Monday, November 2, 2009

November 2 2009: The American Dream Needs a Loan

Detroit Publishing Co. Rollin' on the river 1900
The levee and the sternwheeler Falls City, Vicksburg, Mississippi

Ilargi: After a weekend full of -pretty overwhelming- attention for Stoneleigh's The case for deflation, time to get back to the grind. Today, though, nothing serious, I think I’ll just fool around a bit with a few numbers.

The main issue in the past few days must be CIT's bankruptcy, so here’s some perspective on that. Mind you, I know little of retail trade other than as a customer, in my case one whose amazement never ceases to grow when I see another store laden with products nobody needs.

Sometimes when I read numbers it helps to visualize something about them, in order to let their real meaning become clear. CIT Group has gone from a virtual unknown entity to the 5th biggest bankruptcy in US corporate history. It seems fair to say that CIT had aggressively expanded from a small reliable lender to a giant bottom feeder (think one of those huge dragnets that turn vast swaths of the ocean bottom into wasteland within seconds).

CIT dabbled in subprime mortgages, student loans, anything to make a buck. Most of their business still seems to have been in retail, though, and especially in what is called factoring. Which sort of made the firm a giant debt-collector (the very definition of bottom feeding). Basically, factoring means CIT bought debt from suppliers and made sure it was paid, undoubtedly for hefty fees. It was a giant in the field: its business was 5 times as big as that of its nearest competitor.

So when I was trying to come up with a picture of the numbers, and I thought perhaps finding the 1000 largest towns and cities in the US would provide such a picture. The US Census Bureau uses the term "Primary Census Statistical Areas", which is close enough for my purpose. Wikipedia has a list of 717 PCSA’s. It starts with New York-Newark-Bridgeport at 22,154,752 and ends with Pecos, Texas at 11,062. In between, we find 55 areas with over 1 million residents, while 319 have over 100,000.

Why the interest in these stats? Reading about CIT, I saw that it provided credit to firms that supply some 300,000 stores in the US (including 60% of all clothing stores) . Which means that in those 1000 biggest towns and cities an average 300 stores are in urgent need of funding, and many are unlikely to find it in time to keep their head above water. Also the best customers may find credit elsewhere, which makes CIT’s position even more precarious.

Of course, the holiday season is -almost- here, so many stores will have had their inventory delivered to them. But not all of them by any means, and besides, of those that have, a majority won't have paid the bill yet. I even found myself wondering if holiday sales were a factor in the timing of announcing the CIT demise. Will suppliers start demanding their merchandise back? It’s certainly not impossible.

Still, that sort of works for me as an image: your average town or city, y’all know them, 20,000-30,000 people, nothing special, a few schools, a few churches, maybe a factory or a mill, that loses 200-300 of its stores. And that’s before we even think about the fast developing commercial real estate plunge (of which CTI also held way more than desired). Makes you wonder where you’ll go buy your present next time Christmas comes around, doesn't it?

Not surprisingly, the government is involved in all this as well, through the Small Business Administration (SBA), which provides loans itself and guarantees loans from banks to small business. But the meltdown has hit there as well. Lenders (loaded with billions in TARP funds) refuse to provide loans even if they are guaranteed by the government. They prefer to keep their funds close to their chest. That all by itself should give you a pretty strong idea of the level of confidence that exists in the economy, recovery or not. Interestingly, one of the SBA’s main loan guarantee programs involves commercial real estate loans. Oh boy, that should be good. Grab some popcorn.

Come to think of it, I still haven't seen anyone in Washington return to mentioning the term "confidence" much, whereas at the beginning of the year it was one of the most used words in connection with the Obama administration. Curious. Here's thinking that in a similar vein, "recovery" will go the way of "confidence". There is no recovery other than in the media. Ask the millions of jobless, the foreclosed and now the small business owners and their personnel. Hmm, that's right, 300,000 small businesses, say with 25 employees each, that's another 7.5 million jobs on the line. They could do with some confidence.

What CIT's bankruptcy will show America is that, more than anything else, in words used by ABC’s Jake Tapper to describe Obama’s speech on small business 10 days ago, the American Dream itself needs a loan. Or it can’t survive. And no, the American Dream lending itself the money through the government won't do.

PS. Good stuff below from McClatchy, but especially from Janet Tavakoli, on Goldman Sachs. It’s just that I keep thinking that whatever you say about Goldman, you say about Tim Geithner too. And Bob Rubin and Larry Summers. And down the line about the man they supposedly work for.

There's something tragically wrong with that.

CIT's Bankruptcy and the Trading Sardine
CIT, one the world's largest finance companies specializing in lending to medium-sized companies and equipment leasing, just filed for bankruptcy. It is highly unlikely that American taxpayers are going to recoup any of the $2.33 billion of bailout money the company was provided in the form of preferred equity.

In the chart below, let's take a look at CIT's balance sheet assets, its equity and the price of its shares - all at year-end except for the last two quarters of 2009, and ask ourselves this simple question: What is the probability these assets (mostly loans and leases) were really worth what the annual and quarterly reports said, particularly after 2006? Judging from the share price: zero probability, of course.

