South Africa's First Lady, Second Lady or Third Lady. Maybe they'll take turns. Except for those who are keen on foreign affairs, the denizens of Wall Street are apt to give scant notice to heads of state and their trials and tribulations, much less their spousal arrangements. And who can blame them? After all, no one ever got rich worrying whether a president or a premier of some alien country was faithful or a philanderer.

For that matter, the only marriages Wall Street has ever paid much heed to are the nuptials -- bereft of even a hint of romance -- known as mergers. And there has been a notable paucity of those of late as tough times in the economy, the credit markets and the stock market sharply curbed the corporate urge to merge. Comes now the shotgun wedding -- proposed but not as yet consummated -- between bankrupt Chrysler and the Italian auto maker Fiat, with a grim Uncle Sam as matchmaker and dowry donor. It's hardly the kind of arranged joining together that sends shouts of "Whoopee!" jubilantly echoing through the Street. And for several good reasons, not the least of which is that the lenders -- JPMorgan , Citigroup , Goldman Sachs , Morgan Stanley et al. -- who provided Chrysler with $6.9 billion in supposedly secured debt -- are to get back only $2.25 billion, or roughly 33 cents on the dollar. A small bunch composed mostly of hedge funds that bought some of those loans from the banks at a sharp discount balked at the offer and find themselves, for the moment, out in the cold.

The holdouts huff that their rejection of the government's offer is based on principle. Perhaps they mean principal, since reportedly they were willing to accept 36 cents on the dollar. Chrysler debt had been trading for less than half that much, so maybe the better part of wisdom would have been to take the money and run. Crucial to the deal is Chrysler escaping quickly from the clammy grip of bankruptcy, and quickly, in this instance, means several months, not the years it took airlines in a similar bind to emerge. Once it does, the company will be 55% owned by the United Auto Workers' retirement fund and something between 20% and 35% by Fiat, with Washington a heavy presence on the liberated company's board. Fiat is bringing its know-how on making small, gas-efficient cars -- but no dough -- to the party.

That expertise, and even more so, its line of agricultural and construction equipment, have stood the company in very good stead in recent years. But in the first quarter of '09, they proved no match for the one-two punch of recession and the big skid of the global auto market. Fiat wound up in the red, its car sales off 18% from the like year-earlier quarter. Even if the stay in bankruptcy is brief and the merger goes smoothly -- and those are big ifs -- the great unknown is whether Americans will go for a small non-gas-guzzler. And on that score, history and a continuing infatuation with jalopies that boast size and muscle stack the odds against it. In short, the road ahead for this latest incarnation of Chrysler looks bumpy, especially if, as we suspect, the economy is likely to take its own sweet time getting back in the groove. But, for all that, we still wish it a bon voyage.

The incomparable Stephanie Pomboy, no stranger to this space, week in week out spices her intriguing insights with sprightly irreverence. But she was really in top form in the latest edition of her worthy MacroMavens commentary. So we thought we might pass along some of her bon thoughts and bon mots that enlightened and tickled us. Under the elegant title "Burping Out Loud," Stephanie stands the conventional wisdom on its head on corporate profits and the stock market. We should warn you that recovery isn't currently a prominent part of her lexicon. For openers, she doesn't buy the growing conviction that what we've been witnessing is more than a bear-market rally. And her Exhibit A is the amount of financial pain being priced into the credit markets. She readily grants that spreads have narrowed, but notes that they remain "far, far wider than they were at the 2003 cycle lows."

The complacent reaction among the investment cognoscenti is that the credit markets are wildly oversold. More likely, she sniffs, it has something to do with the fact that "an overwhelming portion of some $8 trillion in mortgage debt (or 80% of the total) is teetering on the edge of, or in some state of, negative equity." As to the Fed's claim that the equity of homeowners as a group stands at 43%, she points out that what the Fed neglects to tell you is that roughly a third of them have their houses free and clear. Lo and behold, some basic arithmetic reveals that 67% of homeowners with mortgages have equity of less than 15%. That, Stephanie comments drily, suggests the "destruction priced into the credit markets hardly seems out of whack with potential reality."

And while, thanks to "the transfer of toxic assets to taxpayers" and the magic of accounting legerdemain, the scarred financials to some significant extent may be spared further pain, the same, alas, can't be said for the nonfinancial sector. Little recognized, she insists, is how much the extraordinary gains in domestic nonfinancial profits from the low in 2001 to the peak in 2006 -- a stunning rise of 388% -- owed to the housing bubble. "Who in his right mind," she asks, "would believe that explosion in profits during the housing-bubble stretch a mere coincidence and, therefore, in no way subject to the same inexorable decline?" Since we delight in answering rhetorical questions, we'd reckon not more than 95% of the folks who contend we're in a new bull market.

Absent the powerful stimulus provided by the unprecedented boom in housing, she sees a huge hit still in the offing for nonfinancial corporate profits. A worst-case analysis is that such profits would sink to 2003 levels, a further decline of $450 billion, or 54%. Under a less exacting (and frightening) estimate, using their relationship to GDP, they would return to their pre-bubble percentage of 3.5%, which translates into a drop from here of $340 billion, or 41%. At the end of the day, earnings, to state the obvious, are what makes the stock market go up -- and down. The prospect that they are in for a fresh drubbing is all the more ominous because it's unexpected. As Stephanie reflects, "bear-market rallies come and go, but what makes this one so noteworthy is just how far removed perception is from reality."

AIG Plans To Award Bonuses Even If Taken Over By US
Even if the U.S. government were to entirely take over American International Group, company executives would still be able to collect bonuses at taxpayer expense, according to a letter from AIG CEO Ed Liddy to employees disclosed in the company's recent SEC report. "As this special award is being made to a very select group of executives, I ask that you treat it as confidential," wrote Liddy. The letter is dated less than a week after the government first bailed the company out. The letter assured the select group that "in the event the AIG entity that is your employer (the Company') experiences a Change in Control (e.g., consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the sale or other disposition of all or substantially all of the Company's assets to an entity that is not an affiliate of the Company), AIG guarantees the payment of the 2008 Special Cash Retention award on the dates and under the conditions specified above."

The United States is roughly a 79 percent owner of AIG, having pumped in some 170 billion in taxpayer dollars. Elsewhere, the SEC filing reports that "AIG is working with the Department of the Treasury and NY Fed to establish a framework for further extending the period for earning retention awards and making them performance-based." (Now there's a crazy idea.) Some of those in line to get bonuses have family in the right places, according to the filing. The daughter of top executive Edmund Tse, Ada K.H. Tse, is president and CEO of AIG Global Investment Corp. (Asia) Ltd. In 2008, she pocketed $400,000 in "retention awards" and $250,000 in a year-end bonus.

She will be "eligible to receive an additional amount that has not yet been approved. Ms. Tse also will be eligible for retention payments in 2009 in the amount of approximately $600,000," reads the report. Daniel Neuger is the son of another top executive, Win Neuger, and serves as "managing director of AIG Global Investment Corp. and AIG Global Asset Management Holdings Corp." He took in $75,000 in "retention awards" in 2008 and is on track for roughly $110,000 in 2009. Liddy promised there was more to come. "I fully recognize the devastating loss of personal wealth you've suffered, and pledge to you my personal commitment to provide an opportunity for substantial wealth creation through a combination of cash and equity awards in the coming months and years," he wrote in the letter to employees outlining the bonus policy.

Liddy kept his word.
Read the full message:
Edward M. Liddy
September 22, 2008
[Recipient Address]
Dear ,
I'm pleased to award you a Special Cash Retention award of $[•], payable in two installments of $[•] and $[•], on or about December 31, 2008 and December 31, 2009. Additional terms of the award are set forth at the end of this letter. I fully recognize the devastating loss of personal wealth you've suffered, and pledge to you my personal commitment to provide an opportunity for substantial wealth creation through a combination of cash and equity awards in the coming months and years. I'm convinced that we can turn around AIG and restore the value, confidence, and trust that have been eroded by recent events. I need your renewed commitment, leadership and teamwork to accomplish this challenging task.

The rewards for achieving the objective of paying off the revolver line of credit from the Fed could be substantial, and I intend to handsomely remunerate those who step up to the challenge and take AIG proudly into the future. I'm counting on you to work with me and our other leaders to take back the company from the federal government and regain our rightful place as one of the best companies in the world. In return, just know that you can count on me. As this special award is being made to a very select group of executives, I ask that you treat it as confidential. Thank you again for your hard work and the sacrifice that you and your family have made for AIG.
Very sincerely,
Edward M. Liddy

Each installment is payable if you are employed with the company through the respective installment date. You also will receive these payments if your employment is terminated prior to December 31, 2009 for any reason other than Cause. (Cause is conduct involving fraud, intentional misconduct, gross negligence or material violation of AIG policy.) Furthermore, in the event the AIG entity that is your employer (the "Company") experiences a Change in Control (e.g., consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the sale or other disposition of all or substantially all of the Company's assets to an entity that is not an affiliate of the Company), AIG guarantees the payment of the 2008 Special Cash Retention award on the dates and under the conditions specified above.

Causes of the Crisis
Editor’s note: These remarks were delivered to a meeting of the Texas Lyceum in Austin on April 3, at a debate between University of Texas professor James Galbraith, an Observer contributing writer, and former Majority Leader Richard Armey, chief instigator of the recent Astroturf “tea party" protests. Armey had begun his remarks by noting that his rule in life was “never trust anyone from Austin or Boston,” and proceeded to declare his allegiance to the “Austrian School” of economics, a libertarian view that regards public intervention in private markets as socialism.

It is of course a pleasure to be with you today. I was born in Boston, and I am proud of it. And I have lived 24 years in Austin—and I’m proud of that. Leader Armey spoke to you of his admiration for Austrian economics. I can’t resist telling you that when the Vienna Economics Institute celebrated its centennial, many years ago, they invited, as their keynote speaker, my father [John Kenneth Galbraith]. The leading economists of the Austrian school—including von Hayek and von Haberler—returned for the occasion. And so my father took a moment to reflect on the economic triumphs of the Austrian Republic since the war, which, he said, “would not have been possible without the contribution of these men.” They nodded—briefly—until it dawned on them what he meant. They’d all left the country in the 1930s.

My own economics is American: genus Institutionalist; species: Galbraithian. This is a panel on the crisis. Mr. Moderator, you ask what is the root cause? My reply is in three parts.
  • First, an idea. The idea that capitalism, for all its considerable virtues, is inherently self-stabilizing, that government and private business are adversaries rather than partners; the idea that freedom without responsibility is a viable business principle; the idea that regulation, in financial matters especially, can be dispensed with. We tried it, and we see the result.
  • Second, a person. It would not be right to blame any single person for these events, but if I had to choose one to name it would be a Texan, our own distinguished former Senator Phil Gramm. I’d cite specifically the repeal of the Glass-Steagall Act—the Gramm-Leach-Bliley Act—in 1999, after which it took less than a decade to reproduce all the pathologies that Glass-Steagall had been enacted to deal with in 1933. I’d also cite the Commodity Futures Modernization Act, slipped into an 11,000-page appropriations bill in December 2000 as Congress was adjourning following Bush v. Gore. This measure deregulated energy futures trading, enabling Enron and legitimating credit-default swaps, and creating a massive vector for the transmission of financial risk throughout the global system. When the Washington Post caught up with me at an airport in Parkersburg, West Virginia, a year ago to ask for a comment on Gramm’s role, I said very quickly that he was “the sorcerer’s apprentice of financial instability and disaster.” They put that on the front page. I do have to give Gramm some credit: When the Post called him up and read that to him, he said, “I deny it.”
  • Third, a policy. This was the abandonment of state responsibility for financial regulation: the regulation of mortgage originations, of underwriting, and of securitization. This abandonment was not subtle: The first head of the Office of Thrift Supervision in the George W. Bush administration came to a press conference on one occasion with a stack of copies of the Federal Register and a chainsaw. A chainsaw. The message was clear. And it led to the explosion of liars’ loans, neutron loans (which destroy people but leave buildings intact), and toxic waste. That these were terms of art in finance tells you what you need to know.

Subprime securities are inherently unsafe and should never have been permitted. They are based on loans to borrowers who cannot document their income and who may have bad credit histories, and they are collateralized by houses with fraudulently inflated appraisals, rated by agencies that did not examine the loan files. Writing in The Washington Post, Richard Cohen described one case, of Marvene Halterman of Avondale, Arizona:
At age 61, after 13 years of uninterrupted unemployment and at least as many of living on welfare, she got a mortgage. She got it even though at one time she had 23 people living in the house (576 square feet, one bath) and some ramshackle outbuildings. She got it for $103,000, an amount that far exceeded the value of the house. The place has since been condemned. ... Halterman’s house was never exactly a showcase—the city had once cited her for all the junk (clothes, tires, etc.) on her lawn. Nevertheless, a local financial institution with the cover-your-wallet name of Integrity Funding LLC gave her a mortgage, valuing the house at about twice what a nearby and comparable property sold for. ... Integrity Funding then sold the loan to Wells Fargo & Co., which sold it to HSBC Holdings PLC, which then packaged it with thousands of other risky mortgages and offered the indigestible porridge to investors. Standard & Poor’s and Moody’s Investors Service took a look at it all, as they are supposed to do, and pronounced it ‘triple-A.’”

The consequence of tolerating this and like behavior is a collapse of trust, a collapse of asset values, and a collapse of the financial system. That is what has happened, and what we have to deal with now. Can “stimulus” get us out? As a matter of economics, public spending substitutes for private spending. It provides jobs, motivates useful activity, staves off despair. But it is not self-sustaining in the absence of a viable private credit system. The idea that we will be on the road to full recovery and returning to high employment in a year or so therefore seems to me to be an illusion. And for this reason, the emphasis on short-term, “shovel-ready” projects in the expansion package, while understandable, was a mistake. As in the New Deal, we need both the Works Progress Administration, headed by Harry Hopkins, to provide employment, and the Public Works Administration, headed by Harold Ickes, to rebuild the country.

The desire for a return to normal is very powerful. It motivates both the ritual confidence of public officials and the dry numerical optimism of business economists, who always see prosperity just around the corner. The forecasts of these people, like those of official agencies such as the Congressional Budget Office, always see a turnaround within a year and a return to high employment within four or five years. In a strict sense, the belief is without foundation. Liquidation of excessive debt is now, and will remain for a time, the highest priority of American households. That is in part because for the moment they want to hold on to cash, and therefore they do not wish to borrow, and in part because with the collapse of house values, they no longer have collateral to borrow against. And so long as that is the case, there can be no strong recovery of private spending or business investment.

The risk we run, in public policy, is not inflation. It is lack of persistence, a premature reversal of direction, and of course the fear of large numbers. If deficits in the trillions and public debt in the tens of trillions scare you, this is not a line of work you should be in. The ultimate goals of policy are not measured by deficits or debt. They are measured by the performance of the economy itself. Here Leader Armey and I agree. He spoke with approval, in his remarks, of the goals of 3 percent unemployment and 4 percent inflation embodied in the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978. Which, as a 24-year-old member of the staff of the House Banking Committee in 1976, I drafted.

Banking Fortunes – From 'Catastrophic!' to 'Just Awful'!
by : Satyajit Das

The recent rally in equity markets – the largest for decades – was predicated, in part, on the improving fortune of banks. Banks reported better than expected profits. U.S. banks seem likely to pass the “stress” test. Repayment of taxpayers funds by some institutions, at least, seemed imminent. Scrutiny suggests that the episode reflected Adlai Stevenson’s logic: “These are conclusions on which I base my facts.” Banks beat “well managed” low-ball expectations. In the last quarter of 2008, publicly traded banks lost $52 billion. Despite a return to profitability for some institutions, in the first quarter of 2009, banks are still expected to lose around $34 billion. For example, UBS and Morgan Stanley recorded losses. The quality of earnings was questionable. Core businesses declined by 20-30%. Trading revenues, especially fixed income, rose sharply at most big banks reflecting high volumes of bond issuance, especially investment grade corporate issues and government guaranteed bank debt.

Corporate issuance was the result of the continued tightening in credit availability as banks reduced balance sheet. The issuance of government guaranteed bank debt provided underwriters with a “double subsidy” – the government guaranteed the debt but then allowed the banks to earn generous fees from underwriting government guaranteed debt. High volatility generated strong trading revenues. Key factors were increased client flows and increases in bid-offer spreads (by up to 300% in some products). High trading revenues also reflect principal position taking and trading. It will be interesting to see if trading revenues are sustainable. Questions remain about the impact of payments by AIG to major banks. Conspiracy theories notwithstanding, it seems likely that these were collateral amounts due to the counterparty or settlement of positions that were terminated. At a minimum, the banks benefited from a one-off increase in trading volume and also larger than normal bid-offer spreads on these closeouts reflecting the distressed condition of AIG.

The banks also benefited from revaluing their own debt where credit spread widened. The theory is that the bank could currently purchase the debt at a value lower than face values and retire them to recognise the gain. Unfortunately, banks are not in position to realise this “paper” gain and ultimately if the debt is repaid at maturity then the “gain” disappears. If you are confused then revaluation of issued debt worked differently at Morgan Stanley. The bank would have been profitable without a $1.5bn accounting charge caused by an increase in the price of its debt from lower credit spreads. Earning were also helped by a series of one-off factors. Bank of America realised a large gain on the sale of its stake in China Construction Bank and also revalued some acquired assets as part of the closing of its Merrill Lynch acquisition. Goldman Sach’s changed its balance date reporting results to the end of March rather than February. Given that its last financials were for the year to the end of November 2008, Goldmans separately reported a loss for December 2008. It is not clear how much Goldmans Sachs profit benefited from the change in the reporting dates.

Barclays Bank recently sold its iShares unit (a profitable unit which contributed around 50% of the earnings of BGI (Barclays Global Investors) to a private equity firm for $4.2 billion allowing the bank to book a gain of $2.2 billion that boosted capital ratios. CVC Capital only paid $1.05 billion with the rest ($3.1 billion) being borrowed from Barclays itself. The loan was for 5 years and Barclays is required to keep the majority of the debt on balance sheet for at least five years. In effect, the gain and capital increase is lower than the cash received (in effect, Barclays is treating part of its loan as profit and capital!). In addition, senior executives of Barclays received substantial gains from the sale under a compensation scheme where BGI employees received shares and options over (up to) 10.3 % of the division’s equity.

Effects of changes in mark-to-market accounting standards, which arguably reflected political and industry pressure, are also not clear. New guidance permits banks to exclude losses deemed “temporary” and also allows significant subjectivity in valuing positions. This may improve the financial position and overstate both earnings and capital. Some commentators believe that the changes could increase earnings by up to 10 to 15% and capital by up to 20%. The market ignored continuing increases in bad debts and provisions. After all “that’s so yesterday!” Further losses are likely in consumer lending (e.g. mortgages, credit cards and auto loans), corporate and commercial lending. In recent years, it has become an article of accepted faith that corporate debt levels have fallen. In aggregate, that is perfectly true. However, the debt has become concentrated in a number of sectors - commercial property, merger financing, private equity/ leveraged finance and infrastructure and resource financing.

The overall quality of debt has deteriorated significantly. In 2008, over 70% of all rated debt were non-investment grade (“junk”). This is an increase from less than 30% in 1980 and around 50% in 1990. The debt is also heavily reliant on collateral; the loans are secured against financial assets (shares and property). Reduced ability to service the debt and falling collateral values may prove problematic. For example, the recent distressed sale of the John Hancock Tower produced around 50% of the value paid a few years earlier. In April 2009, the International Monetary Fund (“IMF”) estimated that banks and other financial institutions face aggregate losses of $4.1 trillion, an increase from $2.2 trillion in January 2009 and $1.4 trillion in October 2009. Around $2.7 trillion of the losses are expected to be borne by banks. The IMF estimated that in the United States banks had reported $510 billion in write-downs to date and face additional write downs of $550 billion. Euro zone banks had reported $154 billion in write-downs face a further $750 billion in losses. British banks had written down $110 billion and face an additional $200 billion in write offs.

Banks may not be properly provisioned for these further write-downs. Recent accounting standards made it difficult for banks to dynamically provision whereby banks provided in low loss years for any eventual increase in loans losses when the economic cycle turns. Criticisms regarding income smoothing led to this practice being discontinued. Increasing bad debt will flow directly into bank earnings as credit losses increase as the real economy slows. The stress tests do not provide comfort regarding the health of the banks. As Nouriel Roubini, Chairperson of RGE Monitor, has pointed out the likely macro-economic environment is likely to be significantly worse than the adverse scenarios used. The Federal Reserve hinted that banks even banks that passed the “stress test” would be required to hold extra capital. This is puzzling as surely a bank is appropriately capitalised or it is not. Given that the test is the basis for setting solvency capital requirements, this is hardly reassuring or a guarantee that further taxpayer funded recapitilisation of the banking system is not going to be needed.

The proposal floated by some banks to return taxpayer capital misses an essential point. The banks did not offer to waive the government/ FDIC guarantees, which have allowed them to fund in the capital markets. The suspicion is that the proposal had more to do with avoiding close public scrutiny of compensation and hiring practices. Goldman’s compensation costs increased 18% in the first Quarter while employee numbers were down around 7% translating into a 27% increase in employee costs. The reality is that the global economic system is de-leveraging and levels of debt must be reduced. As result, asset values are declining and sustainable growth levels have fallen significantly. In this environment, banks are likely to continue to suffer losses on assets (bad debts and further write offs) and earnings will remain sluggish (lower loan demand and lower levels of financial transactions). Higher funding costs and the need to raise capital compound the difficulties. For the banks currently: “On the liability side, some things aren’t right and on the asset side, nothing’s left.”