But this post is not really about CIT. Rather, it is meant as a general comment on financial company balance sheets. To wit, it is nearly impossible to properly value loans, leases and other more esoteric financial assets (e.g. CDO, CDS, IRS, FRA, etc.) when we are out in 3+ sigma territory in delinquencies, defaults, counterparty risk metrics and volatility. One day a company like CIT is supposed to be "worth" $6 billion according to its books, and the next it's hyena food.

I've said it before and I'll say it again: A company that bases its valuation, indeed its entire business, on the Trading Sardine principle (see below) should be judged not by analysts but by fishmongers. Better yet, by their wives...

Andy convinces Billy to buy a can of sardines at a high price by telling him how wonderful they taste. Billy, being greedy, decides to resell them to Charlie for a profit at an even higher price by convincing him, too, about how great these sardines are. The process is repeated several times until the last buyer, let’s call him Zebediah, pays a million bucks to Yorick for a can of the "world’s absolute best sardines – EVER..."

Zebediah decides to open the can and eat the sardines, only to discover they are ordinary, plain sardines. Furious at being swindled, he yells at Yorick: "You crook! You liar! I paid you a million bucks for plain ordinary sardines. They were not the greatest tasting sardines - EVER!" yells Zeb. Yorick shrugs and replies…

"Hey Zebediah, you are such a schmuck. Those were not eating sardines – them were trading sardines!"

US businesses at risk as lender CIT Group files for bankruptcy
Thousands of small and medium-sized businesses in the US face financial difficulties and could go out of business after lender CIT Group filed for bankruptcy protection last night. Although the company will keep operating, it is unlikely to be able to make the same number of loans as before. CIT provides working capital to small firms such as shops, their suppliers and restaurants, many of whom are already struggling in the recession.

In one of the the biggest corporate failures in US history, CIT made its filing in the New York bankruptcy court yesterday, after a debt-exchange offer to bondholders failed. CIT said most of its bondholders have agreed a prepackaged reorganisation plan which will reduce total debt by $10bn (£6.1bn) while allowing the company to continue to do business. The collapse is also bad news for US taxpayers, who stand to lose the $2.3bn provided last year to prop up the troubled lender.

Creditors will end up owning the company, while common and preferred shareholders – including the US government – will be wiped out by the plan. This is the government's biggest loss yet through its Troubled Asset Relief Programme (Tarp). "The decision to proceed with our plan of reorganisation will allow CIT to continue to provide funding to our small business and middle-market customers, two sectors that remain vitally important to the US economy," said CIT's chairman and chief executive, Jeffrey Peek, who will step down by the end of the year.

But retail trade groups are worried that many shops will be left without financing – and stock – ahead of the crucial Christmas season, with traditional banks also cutting back credit. CIT has provided funding to 2,000 firms that supply merchandise to more than 300,000 stores. About 60% of America's clothing industry depends on CIT for financing. Harold Reichwald of law firm Manatt, Phelps & Phillips said CIT's case is likely to force the company's customers to look elsewhere for financing. "If I was a small businessman, I would say to myself, 'I have to find alternatives'," he said. "In this marketplace, there aren't a lot of alternatives."

CIT failure to leave small businesses floundering
CIT Group Inc's bankruptcy filing, while long expected, could still trigger a financing crunch for many of the hundreds of thousands of small businesses it finances. CIT filed for bankruptcy protection on Sunday, and said its creditors have already approved the century-old commercial lender's reorganization plan. The bankruptcy followed a failed struggle to refinance its debt amid the credit crunch and recession, and paves the way for it to restructure. Under the plan announced on Sunday, the lender expects to reduce total debt by about $10 billion.

But the company's long-term prospects are uncertain and the bankruptcy could leave more than one million small and medium-sized businesses looking for another source of funding, lawyers said. "This could have a devastating effect," said Jerry Reisman, a partner at law firm Reisman Peirez & Reisman in Garden City, New York, who has been working with many of CIT's factoring clients. These clients -- about 2,000 small companies -- are in a particular bind when it comes to finding alternative financing since CIT is by far the biggest provider of factoring services.

In the factoring business, CIT buys accounts receivables from vendors that range from $5 million to $1 billion in size and then works with their customers to ensure payment. What's more, many of the factoring clients are in the garment industry, where they already face a bleak holiday season. "In the best of times you would have seen a situation where other lenders would certainly have been willing to consider getting into this business," said Mark Jacobs, a partner in law firm Pryor Cashman's bankruptcy group. "In the current environment, given the constraints on credit generally, there's not enough capacity out there," he added.

In the first six months of the year, CIT lent just $65 million in Small Business Administration loans, one percent of the total lent in this category over that time period. In 2008, CIT was the top SBA lender in dollar terms, providing 6 percent of all SBA lending, according to the National Small Business Association. At the same time, banks are also broadly cutting back on lending to small and medium-sized businesses. Banks' lending to small companies fell by about 2 percent, or $14.8 billion, for the year through June, according to data from the Federal Deposit Insurance Corp.