Many major global bank shares are still, on average, trading at levels 70%-90% below their highs. Following the collapse of the “bubble” economy, Japanese banks staged a number of significant recoveries in share price before falling sharply necessitating government intervention to recapitalise and consolidate the banking system. There seems to be a patent unwillingness to admit to and confront the problems facing the industry. Recognition of the problem is generally a prerequisite to working towards a solution. Amusingly, Peter Hahn, a former managing director of CitiGroup and now a fellow at London’s Cass Business School was reported by Bloomberg as saying: “When you look at the income numbers that have been put out by banks recently they contain so much fudge and financial manipulation. You could say that the automobile industry has a clearer future at the moment.” Banks have gone from catastrophic to just awful. By most standards, that condition does not constitute a necessary and sufficient condition for a recovery in the global economy.

Citi Said to Need Up to $10 Billion
Citigroup Inc. may need to raise as much as $10 billion in new capital, according to people familiar with the matter, as the government continues negotiations with banks over the results of its so-called stress tests. The bank, like many others, is negotiating with the Federal Reserve and may need less if regulators accept the bank's arguments about its financial health, these people said. In a best-case scenario, Citigroup could wind up having a roughly $500 million cushion above what the government is requiring. The discussions stem from the tests being run by the Fed and the Treasury to assess the health of the country's 19 largest banks. Those results will be released Thursday, later than initially planned.

The tests will predict each bank's potential losses in certain asset categories under dire economic scenarios. The government is expected to direct several banks, including Bank of America Corp., to bolster their capital by raising new funds or converting existing securities into common stock. The government's strong preference is for banks in need of fresh capital to raise it either through private investors or selling assets, officials say. That won't be an option for certain weaker banks, who may have to give the government big stakes in their common equity to boost capital levels. Such a move would help fill banks' capital needs but would also raise thorny questions about how large a role the U.S. might play in their daily operations.

The Obama administration is expected soon to outline what type of investor it will be in companies where it has a stake, according to people familiar with the matter. The Treasury is discussing applying different levels of governance depending on the size of the U.S. government's stake. The overall goal is to get out of the investments as quickly as is possible and minimize government intervention in banks' operations.
The outcome of the stress tests could play a major role in shaping the next phase of the U.S. government's intervention in the nation's ravaged financial system. After the results, banks will have 30 days to give the government a plan and six months to put it into effect. The banks are expected to reveal their plans next week. Concerned about investor and depositor panic, government officials have said banks needing more capital should not be viewed as being at risk of collapse. In fact, the government has said it would not allow any of the 19 banks undergoing the test to fail.

Some banks still might need to seek more money from the government. Goldman Sachs Group Inc. and J.P. Morgan Chase & Co., widely regarded as two of the nation's strongest banks, aren't expected to be required to boost capital, according to people familiar with the matter. It's not clear whether officials will permit the banks to immediately repay the government's existing investments in these banks. The stress tests are a central part of the Obama administration's effort to restore confidence in the U.S. banking system. They have met resistance from top bank executives who complain the government's estimates are wrong and too theoretical. The Fed has told bank executives it's looking at a measurement of capital called "tangible common equity," which essentially measures what shareholders would have left if a company were liquidated. Some bankers say the Fed wants them to hold TCE equivalent to at least 4% of their risk-weighted assets, under the stress-test scenarios.

Banks have been scrambling over the past week to refute the Fed's preliminary conclusions. Bankers say those negotiations are part of the reason the government has pushed back its announcement of the results. "The gloves have been taken off, and there's some real battles going on right now," said Gerard Cassidy, a bank analyst with RBC Capital Markets. Government officials originally hoped to release the results May 4. The plan now is to do so after U.S. stock markets close May 7. A smooth release is a critical component of the effort, as policy makers fear investors could punish banks that appear to have performed poorly. "I would not read anything into the delay and results, except the notion that regulators and the administration want to get this right from the very beginning," White House spokesman Robert Gibbs said. Citigroup announced Friday it was selling its Japanese brokerage business for about $7.9 billion, a deal that will boost the company's tangible common equity by about $2.5 billion. The New York-based company has argued the Fed should give Citigroup credit for the planned transaction, along with other pending sales, as it tabulates the company's capital levels.

Under an earlier government effort to stabilize Citigroup, which involved a conversion of preferred stock into common, the U.S. was going to end up with 36% of Citigroup's common stock. To raise new capital, Citigroup is likely to broaden the conversion to include preferred securities held by private investors. The end result will likely leave Washington holding about the same amount as previously envisioned. Some banks are haggling with the Fed over how it calculated their projected 2009 and 2010 revenues -- a central factor in gauging banks' ability to absorb losses. Some have pushed the Fed to use their strong first-quarter performances as a baseline, even though many acknowledge their first-quarter results are likely unsustainable.

Fiat chairman calls GM's Opel an 'ideal partner'
Fiat SpA reportedly confirmed interest in General Motors Corp.'s Opel division in a move that would further extend the Italian automaker's global reach as it grapples with the historic industry downturn. Fiat Chairman Luca Cordero di Montezemolo told Italian newspaper Corriere della Sera in an interview published Sunday that Opel would make an "ideal partner" and that a possible takeover by Fiat presents an "extraordinary opportunity." Fiat last week completed a deal with Chrysler LLC giving it a 20% stake in the bankrupt U.S. car maker that would rise to 35% as certain milestones are reached. Fiat CEO Sergio Marchionne will meet with German government officials in Berlin on Monday to discuss an offer for Opel, GM's German unit, according to media reports. Marchionne previously said Fiat needs to sell between 5.5 million and 6 million vehicles to survive the current automotive industry crisis. With Chrysler in the fold, the combined company's sales come in at about 4.2 million vehicles a year.

Fiat SpA reportedly vowed last month to keep open all four Opel production sites if it eventually acquires the company. GM, in an attempt to overhaul its operations and justify billions of dollars in federal money, has been shopping around its Opel brand and has garnered some interest from Canadian parts maker Magna International GM, which could follow Chrysler into bankruptcy within weeks, is looking to shutter several brands to focus on its core lineup of Chevrolet, Buick, GMC and Cadillac. Pontiac was the most recent casualty of the vast restructuring, with GM aiming to phase out the brand by next year.

Bernie Madoff
by Michael Moore

Elie Wiesel called him a "God." His investors called him a "genius." But, proving correct that old adage from the country and western song, you never really know what goes on behind closed doors.
Bernie Madoff, for at least 20 years, ran a Ponzi scheme on thousands of clients, among them the people you and I would consider the best and brightest. Business leaders, celebrities, charities, even some of his own relatives and his defense attorney were taken for a ride (this has to be the first time a lawyer was hosed by the client). We're clearly in one of those historic, game changing years: up is down, red is blue and black is President. Aside from Obama himself, no person will provide a more iconic face of this end-of-capitalism-as-we-know-it year than Bernard Lawrence Madoff.

Which is too bad. Yes, he stole $65 billion from some already quite wealthy people. I know that's upsetting to them because rich guys like Bernie are not supposed to be stealing from their own kind. Crime, thievery, looting — that's what happens on the other side of town. The rules of the money game on Park Avenue and Wall Street are comprised of things like charging the public 29% credit card interest, tricking people into taking out a second mortgage they can't afford, and concocting a student loan system that has graduates in hock for the next 20 years. Now that's smart business! And it's legal. That's where Bernie went wrong — his scheming, his trickery was an outrage both because it was illegal and because he preyed on his side of the tracks.

Had Mr. Madoff just followed the example of his fellow top one-percenters, there were many ways he could have legally multiplied his wealth many times over. Here's how it's done. First, threaten your workers that you'll move their jobs offshore if they don't agree to reduce their pay and benefits. Then move those jobs offshore. Then place that income on the shores of the Cayman Islands and pay no taxes. Don't put the money back into your company. Put it into your pocket and the pockets of your shareholders. There! Done! Legal! But Bernie wanted to play X-games Capitalism, run by the mantra that's at the core of all capitalistic endeavors: Enough Is Never Enough. You have the right to make as much as you can, and if people are too stupid to read the fine print of their health insurance policy or their GM "100,000-mile warranty," well, tough luck, losers. Buyers beware!

It would be too easy — and the wrong lesson learned — to put Bernie on TIME's list all by himself. If Ponzi schemes are such a bad thing, then why have we allowed all of our top banks to deal in credit default swaps and other make-believe rackets? Why did we allow those same banks to create the scam of a sub-prime mortgage? And instead of putting the people responsible in the cell block in Lower Manhattan, where Bernie now resides, why did we give them huge sums of our hard-earned tax dollars to bail them out of their self-inflicted troubles? Bernard Madoff is nothing more than the scab on the wound. He's also a most-needed and convenient distraction. Where's the photo on this list of the ex-chairmen of AIG, Merrill Lynch and Citigroup?

Where's the mug shot of Phil Gramm, the senator who wrote the bill to strip the system of its regulations, or of the President who signed that bill? And how 'bout those who ran the fake numbers at the ratings agencies, the lobbyists who succeeded in making sleazy accounting a lawful practice, or the stock market itself — an institution that's treated like the Holy Sepulchre instead of the casino that it is (and, like all other casinos, the house eventually wins). And what of Madoff's clients themselves? What did they think was going on to guarantee them incredible returns on their investments every single year — when no one else on planet Earth was getting anything like that? Some have admitted they did have an inkling "something was up," but no one really wanted to ask what it was that was making their money grow on trees. They were afraid they might find out it had nothing to do with gardening.

Many of Madoff's victims have told investigators that, over the years, they have made much more than the original investment they gave Bernie. If I buy a stolen car from the guy down the street, the police will take that car from me regardless of whether I knew it was stolen. If I knew it was stolen, then I go to jail for receiving stolen property. Will these "victims" give back their gains that were fraudulently obtained? Will the head of Goldman Sachs reveal what he was doing at the meetings with the Fed chairman and the Treasury secretary before the bailout? Will Bank of America please tell us what they've spent $45 billion of our TARP money on? That's probably going too far. Better that we just put Bernie on this list.

'China cancels America's credit card'
China, wary of the troubled US economy, has 'canceled America's credit card' by cutting down purchases of debt, a US congressman says. China has the world's largest foreign reserves, believed to be mostly in dollars, along with around 800 billion dollars in US Treasury bonds, more than any other country. But data from the Treasury Department shows that investors in China have sharply curtailed their purchases of bonds in January and February. Representative Mark Kirk, a member of the House Appropriations Committee and co-chair of a group of lawmakers promoting relations with Beijing, said China had 'very legitimate' concerns about its investments. "It would appear, quietly and with deference and politeness, that China has canceled America's credit card," Kirk told the Committee of 100, a Chinese-American group.