The NSBA had expressed its concern about a potential CIT bankruptcy and in July wrote to U.S. Treasury Secretary Timothy Geithner to ask the government to consider assisting CIT. It may discuss a similar lobbying effort again, spokeswoman Molly Brogan said in an interview before the bankruptcy filing. The major question for CIT's factoring clients is whether that unit can continue to operate as usual while its parent goes through bankruptcy. The lender said on Sunday that all operating entities are expected to continue functioning normally.

CIT's factoring business, worth about $42 billion in 2008, is estimated to be at least five times the size of its closest competitor, Wells Fargo & Co, followed by other smaller companies such as GMAC Inc and Rosenthal & Rosenthal. It is not clear if these rivals have enough capacity to take on all of CIT's existing customers. Many of those clients, anticipating funding problems from CIT, have already drawn down on their credit lines. In one week in July alone -- before the company secured an emergency loan from bondholders -- CIT said in a filing it had $700 million of draws, about twice the normal level.

The company has said in filings that it hopes to complete a quick restructuring that would have minimal impact on its clients. Still, a lot about the process is uncertain, and that has CIT clients worrying about the security of their financing. "The businesses that I'm talking to are very nervous," said Vano Haroutunian, lawyer at Ballon Stoll Bader & Nadler.

Billions in aid to banks not reaching many seeking loans
Last month, Tim Burr needed $35,000 to boost his small software company, so he applied for loans at Bank of America and Citibank, both of which took billions of dollars in government bailout funds intended to spur lending and lift the economy out of a recession. They turned him down. "I thought, ‘I can’t believe this!’ These programs are supposed to help small business during tough times," said Burr, chief executive of Scopic Software in Rutland. "They were no help whatsoever."

Now he has taken another route - seeking approval for a Small Business Administration loan from Middlesex Community Savings Bank, a 31-branch bank that did not receive bailout money. Like Burr’s, many small businesses are having a difficult time getting SBA loans from lenders that took government handouts. In addition to frustrating owners who say they need the money to survive, the banks’ reluctance to lend undermines a goal of the federal stimulus program: Ease the credit crunch so companies can grow and hire again. President Obama and Governor Deval Patrick, both citing the predicament of small businesses, have in the last week proposed separate plans to encourage lending.

Overall, US commercial and industrial loans declined from about $1.6 trillion in September 2008 to $1.4 trillion in September 2009, an 11 percent decline, according to the Federal Reserve. From Oct. 1, 2008, to Sept. 30, however, SBA loans in Massachusetts through the agency’s primary program - called 7(a) - fell 17 percent, from $197 million to $164 million, and the number of loans approved dropped from 1,349 to 1,195, with an average amount of $137,000.

Loan numbers typically drop during a recession because business demand is lower and banks become more conservative, especially when dealing with struggling companies whose credit has eroded. But the 7(a) program is specifically aimed at encouraging banks to take modest risks on credit-worthy businesses whose net worth is under $8.5 million, and in February it received $730 million in stimulus money to do just that.

The government backs the loans up to 90 percent of their value, but such transactions usually account for a tiny fraction of lending at national banks, mainly because they are geared toward making much larger and more lucrative loans. Robert Nelson, SBA chief executive, said that while 7(a) loan lending remains down, the numbers are better than they were last fall and winter and he is optimistic they will continue to improve as the economy recovers.

Brian Bethune, an economic analyst for IHS Global Insight, a Lexington forecasting firm, said large banks that received bailout funds have turned away potential borrowers because they don’t have enough cash on hand. Stuck with so-called "toxic assets" - bad real estate and other investments - many banks have used bailout money to pay down debts. "They’re not good places to go for a loan," Bethune said. "They’re not really anxious to do that sort of business."

Bank of America, the largest bank in Massachusetts and the recipient of more than $45 billion in federal relief, made only 11 Massachusetts SBA 7(a) loans totaling $240,500 in the year ending in September, down from 54 loans totaling $1.6 million in the previous year. Citibank made eight loans totaling $2.4 million through the program in 2008, and one loan for $250,000 through the end of September. Its parent company, Citigroup Inc., accepted about $50 billion in bailout money. Citizens Bank, whose parent Royal Bank of Scotland benefited from a $31.9 billion bailout from the British government, approved 130 SBA loans totaling $7.9 million during the same period, down from 256 loans totaling $11.4 million the year before.

Other banks that do business in Massachusetts and accepted money from the government’s Troubled Asset Relief Program also slowed lending or offered no loans through the 7(a) program. Wainwright Bank & Trust, which got $22 million from taxpayers, offered just a single SBA loan, worth $998,000, in the year ending in September. LSB of North Andover also approved only one SBA-backed loan this year, for $150,000. LSB, the holding company for Riverbank, took $15 million in bailout money.

Central Bancorp of Somerville and OneUnited of Boston received $10 million and $12 million respectively. Neither loaned money through the SBA in the year ending in September, even after the federal government temporarily eliminated a 2 percent borrower’s fee on the guaranteed portion of all SBA loans in February. "That’s what has a lot of people on Main Street angry," said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University Law School. "It doesn’t appear to them that bankers have suffered that much" because of the recession, he said.