Kirk said he was the first member of Congress to tour the Bureau of Public Debt, which trades bonds, and was alarmed at how much debt was being bought by the US Federal Reserve due to absence of foreign investors. "There will come a time where the lack of Chinese participation may have a significant impact," Kirk said. With China's economy also hit by the global economic crisis, Premier Wen Jiabao has openly voiced concern about the status of his country's investments in the United States. China has also floated replacing the dollar as the key international currency with a basket of units bringing in the euro, sterling and yen.

US Colleges Flunk Economics Test as Harvard Model Destroys Budgets
On a Thursday morning in March, the $32 million School of Management building at Simmons College in Boston is all but deserted. Three students lounge in armchairs facing floor-to-ceiling windows that look over the quad with its winding walkways and greening lawn; another makes photocopies. "This building is always empty," says Raya Alazzouni, a sophomore from Saudi Arabia who’s studying graphic design and taking courses in the management school. Simmons, home to 4,700 students, opened the 66,500-square- foot (6,200-square-meter) center in January, two months before the U.S. stock market hit its lowest point in 12 years. Even before the ribbon cutting, enrollment in the management school had been dropping. Now, the vacant halls are reminders of the new math confounding U.S. colleges. Students, pummeled by scarce loans and savings plans that have fallen as much as 40 percent, are heading for less expensive schools. The perks designed to lure them during boom times -- from hot tubs to dorm-suite kitchenettes, to in-room cable TV -- are crushing universities with debt. Even projects like Simmons’s "green" management building, with its rain-absorbing roof patio and toilets with two flushing modes, can turn into burdens as schools struggle with rising expenses, plummeting endowments and needier applicants.

"The spending binge by colleges and universities was part of the same trend that created the bubble in the rest of the economy," says Ronald Ehrenberg, an economics professor at Cornell University in Ithaca, New York, and author of "Tuition Rising: Why College Costs So Much" (Harvard University Press, 2000). "Now we’re seeing it burst." From Harvard University to California’s 3 million-student community college network, the American system of higher education is in turmoil. The economic crash is upending each step in the equation that families use to determine where students will spend four of their most formative -- and expensive -- years. Today is the deadline that most schools set to receive a decision from accepted applicants. Independent colleges that lack a national name or must-have majors are hardest hit. Many gorged on debt for construction, technology and creature comforts. Now, as endowments tumble and bills mount, they’re struggling to attract cash-strapped families who are navigating their own financial woes.

Such mid-tier institutions may be forced to change what they do to survive. In the best case, they’ll merge with bigger schools, sell themselves to for-profit organizations or offer vocational training that elite colleges eschew, says Sandy Baum, a senior policy analyst at the College Board. In the worst case, they’ll shutter their doors for good. Standard & Poor’s predicts bankruptcies will rise from the typical one or two schools that fold each year. "Small colleges with no reputation could go out of business," Baum says. "They’re very tuition-driven, so if they can’t get tuition revenues, they’ll be in really bad shape." College of Santa Fe, a private liberal arts institution, is one casualty. On March 24, the 1,900-student school in New Mexico announced it was closing. The reasons: It couldn’t pay its $30 million in debt, and talks to join with New Mexico Highlands University, a state school, broke down. Richard Kneedler, a former president of Franklin & Marshall College, a Lancaster, Pennsylvania-based college founded in 1787 with financial support from Benjamin Franklin, says many small schools face the same predicament.

Kneedler says 207 independent colleges, or almost a third of the 678 he analyzed, don’t have enough capital to keep going for the long haul -- a 35 percent surge from a year ago. These schools are at risk of closing during a prolonged crisis. Failures would rise further if the recession persists beyond 2009, says Kneedler, who’s now a management consultant at Towson, Maryland-based Yaffe & Co. "If the markets normalize in a year, most might survive," he says. "If we’ve got a second year like this, the number of schools in danger will multiply by 10." Simmons, founded in 1899, educates a mix of 1,900 female undergraduates and 2,800 graduate students. Its women-only undergraduate liberal arts program accepts 56 percent of applicants; top-tier schools accept fewer than 20 percent. Simmons has five graduate schools, from the 200-student School of Management to the 1,100-student College of Arts & Sciences Graduate Studies. Colleges like Simmons -- mainly undergraduate schools offering some master’s degree programs -- are in the worst financial shape, according to Kneedler’s analysis. They turned to borrowing for the amenities they used to entice students to small programs. Now, they’re drowning in debt, Kneedler says.

Simmons President Helen Drinan says she hopes the new building and accreditation in March by the Association to Advance Collegiate Schools of Business will make it easier to market the School of Management to prospective students. The school hired Deloitte LLP’s higher education advisory unit to suggest ways to navigate its current bind and to find further savings. If these ideas don’t work, the business school may have to go co-ed or abandon its emphasis on MBAs to focus on undergraduate business degrees. Drinan bets Simmons won’t have to go that route. It should be able to keep its undergraduate enrollment steady and increase students in its graduate programs, including the business school, she says. "If that school cannot grow, then we have another decision to make," she says. "There’s been a lot of political anxiety around campus over the fact that the School of Management is a relatively small program. Now we’re in a position to say, ‘Let’s run with it.’" Like the housing bubble, Simmons’s woes started with easy credit. The school borrowed more than $140 million, tripling its debt in the seven years through 2008. It added classrooms connected via wireless networks. It renovated its library. And it spruced up its student center with a coffee bar and mix-your- own-milkshake cafeteria. "That was a pretty bold borrowing strategy," Kneedler says.

Simmons followed suit as U.S. colleges jacked up tuition by an average of 3 percent above inflation every year. It counted on a rising endowment, parents’ bull-market-fed wealth and burgeoning private loans that more than doubled student debt from 1998 to 2008. Simmons raised annual tuition and living expenses to $41,500 in 2008, 22 percent above the $34,132 average for private colleges. Sarah Lawrence College in Bronxville, New York, the costliest U.S. school, charged $53,166 last year. Then credit markets collapsed. Simmons -- and even better- known schools such as nearby Boston University -- felt the aftershocks. Like many now-struggling companies and municipalities, Simmons had sold variable-rate bonds and hedged against rising interest rates through swap agreements, which fixed interest costs for the school. When rates fell, Simmons owed more than $10 million on the swaps. When it refinanced the bonds, it had to accept more than triple the interest rate it had been paying before the crisis. Drinan expects to settle the swap with bankrupt Lehman Brothers Holdings Inc. at a lower cost. Wall Street provided the tools for schools to take advantage of cheap credit. Bankers introduced college finance executives to the interest-rate swaps and similar innovations that are now costing colleges, says Andrew Evans, vice president for finance at Wellesley College in Massachusetts.

"All these investment banks were offering a wide variety of products," he says. "It’s not like the schools and universities thought of these themselves." Last fall, Moody’s Investors Service and S&P downgraded Simmons’s debt by one grade to three grades above junk, citing projected budget deficits. Since then, Simmons has trimmed its $100 million budget by $5 million. It wants to cut another $2 million by June. It boosted tuition and living expenses by 5 percent to $43,500 for the 2009-10 school year. The president’s residence, a two-story redbrick mansion 3.5 miles (5.6 kilometers) from campus, is for sale for $2.2 million. "I don’t know why they did the School of Management building," says Katelyn Scalera, 19, a sophomore from Massachusetts’s Cape Cod, who’s studying nursing. "They didn’t have the money for it, so we’re further in debt. And then they announce these cuts and increase tuition." With families hurting, Drinan says it will be difficult for Simmons and its rivals to entice more students. "Every college and university in America is worried about that," she says. "Higher education needs to pay attention to its cost structure, but we have to have the facilities that are necessary to house and teach our students."

Simmons’s neighbors around Boston, a 4,466-square-mile metropolitan area packed with 53 institutions of higher education, are mired in their own financial messes. Even Cambridge, Massachusetts-based Harvard, whose endowment almost tripled to $36.6 billion in the past decade, is offering buyouts to 1,600 nonfaculty employees. In mid-April, Harvard’s Faculty of Arts and Sciences said it would slash 19 percent, or $220 million, from its $1.15 billion budget over two years because of endowment losses. Harvard’s holdings plunged 22 percent in the second half of last year, leaving a $52 million budget gap. In December, falling interest rates had already forced Harvard to sell $500 million of bonds to cover swaps it had bought to protect against rising rates. Harvard will have to sell more assets to meet its obligations to private equity firms in coming years, says Steven Davidoff, a law professor at the University of Connecticut, who has studied the school’s endowment. Private equity firms require commitments from investors for more money when buying opportunities pop up.

Across the Charles River, Boston University, with more than 30,000 students, has frozen staff hiring and salaries. It spent more than $500 million in the past five years on a 6,300-seat ice hockey arena, home to the 2009 men’s national champions, and dorms with two- to four-bedroom suites. Another centerpiece, the $100 million fitness center, features a 35-foot (11-meter) rock- climbing wall, indoor track, Olympic-size pool and hot tub. "I’m very athletic, so when I saw the gym during my first campus tour before I came here, it was a very important factor in my college choice," says Katie Burr, 21, a junior from Canton, Massachusetts, who’s wearing baggy basketball shorts on her way to exercise there. Both Boston University and Harvard have halted construction projects after they and other U.S. colleges spent $93 billion on new buildings and renovations from 2002 to 2008. That’s almost double the $48 billion spent in the previous seven years, according to trade magazine "College Planning & Management." The trauma is worse for small schools like Simmons that lack national cachet. About 20 percent of private colleges reported that fewer students returned this past September compared with the previous year, according to the National Association of Independent Colleges and Universities.

As students leave these private schools, pressure builds on cheaper public universities, which are navigating their own funding shortfalls. Colleges in South Carolina are getting 18 percent less in state aid this year; Florida schools are seeing a 9 percent drop. Meanwhile, their populations are growing: California’s community college system has 100,000 more students this year without additional funds. "What’s worrisome is states cutting budgets," says Patrick Callan, president of the National Center for Public Policy and Higher Education. "Those schools won’t have enough money to educate their growing populations." The administration of Barack Obama is boosting aid to reeling families. It may not be enough. The president is increasing grants and tax credits and expanding federal loans. "Economic progress and educational achievement have always gone hand in hand in America," Obama, a Columbia College and Harvard Law School graduate, said in a March speech. In February, he increased the maximum annual amount for a Pell grant, a government scholarship for needy students, by $619. It’s now $5,350 for the 2009-10 school year. He also replaced the so-called Hope tax credit, which was limited to $1,800 per student and covered only the first two years of schooling. Now there’s a $2,500 credit for all four years. Families who make less than $180,000 a year -- the income limit was almost doubled -- can deduct that amount annually from their taxes.

"Pell serves the neediest students, but our middle-class families need help too right now," says Eileen Wilson-Oyelaran, president of Kalamazoo College, a liberal arts school in Michigan. Battered on all fronts, many families are recalculating whether the return on their college investment is worth the cost. In New Hope, Pennsylvania, a historic town and tourist spot on the Delaware River, Tim and Laura McNamara are weighing whether to send their son, Daniel, to Gettysburg College, with its $48,050 annual tab for tuition and expenses. The 2,600- student liberal arts school next to the Civil War battlefield in Pennsylvania is his top choice. Daniel applied early decision and was accepted in November, without getting financial aid. A few months later, Philadelphia- area schools, including Arcadia University, Drexel University and La Salle University, sent their acceptance letters. Daniel, 18, got offers that would cut the price of his education in half, Tim McNamara says. Even though they can afford Gettysburg, Tim and Laura worry one of them could lose his or her job -- Tim’s as a software company executive or Laura’s as a medical affairs director. They’re anxious that their savings may decline further and have asked Gettysburg to reconsider its lack of aid or relieve them of Daniel’s commitment to attend. Students accepted under early- decision programs are required to enroll in that school.

"Gettysburg has a little bit better brand name," Tim McNamara says. "But he can get a great education at all these schools, so we’re not sure whether the $25,000 difference is worth that small difference in reputation." For Carl Erickson and Mary O’Neill of Grand Rapids, Michigan, the answer to the "Is it worth it?" question is yes. They’ll pay the extra $43,000 a year for their daughter, Caroline, to attend Northwestern University in Evanston, Illinois, outside Chicago, if she gets in and chooses it over the University of Michigan in Ann Arbor, a state school. Caroline, a high school junior who turns 17 in June, wants a big-city experience. She might find the art design program at Northwestern a better fit, her father says. The family would spend $10,848 at Michigan compared with $53,608 at Northwestern. "If she decides Northwestern has something that Michigan doesn’t give you, then we’ll pay for it," says Carl Erickson, 47, who owns a software company. One thing that has kept families shelling out for higher education of any ilk is the return their children get on the investment. People between the ages of 25 and 34 with college degrees make on average $50,900 a year, or 62 percent more than those without, the College Board says. With an annual gap of about $20,000 a year, it takes about 10 years to recoup a $200,000 investment in a college degree.

For current students, the new reality as they pursue their degrees is crowded classrooms and fewer courses. Kirstin Gardzina, a sophomore studying nursing at Simmons, says that when she showed up for her first microbiology class in September, there weren’t enough chairs because enrollment had shot up to 60 from the more typical 40. Kalamazoo College, with 1,340 students, has told professors to increase class sizes so it can boost tuition revenue. California community colleges are cramming in more people to fulfill their legal mandate to accept every student who applies. "We’re bursting at the seams," says Jack Scott, chancellor of the community college system. "We’re trying to serve as many people as possible, but we can’t serve everyone without increased funding." As colleges scale back, some students are changing what they study. Heather Demali, 20, a sophomore majoring in biology at the College of Wooster in Ohio, says she might have to drop her two minors: geology and environmental studies. Wooster offers some courses once and may not repeat them for several years, making it tough to fulfill her requirements. "Scheduling has become a nightmare," she says.

That’s a far cry from the bubble years when schools raced to offer the biggest and best -- from dorm rooms to exercise equipment, to food courts -- because that’s what families demanded. "The student coming out of high school today is a very different student than I was," says Robert Brown, president of Boston University. "We participated in the arms race to create community just like all other high-quality undergraduate institutions." Deborah Moore, publisher and executive editor of "College Planning & Management" magazine, which tracks campus construction, says families were willing to spend to give their children what they had at home. "When you live in a 3,000- to 4,000-square-foot home, each kid has their own room," Moore says. "They don’t know anything else. So they demand singles, apartment-style quarters. Today’s kid is more spoiled because that’s what the experience is at home." At the University of California, Irvine, the Vista del Campo Norte student apartment complex looks like a five-star hotel. At night, the curvy outdoor swimming pool is illuminated by underwater floodlights. At Kalamazoo College, the main cafeteria, which the school renovated as part of $14.5 million in spending on the student center last year, lets students pick among pizza, hamburgers, grilled vegetables, make-your-own salads and a dozen other choices.

On a Wednesday afternoon in March, Ryan Hagerty, a Boston University junior who lives in the so-called student village that sports suites with kitchens and private bathrooms, is typing away on his WiFi-connected laptop at the Buick Street Market & Cafe on the ground floor of his dorm. "I probably won’t be living in such a nice building for a while after graduating," says Hagerty, 20, who’s from Easton, Massachusetts. "I don’t think this building or the arena are necessary; they’re over the top a bit." Even so, he says he wouldn’t choose to live anywhere else while his father pays for full tuition and living expenses of $48,468 this school year. Boston University, where research funding of about $450 million in 2008-09 accounted for a quarter of its operating budget, is surviving the crash because it relies less than rivals on endowment income, Brown says. The endowment provides 3 percent of its operating budget compared with 15 percent at Wooster. BU has enough of a reputation to fill its ranks so tuition revenue will remain consistent, he says. Beloit College in Wisconsin, where tuition accounts for three-quarters of its income, doesn’t have as many options. It got trapped in a $1 million budget shortfall when it slid 36 students short of projected enrollment in September. The liberal arts college, with 1,282 students, had to fire 40 people, including three faculty members. With a 70 percent acceptance rate, Beloit and similar colleges don’t have much margin when applications drop.

To keep its numbers up, Beloit accepted the same number of students this year despite a 10 percent decline in applications. Interim President Dick Niemiec is counting on at least 1,250 students next year. Even so, he prepared the 2009-10 budget on an assumption he’d get 1,200, cutting costs further to be safe. "If the economy doesn’t bounce within a year, then, like other businesses, we’ll have to change our model," Niemiec says. That could mean reducing faculty over time and shrinking the school to 1,000 students, which was the case in the 1960s, when Niemiec attended. Kalamazoo College, 240 miles to the east, is scrambling to slash $2.8 million in costs. It needs to compensate for the 28 percent decline in its $157 million endowment and the expected increase in financial aid it will have to dole out next year. On this sunny March day, Kalamazoo’s tree-lined campus is bustling with people walking to class and studying on the lawn. Students, mainly from Michigan, and faculty mostly know each other by first name. Classes range from 1 person in an upper- level Italian course to 40 in some introductory classes. For the small classes and personal attention, students pay $38,166 a year, including room and board.

Saving money is a campus-wide affair. On this day, about 40 students, professors and staff gather in a wood-paneled conference room. The group calls out suggestions, and students write them on easels lined with blank white paper: Dorm hall lights shouldn’t be on 24/7; videoconferencing instead of travel; rent classrooms to companies. While those ideas will help, the only savior for a school like Kalamazoo is more paying students. Last year, it had six fewer than anticipated, which means it will lose about $1 million over four years, says Jeffrey Haus, a professor of religion and history who’s on the admissions committee. "They’re asking us to increase the size of attendance," Haus says. "Larger classes work against the mission of a small liberal arts college." Amanda West, a first-year Kalamazoo student from Los Angeles, says she might transfer to a bigger school that costs less and offers more. "I’m worried that my experience here won’t be as rich as it could be," she says. Colleges will be stretched further as the private equity firms they’ve invested with make calls for money promised earlier, says Wellesley’s Evans. "You might be liquidating assets that you might not want to be liquidating," he says. "Your asset allocation will be out of whack." By 2012, the ratio of illiquid assets such as private equity stakes and real estate in Harvard’s portfolio will likely rise to 44 percent from 26 percent, the University of Connecticut’s Davidoff estimates.

Schools are also hurting as they pay 10 times more for bank lines of credit. The standby cost, or interest paid on the credit when it’s not being used, has surged to 1 percent from less than 10 basis points, says James McGill, senior vice president for finance and administration at Johns Hopkins University in Baltimore. (A basis point is 0.01 percentage point.) "We’re in the process of deciding whether these are worth keeping," McGill says. "If liquidity freezes up again, they’re good to have." One way schools like Beloit and Kalamazoo may prosper is by offering vocational training, unique majors and other programs that the most-competitive colleges don’t provide, says Morton Owen Schapiro, president of Williams College in Williamstown, Massachusetts, which is tied with Amherst College 60 miles southeast as the top U.S. liberal arts college as ranked by "U.S. News & World Report." Amherst President Tony Marx says most institutions will scale back financial aid commitments. "Access to higher education in America is going to be squeezed, become less equitable," he says. "America will pay an unbelievable price for this 20 years from now."

Public universities will change too. "State universities have to think about how many resources they’re going to put into being a top-ranked research institution and balance that against their primary educational mission," Boston University’s Brown says. "Every state wants its flagship university to be a top-20 research university. Obviously, the math doesn’t work." More students will start undergraduate careers at community colleges. About three-quarters of such colleges say enrollment increased at least 5 percent this year from a year earlier, according to a survey published on March 17 by the League for Innovation in the Community College. Financial pressures will prompt more students to cram four years of college into three straight years, says Richard Ekman, president of the Council of Independent Colleges. He’s not sold on the idea. "You spend 100 years running a college based on a four-year model, with summer breaks for mental assessment," Ekman says. "Then you suddenly announce you can do it in three years. You do have to ask whether it’ll still have as good an effect."

Boston University student Burr, en route to the fitness center, says the three-year trend is gaining momentum: Two of her best friends are overloading courses to graduate early. On the positive side, cost cutting might make universities more efficient. That hasn’t been their strong suit, says Callan at the National Center for Public Policy and Higher Education. Colleges, unlike businesses, could keep increasing prices without losing market share. Schools hired presidents to raise money and spend it to make their universities more prestigious, he says. Now boards might look for leaders whose strengths run to fiscal restraint. At Simmons, Drinan says she was working to reduce costs even before the crisis hit. She says financial prudence is the way forward for higher education nationwide. If her cuts and efforts to expand the business program fail, the School of Management -- and Simmons’s $140 million of debt -- may wind up as a case study in what can happen when a bubble pops.

Life Creates Time, Space, and the Cosmos Itself
The Biocentric Universe Theory

The farther we peer into space, the more we realize that the nature of the universe cannot be understood fully by inspecting spiral galaxies or watching distant supernovas. It lies deeper. It involves our very selves. This insight snapped into focus one day while one of us (Lanza) was walking through the woods. Looking up, he saw a huge golden orb web spider tethered to the overhead boughs. There the creature sat on a single thread, reaching out across its web to detect the vibrations of a trapped insect struggling to escape. The spider surveyed its universe, but everything beyond that gossamer pinwheel was incomprehensible. The human observer seemed as far-off to the spider as telescopic objects seem to us.