Bank of America spokesman T.J. Crawford said the SBA loans constitute less than 5 percent of the bank’s small business loan portfolio. He declined to disclose the total number of loans the bank has made in Massachusetts this year or discuss the steep decline in its 7(a) program. Mike Jones, a spokesman for Citizens, said the bank ranked second overall in 7(a) loan volume this year in Massachusetts, despite its overall decrease in SBA loans. He also said the British government’s bailout of the bank’s parent company, Royal Bank of Scotland, did not directly benefit Citizens, which functions independently.

Some of the state’s smallest - and most stable - banks have been filling part of the lending void. Eastern Bank, based in Boston and with 80 branches, made 156 small business loans worth $7.3 million in the year ending in September. It did not receive any bailout money. Richard Holbrook, Eastern Bank’s chief executive, said doling out money through the SBA is "really not a profitable business" but such loans meet a community need and introduce customers to the bank.

David Bennett, vice president of small business lending at Middlesex Community Savings Bank, said community banks have always been in tune with small business needs because they make lending decisions based on the needs of customers, not shareholders. Middlesex made 35 SBA loans worth $6.1 million in the year ending in September 2008, compared with 33 loans totaling $5.6 million during the same period this year, a 5 percent decline, compared with the 11 percent drop in the number of loans statewide.

"There’s been a lot of frustration among the community banks because all banks were painted with the same brush during the crisis," Bennett said. "But we’ve continued to lend. And we continue to work closely with customers that are having financial trouble in this economy." As a result, big banks may be losing credit-worthy customers to smaller counterparts. Second-generation bread baker Nabil Boghos, for instance, said he wants to get a loan that will help him nearly double the size of his Woburn company, Jessica’s Brick Oven.

Boghos, whose father founded the pita-bread company Joseph’s Middle East Bakery Inc. in 1974, said he needs to borrow about $5 million to move to a larger plant and hire more employees, which will allow him to sell bread to the Hannaford’s supermarket chain. But Boghos fears his bank, Bank of America, may say no, so he plans to apply for an SBA loan at a community bank as well. "Nobody is willing to take a chance," he said. "I don’t quite understand it. All these [federal] dollars that are being given to these banks. It seems like everybody is getting dollars these days."

Jittery Companies Stash Cash
Stung by the financial crisis, companies are holding more cash -- and a greater percentage of assets in cash -- than at any time in the past 40 years. In the second quarter, the 500 largest nonfinancial U.S. firms, by total assets, held about $994 billion in cash and short-term investments, or 9.8% of their assets, according a Wall Street Journal analysis of corporate filings. That is up from $846 billion, or 7.9% of assets, a year earlier. The trend appears to have continued in the third quarter, despite an improving economy. Of those 500 companies, 248 have reported third-quarter results. Their cash increased to 11.1% of assets, from 10.1% in the second quarter. Companies as diverse as Alcoa Inc., Google Inc., PepsiCo Inc. and Texas Instruments Inc. all reported big third-quarter increases in cash holdings.

"Everyone is hoarding cash," says Carsten Stendevad, head of Citigroup Inc.'s financial-strategy group. He and others call that a hangover from the financial crisis a year ago, when companies couldn't raise money or had to pay much higher rates than usual. Large cash balances are both a curse for the economy and a potential blessing. Hoarding means companies are spending and investing less, damping economic growth. But that leaves them with more cash to deploy as the economy improves, giving them a freer hand to acquire, and to restart hiring and capital spending. Large cash balances are "great news for the macroeconomy," says Mr. Stendevad. "A lot of firms now are in a start reinvesting again, and that ultimately is what is gong to drive employment."

In response to last year's financial crisis, executives have bolstered rainy-day funds to ensure they can cover day-to-day operations. Aggressive cost cutting and a recent boom in debt issuance also have swelled cash balances. Many companies have no plans for the cash, beyond peace of mind. "They'd have to beat me over my head to get it out of my hands," says Charles McLane, Alcoa's chief financial officer. The aluminum maker reported holding $1.1 billion in cash and cash-equivalents on Sept. 30, up 28% from a year earlier. As revenue slumped this year, Alcoa cut its dividend, its spending and more than 15,000 jobs to save cash. Alcoa posted a profit in the third quarter, but Mr. McLane remains cautious. "We're just going to be extremely prudent" about managing cash, he says.

Some companies are considering targeted spending or acquisitions. Semiconductor maker Texas Instruments this year has acquired two small companies, plus equipment from a bankrupt competitor. TI reported $2.8 billion in cash and short-term investments as of Sept. 30, up 42% from a year earlier, despite a 26% decline in revenue in the nine months ended Sept. 30, from the year-earlier period. Chief Financial Officer Kevin March says executives decided a year ago to amass cash so they could seize opportunities to buy cheap manufacturing capacity, technology and other assets. Now, he says, TI can "move very quickly" on deals while maintaining strong reserves.

The cash stockpiling has accelerated a trend that dates back about two decades. In the second quarter of 1991, the 500 largest nonfinancial companies held 3.9% of their assets in cash, according to the Journal's analysis of data from corporate filings compiled by Capital IQ, a Standard & Poor's business. That number rose steadily to 9.2% in mid-2004. Rene Stulz, a finance professor at Ohio State University's business school, says companies increased cash holdings as globalization and technological change exposed them to more risk. "Firms are riskier than they used to be, so they need a bigger security blanket," he says. They are holding more of their assets in cash than at anytime since the 1960s, when payment automation reduced the need to hold cash for daily operations, he says.

Kathleen Kahle, a professor at the University of Georgia's business school, offers another reason: the growth of high-tech companies, which tend to hold lots of cash. Younger, riskier firms have more difficulty raising money when credit is tight, so they keep more cash on hand, she says. "At the same time, they have a lot of growth opportunities and want to make sure that they have the funds necessary to invest in good projects," she adds. At the end of the second quarter, the 54 biggest information-technology firms held $280 billion -- or 27% of their assets -- in cash, according to the Journal's analysis, a higher percentage than any other industry group. Cash balances grew further in the third quarter for the 34 companies in that group that have reported results.

Consider Google. The search giant's cash and short-term investments rose 53% to $22 billion in the third quarter from a year earlier, accounting for 58% of its total assets. The cash provides "operating and strategic flexibility," Google Chief Executive Eric Schmidt told analysts last month. "We're very happy to have it sit in our bank account and earn a modest interest rate." The cash-hoarding trend reversed for a few years earlier this decade, as activist investors and hedge funds pressured companies to put cash to use. Private-equity firms turned cash-flush companies into takeover targets, using the cash to repay acquisition debt. By the first quarter of 2008, the percentage of assets held in cash had fallen to 7.9%.

Then came the credit crisis. Unable to raise money in the bond markets or even issue short-term debt known as commercial paper, companies began slashing expenses and stockpiling cash. "Cash suddenly became very strategic," says Citigroup's Mr. Stendevad. In the fourth quarter of 2008, cash holdings of the 500 largest companies jumped by $46 billon, or 5%, to $886 billion. Their cash balances increased by another 12% in the first half of this year, to $994 billion. As investors regained an appetite for corporate debt last spring, companies rushed to take advantage. Through Friday, companies in the S&P 500 have issued $548 billion in corporate bonds this year, up from $403 billion in the year-earlier period, according to data provider Dealogic.

Some of that cash is now sitting idle on balance sheets. Baxter International Inc. sold $500 million in 10-year notes in August, helping to increase its cash and short-term investments by $769 million, or 43%, between the second and third quarters. A spokeswoman says Baxter plans to use the cash over time for working capital, capital spending, dividend payments, share repurchases and business development. Pepsi plans to issue debt to cover roughly half of the $7.8 billion cost of acquiring its two largest bottlers without touching the company's $3.5 billion in cash and short-term investments. The cash total is up from $1.9 billion a year ago. The money will be reinvested over time with an eye toward growth, says a company spokeswoman.

Today investors are rewarding companies with big cash hoards, says Citigroup's Mr. Stendevad. But some firms have more than they need, he says, and investors are starting to pressure executives to reinvest the money or return it to shareholders through stock repurchases or dividends. "During the crisis, no amount of cash was sufficient," he says. "Now it's about growth again."

Banks Have Taken Over The Government And Made Taxpayers Slaves To Bank-Run Gambling Casinos

A More "Personal" Look At Debt
It is common enough to look at debt as a percentage of GDP, DPI, etc. but that's so... impersonal. So here are a couple of (very scary) charts that look at things from a dollars per person perspective (click on charts to enlarge).
  • Debt per person and GDP per person.

  • Debt per person and Disposable Personal Income per person.

Note: the Total Debt used to construct these chart does NOT include debt of the financial sector so as to avoid any double counting (e.g. a mortgage inside a CDO), even at the cost of somewhat understating the crush of debt. It's bad enough, anyway.

Goldman Sachs: Reasonable Doubt
by Janet Tavakoli

In August 2007, I publicly challenged the fact that AIG took no writedowns whatsoever for its credit default swaps on underlying mortgage related "super senior" positions. I used the example of its aggregate $19.2 billion in credit default swaps on super senior positions backed by BBB-rated tranches of residential mortgage backed securities. I spoke with Warren Buffett, but only about what I had already told the Wall Street Journal (Dear Mr. Buffett Pp. 164-165, 246).

I met with Jamie Dimon, CEO of JPMorgan Chase, adding that the difference was material. JPMorgan Chase’s credit derivatives positions exceeded those of all other U.S. banks combined at the time. JPMorgan was not a participant in the problematic deals, and it was not a recipient of AIG’s settlement payments, but stability in the credit derivatives markets was an important issue. Dimon was dismissive of my concerns. In August of 2007, a potential implosion of AIG was too horrible to contemplate.