Yet there was something kindred: We humans, too, lie at the heart of a great web of space and time whose threads are connected according to laws that dwell in our minds. Is the web possible without the spider? Are space and time physical objects that would continue to exist even if living creatures were removed from the scene? Figuring out the nature of the real world has obsessed scientists and philosophers for millennia. Three hundred years ago, the Irish empiricist George Berkeley contributed a particularly prescient observation: The only thing we can perceive are our perceptions. In other words, consciousness is the matrix upon which the cosmos is apprehended. Color, sound, temperature, and the like exist only as perceptions in our head, not as absolute essences. In the broadest sense, we cannot be sure of an outside universe at all.

For centuries, scientists regarded Berkeley’s argument as a philosophical sideshow and continued to build physical models based on the assumption of a separate universe "out there" into which we have each individually arrived. These models presume the existence of one essential reality that prevails with us or without us. Yet since the 1920s, quantum physics experiments have routinely shown the opposite: Results do depend on whether anyone is observing. This is perhaps most vividly illustrated by the famous two-slit experiment. When someone watches a subatomic particle or a bit of light pass through the slits, the particle behaves like a bullet, passing through one hole or the other. But if no one observes the particle, it exhibits the behavior of a wave that can inhabit all possibilities—including somehow passing through both holes at the same time. Some of the greatest physicists have described these results as so confounding they are impossible to comprehend fully, beyond the reach of metaphor, visualization, and language itself. But there is another interpretation that makes them sensible. Instead of assuming a reality that predates life and even creates it, we propose a biocentric picture of reality. From this point of view, life—particularly consciousness—creates the universe, and the universe could not exist without us.

Quantum mechanics is the physicist’s most accurate model for describing the world of the atom. But it also makes some of the most persuasive arguments that conscious perception is integral to the workings of the universe. Quantum theory tells us that an unobserved small object (for instance, an electron or a photon—a particle of light) exists only in a blurry, unpredictable state, with no well-defined location or motion until the moment it is observed. This is Werner Heisenberg’s famous uncertainty principle. Physicists describe the phantom, not-yet-manifest condition as a wave function, a mathematical expression used to find the probability that a particle will appear in any given place. When a property of an electron suddenly switches from possibility to reality, some physicists say its wave function has collapsed. What accomplishes this collapse? Messing with it. Hitting it with a bit of light in order to take its picture. Just looking at it does the job. Experiments suggest that mere knowledge in the experimenter’s mind is sufficient to collapse a wave function and convert possibility to reality. When particles are created as a pair—for instance, two electrons in a single atom that move or spin together—physicists call them entangled.

Due to their intimate connection, entangled particles share a wave function. When we measure one particle and thus collapse its wave function, the other particle’s wave function instantaneously collapses too. If one photon is observed to have a vertical polarization (its waves all moving in one plane), the act of observation causes the other to instantly go from being an indefinite probability wave to an actual photon with the opposite, horizontal polarity—even if the two photons have since moved far from each other. In 1997 University of Geneva physicist Nicolas Gisin sent two entangled photons zooming along optical fibers until they were seven miles apart. One photon then hit a two-way mirror where it had a choice: either bounce off or go through. Detectors recorded what it randomly did. But whatever action it took, its entangled twin always performed the complementary action. The communication between the two happened at least 10,000 times faster than the speed of light. It seems that quantum news travels instantaneously, limited by no external constraints—not even the speed of light. Since then, other researchers have duplicated and refined Gisin’s work. Today no one questions the immediate nature of this connectedness between bits of light or matter, or even entire clusters of atoms. Before these experiments most physicists believed in an objective, independent universe. They still clung to the assumption that physical states exist in some absolute sense before they are measured. All of this is now gone for keeps.

The strangeness of quantum reality is far from the only argument against the old model of reality. There is also the matter of the fine-tuning of the cosmos. Many fundamental traits, forces, and physical constants—like the charge of the electron or the strength of gravity—make it appear as if everything about the physical state of the universe were tailor-made for life. Some researchers call this revelation the Goldilocks principle, because the cosmos is not "too this" or "too that" but rather "just right" for life.

At the moment there are only four explanations for this mystery. The first two give us little to work with from a scientific perspective. One is simply to argue for incredible coincidence. Another is to say, "God did it," which explains nothing even if it is true. The third explanation invokes a concept called the anthropic principle, first articulated by Cambridge astrophysicist Brandon Carter in 1973. This principle holds that we must find the right conditions for life in our universe, because if such life did not exist, we would not be here to find those conditions. Some cosmologists have tried to wed the anthropic principle with the recent theories that suggest our universe is just one of a vast multitude of universes, each with its own physical laws. Through sheer numbers, then, it would not be surprising that one of these universes would have the right qualities for life. But so far there is no direct evidence whatsoever for other universes. The final option is biocentrism, which holds that the universe is created by life and not the other way around. This is an explanation for and extension of the participatory anthropic principle described by the physicist John Wheeler, a disciple of Einstein’s who coined the terms wormhole and black hole.

Even the most fundamental elements of physical reality, space and time, strongly support a biocentric basis for the cosmos. According to biocentrism, time does not exist independently of the life that notices it. The reality of time has long been questioned by an odd alliance of philosophers and physicists. The former argue that the past exists only as ideas in the mind, which themselves are neuroelectrical events occurring strictly in the present moment. Physicists, for their part, note that all of their working models, from Isaac Newton’s laws through quantum mechanics, do not actually describe the nature of time. The real point is that no actual entity of time is needed, nor does it play a role in any of their equations. When they speak of time, they inevitably describe it in terms of change. But change is not the same thing as time. To measure anything’s position precisely, at any given instant, is to lock in on one static frame of its motion, as in the frame of a film.

Conversely, as soon as you observe a movement, you cannot isolate a frame, because motion is the summation of many frames. Sharpness in one parameter induces blurriness in the other. Imagine that you are watching a film of an archery tournament. An archer shoots and the arrow flies. The camera follows the arrow’s trajectory from the archer’s bow toward the target. Suddenly the projector stops on a single frame of a stilled arrow. You stare at the image of an arrow in midflight. The pause in the film enables you to know the position of the arrow with great accuracy, but you have lost all information about its momentum. In that frame it is going nowhere; its path and velocity are no longer known. Such fuzziness brings us back to Heisenberg’s uncertainty principle, which describes how measuring the location of a subatomic particle inherently blurs its momentum and vice versa.

All of this makes perfect sense from a biocentric perspective. Everything we perceive is actively and repeatedly being reconstructed inside our heads in an organized whirl of information. Time in this sense can be defined as the summation of spatial states occurring inside the mind. So what is real? If the next mental image is different from the last, then it is different, period. We can award that change with the word time, but that does not mean there is an actual invisible matrix in which changes occur. That is just our own way of making sense of things. We watch our loved ones age and die and assume that an external entity called time is responsible for the crime. There is a peculiar intangibility to space, as well. We cannot pick it up and bring it to the laboratory. Like time, space is neither physical nor fundamentally real in our view. Rather, it is a mode of interpretation and understanding. It is part of an animal’s mental software that molds sensations into multidimensional objects.

Most of us still think like Newton, regarding space as sort of a vast container that has no walls. But our notion of space is false. Shall we count the ways?
  1. Distances between objects mutate depending on conditions like gravity and velocity, as described by Einstein’s relativity, so that there is no absolute distance between anything and anything else.
  2. Empty space, as described by quantum mechanics, is in fact not empty but full of potential particles and fields.
  3. Quantum theory even casts doubt on the notion that distant objects are truly separated, since entangled particles can act in unison even if separated by the width of a galaxy.

In daily life, space and time are harmless illusions. A problem arises only because, by treating these as fundamental and independent things, science picks a completely wrong starting point for investigations into the nature of reality. Most researchers still believe they can build from one side of nature, the physical, without the other side, the living. By inclination and training these scientists are obsessed with mathematical descriptions of the world. If only, after leaving work, they would look out with equal seriousness over a pond and watch the schools of minnows rise to the surface. The fish, the ducks, and the cormorants, paddling out beyond the pads and the cattails, are all part of the greater answer. Recent quantum studies help illustrate what a new biocentric science would look like. Just months? ago, Nicolas Gisin announced a new twist on his entanglement experiment; in this case, he thinks the results could be visible to the naked eye.

At the University of Vienna, Anton Zeilinger’s work with huge molecules called buckyballs pushes quantum reality closer to the macroscopic world. In an exciting extension of this work—proposed by Roger Penrose, the renowned Oxford physicist—not just light but a small mirror that reflects it becomes part of an entangled quantum system, one that is billions of times larger than a buckyball. If the proposed experiment ends up confirming Penrose’s idea, it would also confirm that quantum effects apply to human-scale objects. Biocentrism should unlock the cages in which Western science has unwittingly confined itself. Allowing the observer into the equation should open new approaches to understanding cognition, from unraveling the nature of consciousness to developing thinking machines that experience the world the same way we do. Biocentrism should also provide stronger bases for solving problems associated with quantum physics and the Big Bang.

Accepting space and time as forms of animal sense perception (that is, as biological), rather than as external physical objects, offers a new way of understanding everything from the microworld (for instance, the reason for strange results in the two-slit experiment) to the forces, constants, and laws that shape the universe. At a minimum, it should help halt such dead-end efforts as string theory. Above all, biocentrism offers a more promising way to bring together all of physics, as scientists have been trying to do since Einstein’s unsuccessful unified field theories of eight decades ago. Until we recognize the essential role of biology, our attempts to truly unify the universe will remain a train to nowhere.

Adapted from Biocentrism: How Life and Consciousness Are the Keys to Understanding the True Nature of the Universe, by Robert Lanza with Bob Berman, published by BenBella Books in May 2009.


el gallinazo said...

In theory, when unemployment departments close their doors due to lack of funding, we could have U6 over 50% and U3 under 5%. Wouldn't that be a knee-slapper?

PKP said...

Easy Money And The Loss Of Character

Anonymous said...

What you all just figured out that Quantum physics reflects the claims of Mystics? Frijtof Capra must be rolling wherever he is.
But the real mind blower is this

This paper surveys evidence and arguments for the proposition that the universe as we know it is not a physical, material world but a computer-generated simulation -- a kind of virtual reality. The evidence is drawn from the observations of natural phenomena in the realm of quantum mechanics. The arguments are drawn from philosophy and from the results of experiment. While the experiments discussed are not conclusive in this regard, they are found to be consistent with a computer model of the universe. Six categories of quantum puzzles are examined: quantum waves, the measurement effect (including the uncertainty principle), the equivalence of quantum units, discontinuity, non-locality, and the overall relationship of natural phenomena to the mathematical formalism. Many of the phenomena observed in the laboratory are puzzling because they are difficult to conceptualize as physical phenomena, yet they can be modeled exactly by mathematical manipulations. When we analogize to the operations of a digital computer, these same phenomena can be understood as logical and, in some cases, necessary features of computer programming designed to produce a virtual reality simulation for the benefit of the user.