Unbeknownst to me, in July 2007, Goldman Sachs and AIG began a prolonged battle over prices and collateral payments for pre-2006 vintage deals on which Goldman had bought protection. Was the risk that Goldman hedged with AIG as bad as Goldman Sachs Alternative Mortgage Products’ GSAMP Trust 2006-S3? Any risk manager worth their salt would have reasonable doubt about this deal and conduct a fraud audit. A fraud audit doesn’t mean you are accusing anyone of fraud, only that the audit will be thorough, because there are indications of grave problems. If there is fraud, however, the audit should be rigorous enough to uncover it.

If the aggregate $19.2 billion CDS position were derived from BBB rated tranches similar to one from GSAMP Trust 2006-3, the supposedly super safe "super senior" tranche would be worth zero. Every underlying BBB tranche would have permanent value destruction and zero value. AIG would owe a credit default swap payment for the full amount $19.2 billion. Since there is doubt about the collateral of every deal of this ilk, super senior tranches of mezzanine CDOs in the secondary market are currently valued at zero. No wonder Goldman Sachs bought protection from AIG on mortgage backed deals—and then bought protection on AIG.

Goldman may not have contributed to the aggregate $19.2 billion position, but this mezzanine super senior risk was visible to all of AIG’s counterparties. Sophisticated counterparties like AIG are supposed to protect themselves, and have little chance for recovering damages. But now the American taxpayer has stepped in to make payments for AIG. U.S. taxpayers have a right to recover money paid out for derivatives on deals that include phony collateral.

Maiden Lane III now owns the underlying CDOs for AIG’s cancelled credit default swaps. One can now investigate them—and all of the underlying collateral.

The government’s 100% payout to AIG’s counterparties was a gift, and the negotiations were done in secret. The monoline insurers were in a similar situation with a variety of deals from a variety of counterparties. (Structured Finance Pp. 405-427) For example, in 2008, Citigroup Inc. accepted about 60 cents on the dollar from New York-based bond insurer Ambac Financial Group Inc. to retire protection on a $1.4 billion CDO. Ambac said the underlying "super senior" was worth about zero, and the protection payment would otherwise have been near the full $1.4 billion. Citigroup got a relatively huge payout, since other "high grade" deals have been settled for as low as ten cents on the dollar.

The irony is that Goldman Sachs may not have been involved in the worst of the deals, but its officers had unusually high profile in AIG’s damage control. Goldman’s deals with AIG may have all been completely proper, but deals like GSAMP Trust 2006-3 indicate that Goldman should not be exempt from the general fraud audit of mortgage securitizations that all of the former investment banks [Lehman, Bear Stearns, Morgan Stanley, Goldman Sachs, Merrill Lynch, and some foreign banks going business in the U.S. (DMB Pp. 97107.)] should undergo.

When Goldman’s CFO David Viniar made his remarks about Goldman’s exposure to AIG on September 16, 2008 it was in the heat of the AIG negotiations. He said Goldman’s exposure to AIG was not material. (DMB P. 167) Goldman’s hedges were a separate issue and may have paid out (due to triggers) even post bail-out, albeit Goldman had high anxiety about its counterparties’ ability to pay at the time. On September 16, Bloomberg’s Erik Holm and Christine Richard wrote of the dire global market consequences of an AIG failure. For example, Bank of America had just agreed to merge with Merrill Lynch & Co., which held $6 billion of super senior exposure to collateralized debt obligations hedged with an insurer.

I told Bloomberg: "It’s impossible [without more disclosure] to know which insurance company they’re referring to, though if it is AIG, it may have emboldened AIG to go to the Fed." AIG’s downgrade would result in another writedown for Merrill. Merrill later received a $6.3 billion bailout payment from AIG. Goldman was not disinterested about the billions in collateral owed by AIG (if it extracted too much in advance, payments could be clawed back). WSJ’s Serena Ng reported that even before AIG collapsed, Goldman received $7.5 billion in collateral from AIG. After the bailout and before year end 2008, AIG got another $8.1 billion from AIG just for the credit swaps and billions more for other financial positions.

Goldman’s CEO Lloyd Blankfein knew that if AIG failed, Goldman’s counterparties would suffer collateral damage (DMB P. 167), and Goldman would be exposed to "untold billions in crippling losses." ( Too Big to Fail, P. 382, Andrew Sorkin, Viking 2009 The quote marks refer to the book’s text, not to a quote from Blankfein. WSJ had previously reported Goldman’s concern. )

The public wanted to know if Goldman Sachs was one of AIG’s large credit derivatives counterparties, since it was involved in the bailout negotiations. In September 2008, AIG’s fresh credit rating downgrade (from AA to A) triggered a clause, requiring it to provide 100% collateral for many of its CDS contracts. It meant AIG had to quickly come up with tens of billions for some of its counterparties, and it was unable to do it. It was in that context that David Viniar made his remarks on September 16, 2008. Viniar’s remarks obscured the fact that Goldman was not disinterested. (DMB P. 167)

Goldman’s board first learned of its ongoing collateral dispute with AIG in November 2007, and Goldman against the possibility that AIG would fail (TBTF P. 175). Goldman bought protection (only $1.5 billion was in dispute at this early stage). In July 2008, PricewaterhouseCoopers (PWC), the auditor for both Goldman and AIG, briefed Goldman’s board about Goldman’s hot dispute with AIG over its portfolio value. Goldman wanted more collateral, and AIG resisted. The amounts in dispute had grown larger. Lloyd Blankfein said AIG was "marking to make-believe." (TBTF P. 175) Goldman’s co-president, Jon Winkelried, questioned PWC about its conflict of interest. Goldman increased its hedges; it paid $150 million for credit protection on $2.5 billion of debt. It also extracted billions more in collateral from AIG.

Gary Cohn, president and COO of Goldman Sachs, boasted that Goldman overhedged its exposure to AIG and might make $50 million if AIG collapsed (TBTF P. 382). That is splendid information, since some (or all) of those hedges may have paid out given the circumstances of the AIG bailout. Participation in the bailout negotiations gives one a chance to structure the bailout in such a way to trigger as many hedge contracts as possible and get a double whammy. Whether or not it maximized its outcome, Goldman was not disinterested.

Stephen Friedman, a Goldman Sachs board member and then also Chairman of the Board of the New York Fed, bought shares of Goldman Sachs before the public knew that Goldman Sachs would receive full payments from AIG with public funds. Things were looking up for Goldman Sachs, and Friedman was in a better position than the public to know that. The public was still in the dark.

David Viniar and Ralph Cioffi, formerly co-head of Bear Stearns Asset Management and now fending off a dispute with former investors, have something in common. After I publicly opposed his proposed Everquest IPO, Cioffi claimed it had little exposure to subprime, because he was "hedged." In my experience, one usually addresses a deal’s gross exposure, and then talks about being hedged. (DMB P. 133) As it happened, Cioffi was underhedged. In Viniar’s case, Goldman was apparently overhedged if AIG collapsed (assuming Goldman’s other counterparties didn’t collapse since AIG, Lehman, and Merrill were having problems causing system-wide stress, and assuming no disputes over whether or not conditions of payment were met).

Yet the magnitude of Goldman’s gross exposure and $7.5 billion in previous collateral payments and prospective billions more owed by AIG was an important consideration at the time—irrespective of the quality of the hedges—given Blankfein’s, and Friedman’s potential roles in the bailout negotiations. Henry ("Hank") Paulson, then Treasury Secretary and a former Goldman CEO, was CEO of Goldman at the time it put on its trades with AIG. He was an important influence and participated in negotiations of the Merrill / BofA merger.

Ralph Cioffi had more in common with Goldman than disclosure style. Reuters’ Matthew Goldstein reported that in March 2007, the funds Cioffi managed became the largest single investor in one of Goldman’s toxic CDOs. The funds made a $300 million investment in Timberwolf I, a $1 billion Goldman deal. It was managed by Greywolf Capital, a firm founded by former Goldman bond traders. Within two weeks of the purchase, Goldman began marking down the value of the securities it just brought to market.

Sorkin states that Goldman’s worried as early as November 2007 about a possibility of AIG’s failure (TBTF P. 175), and if AIG failed in September, Blankfein worried about billions in crippling losses. In a recent Wall Street Journal interview, Blankfein said he didn’t suspect AIG had problems producing collateral: "I never had reason to suspect....[I]t never occurred to me." Yet, it seems nothing about AIG’s potential bankruptcy or bailout was immaterial to Goldman Sachs.

Why the Goldman Sachs-AIG Story Won’t Go Away
How did so much taxpayer money end up in the coffers of American International Group Inc.’s too- big-to-fail customers? The more we find out, the more it becomes obvious we still don’t know the half of it. It’s the story that won’t go away: Was last year’s federal rescue of AIG a back-door bailout for the likes of Goldman Sachs Group Inc., Societe Generale SA, Deutsche Bank AG, Merrill Lynch & Co. and other large banks? And who exactly were the regulators trying to protect when they seized control of the insurance giant in September 2008? The banks? Or the rest of us?

To believe AIG’s disclosures, you’d have thought its executives decided on their own last year to pay 100 cents on the dollar to the various banks that had bought $62 billion of credit-default swaps from the company. Now, thanks to an Oct. 27 story by Bloomberg News reporters Richard Teitelbaum and Hugh Son, we know otherwise. It turns out the decision to make the banks whole wasn’t AIG’s. It was made by the Federal Reserve Bank of New York, back when its president was the current U.S. Treasury secretary, Timothy Geithner, and its chairman was Goldman Sachs director Stephen Friedman. (Friedman resigned from the New York Fed in May, after the Wall Street Journal reported he had bought more than 50,000 shares of Goldman stock following AIG’s takeover.)

Before AIG was seized, its executives had been negotiating for months with the banks, trying to get them to accept discounts of as much as 40 cents on the dollar, Bloomberg reported, citing people familiar with the matter. Then, late in the week of Nov. 3, the New York Fed took over the negotiations with the banks from AIG, together with the Treasury Department (at the time run by former Goldman boss Henry Paulson) and Chairman Ben Bernanke’s Federal Reserve Board. Less than a week later, the New York Fed instructed AIG to pay the counterparties in full, Bloomberg reported.