On this website you can peruse the debate that followed the paper presenting the Simulation argument. The original paper is here, as are popular synopses, scholarly papers commenting on the first paper, and a couple of replies to these comments.

The Simulation argument is continuing to attract a huge amount of attention. I regret that I cannot usually respond to individual queries about the argument.

Have none of you heard about the Singularity? Read Vinge or Charles Stross?
EvilWizardGlick out now.

Glennjeff said...

Thanx 4 great article on REALITY and quantphys TAE.

Anon 7:04, will follow those links. Thanx.

Bigelow said...

“So where is the breaking point? A look into the why instead of how of this rally can offer some insight. This whole rally is essentially a scam to pass off asset depreciation in struggling financials to the taxpayer. The AIG counterparty profits were all taxpayer-financed. The PPIP's leverage is taxpayer-financed. But the real issue is the equity raises in this rally. Goldman announced an equity sale with its earnings a day after pre-announcing earnings. This is $5 billion of Goldman equity being traded for $5 billion of the public's cash on misconceived presuppositions of sustainable profitability. On top of that, Goldman sold $2 billion in bonds on April 29, just days ahead of stress test results. Though the stress test results, made public on May 4 but pre-released to the banks April 24th, are most likely going to be passes for all 19 banks, the details of the results as well as government-suggested capital raises will be the real issue looking forward. REITs have been offering shares all over the place, and conspiracies of their own have developed between the connection of JPMorganChase and Merrill Lynch/Bank of American analysts and the REIT secondaries these banks have been underwriting.

Also, the recent surge in Goldman principal program trading starts to take some context here. If Goldman's program trading arm has been feeding into the rally and forcing quant deleveraging, then this explains why-- so it can raise cash by selling stock. Which I predicted and which indeed occurred. It'd be interesting to know how much of Goldman's $5B has been raised at these scam-inflated prices ($123/share I believe was the going price for the secondary). As soon as it's "finished," I fully expect GS's 5x principal/customer facilitation+agency ratio to fall off a cliff. In a terrific article entitled Goldman's Offering and Recent Rally: Coincidence?, Ben El-Baz states "although there is no hard evidence that Goldman intentionally hyped up the market rally and the financial sector to get a better price on its offering, it would be very naïve to assume that they passively let the market determine the price of this massive dilution." This principal trading participation is the circumstantial evidence I'm sure he would love to see to back up his thesis.”
Why This Rally Is Unsustainable SeekingAlpha

Anonymous said...

I think the plan all along has been for Goldman and a few cronies (JP Morgan) to be the beneficiaries of a large bank die off.

A bank extinction event.

It was in the card from the getgo.

Same deal with Chrysler sinking below the waves to buy more time for GM and Ford.

It's a semi-controlled collapse.

What are there, 8000+ banks. Goldman can walk a long way over the Swamp to safety on their dead bodies.

The Road to Perdition is not paved with good intentions.

el gallinazo said...

Most physicists reportedly claim that the Gisin entanglement experiments do not violate the "speed limit" of Einstein's special theory of relativity. But I was never able to follow their arguments. I was taught that the speed limit of light in a vacuum not only applied to physical matter but also applied to the transference of information as well. Any physicist types out there care to clarify this?

Coy Ote said...

From the post...
"Life Creates Time, Space, and the Cosmos Itself
The Biocentric Universe Theory"

Anyone interested in this likely has read THE TAO OF PHYSICS or/and THE DANCING WU LI MASTERS.

If not, check them out.

Awareness is!

Coy Ote said...

anon 7:04

Interesting, and something we are approaching. Connecting the virtual phenomena with biomass, OK, but with integrated awareness, that's the puzzler.

Theta said...

el gallinazo:No-communication theoremCoy Ote, Anon@7:04: Could you keep the quantum woo out of this discussion please?

jal said...

Nothing has been observed to be able to go faster than the speed of light.
Check out my blog entries and rate them. (The arrow beside the blue boxes)
Tomorrows' Big Bang
My blog is a simplified explanation of what can be projected from what has been observed.

Perhaps some people/readers will end up getting "the bug" and will continue their research/interest.

SR said...

@el gallinazo

No information can be passed using quantum entanglement. As long as one stays on one side of the experiment, all one gets are lists of random events. It is only by comparing the lists that one sees that they are correlated, but to compare them, one needs to transmit one to the other, and that cannot be done faster than light speed.

@el coy ote:

I do not recommend The Dancing Wu Li Masters -- it is full of unsupported speculation. The Tao of Physics is better, although it hangs on an outdated quantum theory (S-Matrix theory), though who knows, it could come back into favor. I recommend Samuel Avery's The Dimensional Structure of Consciousness for anyone wanting to explore this idea further.

ExRanger said...

Any thoughts on the book "Quantum Enigma" by Bruce Resenblum and Fred Kuttner? I just started reading it on Friday and it seems good.

Anonymous said...

For more palatable work read Charles Stross and the late Robert Anton Wilson.
Stross for mainly pure science in his fiction and Wilson for science in his mysticism.
Play with this thought experiment, try to feel/imagine everything is one. There is no separation between outside and inside. We are sensory organs of the universe. Two fingers touching becomes hard to feel both together but easier for each individually.
Greg Bear postulated that universal idea templates exist until something better comes along. Newtonian physics replaced by Quantum physics.

Anonymous said...

Anyone interested in listening to Canada's Goldman Sachs man Mark Carney on today's CBC Sunday?

There is a box provided there to make obscene comments :)


Hey Jal, very interesting site, but for now all I really want to know is how come X-rays get to come out of a black hole, why do they get preferential treatment? Is the universe on the take too?


Peter said...

Anonymous wizard @11:04:

I dig both Stross and Wilson-but didn't know he is residing elsewhere now...bummer. His "Blind Lake" is one of the best depictions of the unfathomable strangeness of alien life I've read. Also, M. John Harrison is very good ("Light").

Theta, we can't only do economic tragedy, occasionally have to leave the illlusion behind for a night, and play in the light...

jal said...

-everyman- said
... all I really want to know is how come X-rays get to come out of a black hole, why do they get preferential treatment? Is the universe on the take too?

I would recommend that you do a search at


at wiki


you will be able to see if your question has made some assumptions and/or presumptions.

This is the only way that I know of to learn. Question, question ..

First, what you think you know

Second, the claims made by others to be true.

Anonymous said...

I did not realize we had so many "thoughtful" folks here.Probably upgradeing my level of museings might be a good idea[g].

Biocentrics would explain..seems to explain a lot...the old Daoist masters may have been on to something we figured out several thousand years ago,but keep forgetting...due to the animal part of our nature...and the fact we keep trying to exterminate ourselves .When you read the old texts of the pre-history of India...and old OLD,non-tradisional get the feeling we have done this before,and before..

Before the dreamtime?


jal said...

snuffy said ...
"... texts of the pre-history of India"
Lots of stuff to think about in the Vedic/vedas text.
Keep the salt shaker handy.

Anonymous said...

When you read the old texts of the pre-history of India...and old OLD,non-tradisional get the feeling we have done this before,and before..Snuffy--
I agree. Everything old is new again. These thoughts are not a new idea, quite the opposite. Plus modern industrialized man has had the disadvantage of way too many distractions.

swans-of-borg said...

Life allows the universe to exist? Then before bacteria there was no time? Do monkeys observe the stars; and only if so will the stars then move for the monkeys?
I am uncomfortable with requiring a certain level of self-awareness before the universe can exist.

I accept that quantum physics is 'wrong' only in the sense that it is not inherently understandable.

Many people from no-tech societies were baffled by the phonograph, too.

The possibility seems more likely that the earth is a huge organic computer to determine the answer to life, the universe and everything.

Persephone said...

Thank you once again Ilargi for providing much this needed information! Awareness IS key - as is understanding the world around us.

I would like to give a belated standing ovation to ccpo for the comment yesterday:
If we, as supposed stewards of Earth, rape and pillage her for pleasure and reap, in the end, great pain for Earth and ourselves, what else are people to wish for?
Humans must be the most self-destructive species on the planet. We are leaving the next generation a climate collapse, a water collapse, a food collapse, an energy collapse, and mass extinction. We have created habitat destruction and pollution of our land and water beyond comprehension.

We will reap what we have sown.

YD said...


This is the link to the first article I remember reading.

This is one that also peaks my interest, because backing the currency with food is an interesting idea.

Other poster,

And I can't remember the poster but someone referenced the PA scrip as debt money. I think anything other than barter ends up being debt money to one degree or another. Even gold has limited utility, so since it has limited ability to fulfill its own promise, its promise to pay is that someone else will take it. Most of us can't use gold for anything other than a perceived store of value. Its permanence and limitied availability give it its value. Too characteristics that could approximately be attributed to a (good) government scrip as well. Ironically, golds fungibility almost declines with increasing utility. A fate that seems more obvious with silver.

In the end it seems the calorie needs to underlie whatever sustainable currency might be utilized. (Gold will still exist if nothing other than as a currency hedge.) I keep trying to figure out how to do that. No answers yet, nothing worth writing down anyhow. Any thoughts?

Chaos said...

I found this piece concerning the environmental collapse of the small nation Nauru fascinating, both for the content and the author's complete lack of understanding of what the "lessons" of the demise of the ecosystem on the island are, or ought to be:

We're running out of resources to convert into money...

Anonymous said...

“Ranked Performance of Eight Technical Indicators

Indicator 10/09/2007 - 3/09/2009

Relative Strength Index -49.0%
Williams %R -41.7%
Commodity Channel Index -38.7%
Parabolic Systems -36.6%
Bollinger Bands -31.5%
Stochastics -24.1%
Directional Movement Indicator +24.0%
Moving Average Convergence/Divergence +25.9%

S&P 500 -56.8%”
Stock Charts Fail Forecast Test in Complete S&P Miss

Anonymous said...

Mon 8:00am ET-
S&P futures vs fair value: +87205.00. Nasdaq futures vs fair value: +13.00. Stock futures are up a bit in the absence of any market-moving...
» Read more 8:45am

Coy Ote said...


Thanks for the tip.

My reading in the area is from decades ago. Wu Li and the Tao of Physics are dated I'm sure, but cornerstones for reaching the masses with physical/mental interactives, etc.

el gallinazo said...


Thanks for the explanation. So the entanglement experiments prove that parts of the universe can communicate with other parts of the universe with speeds that appear to be instantaneous, but we can only know this after the fact by comparing the parts to each other at speeds at or under that of light? The entanglement outcome seems to have no practical applications but enormous philosophical ones.

Coy Ote said...

By the way, any of those posters who think little of gold....
just send me yours!


Mugabe said...

Whoa, guys -- this crash thing is all over -- see here:

Vvvvooom ....

YD said...

el gal,

It would have value immediately, we just won't know for sure it has value except at light speeds. The "reality" should be manifest immediately but our confirmation will just take awhile. Not much different than how we change and measure our economy.

jal said...

AND ... NOW ... back to the present

Does anyone know if it is possible to get the data of the stock market players?
Who are the players on any one day?
What they traded? Volume? Price?

Surely someone is getting that info and tracking it.

It's one thing to project the end of the down turn and its another thing to let the money do the talking.

el gallinazo said...

From a Seeking Alpha commenter:

"The public/private partnership plan to buy up toxic assets is now DOA. You see the relaxation of mark to market rules have made it possible for banks to value those assets as high as they like. Now they have no reason to sell any of it. It produces income for them, and now it lets them inflate their books. They show up as paper gains, which of course they claim as profits. The formerly toxic assets are now the geese laying golden eggs...there is no way they are going to sell any of it."

Is his first point correct? Can private equity companies resist gambling with taxpayer money with minimal downside risk? Gaming Timmy Twolips system is so simple that even I can figure out how to do it.

But also, is his second point correct? Now that bogus accounting rules have been formalized and legalized, can the banks avoid paying any consequences for what Ilargi refers to as their casino toilet paper locked in their vaults? Isn't this a basic definition of a zombie bank?

el gallinazo said...

Though I am not a physicist (obviously from previous comments), I see parallels now to the mounting frustration between theoretical dogma and conflicting experimental results that marked the end of the classical period from 1880 to 1900. Entanglement, dark matter, and dark energy, all brought to light by experimental physicists and astronomers, are punching big holes in the business as usual theories. With this degree of frustration, some geniuses are going to have to come up with a resolving theory soon. The economic collapse shouldn't effect this very much as the data is in. All that is needed is a pencil, paper, giant and creative intellect, and a livable wage from the Chinese patent office.

Frank said...

The happy talk on the MSM finance is mindboggling. Everything is good news. If that much optimism isn't a bear signal, I don't there is one.

Frank said...

@el G Given mark to fantasy, as long as the mortgages are still getting paid, they can count it at full price. They don't have to make any allowances for future defaults. They can even ignore a few late payments. I think some of them can actually afford weed good enough to let them believe that the defaults are stopping.

Submit your advice said...

Well, Stoneleigh was right and this is the rally. Starting about now I think if I had any long positions in equities, mutual funds, etc, I would think about taking a casual stroll towards the door. 9000 on the dow might be better than 8,300, for sure, but 8,300 is a heck of a lot better than 6,500, or 5000, or 4000, ... I would do it very calmy, in no rush. Cash out one here, wait, another there, cash.... cash .... cash. ymmv

el gallinazo said...


I think this bogus rally has more legs than many other doomers. I give it about 75% odds that the giant crash will initiate between Aug 15 and Oct 15 and that the S&P500 will easily break 1000 in the meantime. Would you dare to put a probability figure to this time window? (I am 100% in cash now and will not go long for the foreseeable future).

bluebird said...

From all the happy talk and confidence, and the economy 'booming', and the stock market rallying who/what is going to be blamed for the giant crash? Maybe I am thinking too far ahead, but what goes up, is going to come back down. Will loss of confidence be blamed? Will too many unemployed be blamed? Insolvent banks? Toxic assets? Something else? Wouldn't Obama, Geithner, Bernanke, and Summers be planning things what to tell us when everything crashes? Or maybe Geithner only has Plan 'A' after all.

EBrown said...

El Gal,
I agree with you. The bottom callers have been out in force and their message is going to percolate into the masses' minds. People will hold out a little longer and then with continued positive news most will start to believe again that retirement accounts might be worth contributing to.

Over at today there is a section with multipule "expert" opinions about the direction the markets will take and by extension where to put one's money. I read little bits of each and thought, "wow, I am of the opinion that every single one of these strategies would lose money for if I were to follow it... crazy."

EBrown said...

I think it will be a renewed lack of confidence among counterparties that provide credit at the big overnight lending institutions. When big banks are afraid of not being repaid for a short-term loan and will not lend, even at high interest rates, it wrecks havoc in the real economy. Credit is the dog that wags the market's tail.

Anonymous said...

It's one thing to project the end of the down turn and its another thing to let the money do the talking.

Might be easier to track insider trading, I think that is fairly accessible, and see which way and how much jumping is done there, rather than try ..."to get the data of the stock market players?
Who are the players on any one day?
What they traded? Volume? Price?"


EBrown do you see anything that would support a market. Possibly a WWII effort to restructure energy could do it but with everything mortgaged and in pawn is there anyway to proceed on that. Maybe the best thing everyone can do here is to go do searches into the reason why X-rays escape from black holes ... that is if they do of course:)


Anonymous said...

“Extrapolated to all Americans in the age group studied, the new findings suggest that over the course of a decade, the deaths of one million men and perhaps half a million women could be prevented just by eating less red and processed meats, according to estimates prepared by Dr. Barry Popkin, who wrote an editorial accompanying the report.


The results mirror those of several other studies in recent years that have linked a high-meat diet to life-threatening health problems.”
Paying a Price for Loving Red Meat

Anonymous said...

Very little talk about this:

EBrown said...

Anon 1:12,
I'd be happy to debate the linked article with you, but this is not the forum to do so. We've already beaten that dead horse many times on this site and I think it'll just be aggravating to all involved if it were to occur again. You can e-mail me at edmund dot brown at gmail dot com.

Dr J said...

Anon @ 1:12 - you cannot generate dietary recommendations from nutritional epidemiological studies. All you can do is generate hypotheses that can then be tested using randomized controlled trials. Anyone who makes dietary changes based on these kinds of data is shooting in the dark. I know Barry Popkin and he is a good health economist and deserves credit for his campaign to get pop out of schools but I'm afraid he is way out on a limb with this one. Nobody has done the RCT on this yet. Often when they are done, something that had everyone convinced turns out to be a bust. A good example is the Women's Health Initiative that spent 8 years and about $0.5 billion trying to show the harm of dietary fat. They got a big goose egg for their trouble. I suspect the same would happen here, too, if anyone could get an RCT funded.

Dr J said...

EBrown - Sorry, reflex action, couldn't stop myself. Happy to discuss offline.

FB said...


@ Snuffy

Thought of you today because I heard something interesting about bees. Keepers from the south (near the Mediterranean) bring their hives up here (exactly the midway point between the northern and southern French Alps) to feast on the dandelions and gain strength. Apparently, that is a good way to put a hive into top condition. They are then transported back south a bit later in the season, to the lavender fields because lavender honey earns the best price. Do people in your area do the same type of thing?


Anonymous said...

mmmmm....dead horse! Delicious.

Anonymous said...

The stock market goes up on news that corporations turned a short term quarterly profit; because they 'cut expenses' by firing so many people!


That is perverted.

That is the mentality of the Reptilian Class, cold blooded and ruthlessness are revered in the US.

Gordon Gekko's name was a satire on the reptile nature of Wall St, a gecko is a lizard.

Looks like a lot of Sheeple have bellied up to the Kool-Aid punch bowl of faux optimism.

Boy, when this rally tanks, folks are going to lose their minds.

The only thing large enough to distract their angst will be war and/or pandemic. I guess we are doing a dry run up to both avenues with the propaganda on Pakistan and the Pigman Flu-a-palooza.

Smoke'em if you got'em.

Armando Gascón said...

Biocentrics, and the like: The usual desperate American escapism from reality. And the reality? That their streets are full of black people.
Sorry, folks it has to be said. More than forty years ago our intellectuals -Mario Benedetti, for example- went there, saw that, wrote it.

Anonymous said...

Jal here is something just up on Jesse's Cafe that may be of interest re your question today.:

"We are skeptical of an economic recovery, and prefer to think of this stock market action not as signalling a real bottom but as a sucker's rally in which insiders unload positions on the naive and unsuspecting who are taken in by false optimism. It is difficult to tell however, given the opaque nature of the US financial system."

Sort of like those black holes with only that X-ray stuff to give some idea about something, whatever that is, that may or may not be happening.


Ahimsa said...

Anon. @ 1:12

Thanks for sharing the link to the excellent article on the NY Times. I've been vegan for 14 years and at 58 I'm very healthy and fit (BMI 19.5) thanks to my organic and wholesome plant-based diet.

My whole family eats plant-based and love it. None of us take any Big Pharma drugs. My 19-year-old has been vegan since he was 5 and has never taken antibiotics. I attribute his awesome immune system to his having nursed until almost age 4 and, of course, his plant-based diet.

Go Vegetarian!!! It's great for your health, for the animals and for the ENVIRONMENT!!!

The animals, although they have no voice, will be very grateful!


Anonymous said...

I have a question. When I was a kid just my father worked for wages to support a family of four, in what most today would find a comfortable lifestyle. Since that time when homelessness was almost an oddity of choice rather than of necessity we have gone to (before the current trouble) to both parents working and men woman children and families living on the streets. What I would like to put here is: For the 'system' to continue what furthur societal degeneration would be possible before the centre would collapse. Put another way, how long can bubbles be blown.

Anonymous said...

Well maybe things wern't all that great back in mom and pops days ... here's more bubbles!

Stoneleigh said...

If the rally continues for a while longer, as I think it will, the optimism should get even more intense. It could be verging on outright euphoria by mid-summer. The so-called 'light at the end of the tunnel' is an on-coming train though. As people here have noted, the good news is nothing but a confidence trick that people are temporarily buying into.

They are going to be devastated when the rug is pulled out from under their feet yet again. Then the media will be saying how it was obvious all along that the fake good news shouldn't have been relied on, even though they're the biggest cheerleaders at the moment. Just watch the herding behaviour unfold, first to the upside and then to the downside. It should be very instructive.

Anonymous said...

From a pre-school website, a page called 'Turkey Talk'

"..Turkeys are easily frightened and may hurt themselves when upset by flying into walls or by piling atop each other, causing one or more birds to smother each other.."

This will be the public reaction to the rally bubble bursting.

It can be explained to children but not apparently to parents, it is too lofty a concept for most adults to grasp.

Greenpa said...

For any interested in following up the situation in Egypt - Christians cry bias, battle cops

el gallinazo said...

One of my closest friends is a 70 year old Canadian citizen living in Canada. He has considerable savings, much of it in mutual funds. I was staying with him when TSHTF mid-September and begged him to dump these turkeys, but he wouldn't due to the capital gain taxes they would accrue. He spent a month down here thawing out this winter. I told him that he had a very clever strategy holding onto these duds. Soon they would be almost worthless and then he won't have to pay any taxes on them when he does sell them. I then told him about the suckers rally, and I think he has bought into the idea of dumping them before the crash.

My question is what should he put the money into that is the equivalent of a USA 13 week T-Bill. Do I understand correctly that there is a government bond that pays a certain interest but can be liquidated quickly whenever? It has no set maturity. I know nothing about Canadian government debt structure other than the central bank is run by a Goldman alum :-(

Ilargi said...

New post up