Judging by the result, you might think Geithner’s team was on the banks’ side, rather than AIG’s. AIG wound up paying $32.5 billion to retire the swaps, $13 billion more than if it had paid, say, 60 cents on the dollar. The New York Fed also arranged to pay the banks $29.6 billion for collateralized-debt obligations backed by subprime mortgages and other loans, a tad less than half their face value. (The swaps were side bets by the banks that rose in value as the CDOs fell.)

It probably made sense for the counterparties to reject AIG’s initial settlement offers. They had their own investors to look after. And once the government took control of AIG, it couldn’t credibly threaten to force the company into bankruptcy proceedings. The premise of the government’s seizure, after all, was that AIG was too big to fail.mBut why the rush to pay the banks in full once Geithner’s team took over the talks? The public has never gotten satisfactory answers, notwithstanding that the government’s commitment to AIG now stands at about $182 billion.

In a story published yesterday in response to Bloomberg’s scoop, the New York Fed’s general counsel, Thomas Baxter, told the Washington Post that officials were racing to prevent AIG’s collapse and didn’t have time for protracted negotiations with each creditor. That won’t put to rest suspicions that regulators used AIG as a slush fund to shield some of the banks from losses, using taxpayer money. Nor has anyone from AIG or the government explained why there was such a hurry to buy the CDOs. While the banks supposedly received market prices, that deal has since turned sour for taxpayers. The value of the securities, now held by a Fed-run entity called Maiden Lane III, was down by about $7 billion as of June 30, according to the New York Fed.

The public might get some answers soon. Next month, the inspector general for the government’s Troubled Asset Relief Program, Neil Barofsky, is scheduled to release a report on whether AIG overpaid the banks, and the extent to which the counterparties’ own financial problems may have been at issue. Goldman, for one, has long said it wouldn’t have incurred any material losses even if AIG had gone under. "We limited our overall credit exposure to AIG through a combination of collateral and market hedges," Goldman’s chief financial officer, David Viniar, said in March. "There would have been no credit losses if AIG had failed."

Then again, Viniar is the same guy who this month made the ridiculous claim that Goldman doesn’t have a too-big-to-fail guarantee from the government. Goldman has refused to identify who the counterparties were on the other side of its hedges, rendering Viniar’s statement in March unverifiable. Even if Goldman was fully hedged, it’s reasonable to assume that not all the other banks were. We shouldn’t have to guess anymore, though. It’s long past time for the government to start telling us the whole truth about what happened at AIG. We’ve had too many secrets in this financial crisis already.

Goldman Looks to Buy Fannie Mae Tax Credits
Goldman Sachs Group Inc. is in talks to buy millions of dollars of tax credits from government-controlled mortgage giant Fannie Mae, but the potential deal is running into opposition from the U.S. Treasury, which could block the deal. A sale would bring some needed financial respite to Fannie Mae. But the administration is leery about approving a deal that would help Goldman reduce its tax bill, given the animus held by many lawmakers toward big Wall Street firms in general and Goldman in particular. The Obama administration is looking at the deal with a critical eye and could block it. Goldman, meanwhile, is hopeful it could win approval this week.

."Treasury is reviewing and will not let it proceed unless it is clearly in the taxpayers' interest," spokesman Andrew Williams said. Fannie Mae and its regulator, the Federal Housing Finance Agency, declined to comment. "Fannie Mae is owned and controlled by the federal government," said Goldman Sachs spokesman Michael DuVally, who wouldn't confirm the company was in talks with Fannie about the credits. "The only basis on which approval for any transaction would be given would be if it was clearly in the taxpayers' best interest."

Precise details of the deal couldn't be learned. Some on Wall Street think Goldman could buy $1 billion of the tax credits, which would allow the bank to offset a portion of its profit. It is unclear how much of a discount Goldman is offering to pay. One person familiar with the potential transaction said Goldman could line up other investors for the deal as well. Nearly every major business decision at Fannie Mae and Freddie Mac is vetted or directed by the government. Officials at both firms have complained about their contradictory missions -- they are at once private companies and tools of public policy. The Goldman talks are emblematic of these conflicts: A deal that could help Fannie Mae might also be politically unpalatable.

The Treasury Department has purchased $45.9 billion in preferred stock in Fannie Mae since it took over the company last year to pump money into the firm, giving taxpayers a substantial stake in the firm. The tax credits are an incentive in federal law to spur investments in low-income housing. The law allows investors to receive tax credits for financing qualified housing developments. These credits tend to be drawn out over periods such as 10 years, and are attractive to companies that know they will be profitable during that span.

Both Fannie Mae and its rival Freddie Mac loaded up on low-income housing tax credits during the real-estate boom. But the credits have lost considerable value in the past 18 months. Fannie Mae has lost tens of billions of dollars and, like many other financial firms, has been unable to use them. Fannie Mae had $5.8 billion in such partnership investments as of June 30. "There is decreased market demand for [such] investments because there are fewer tax benefits derived from these investments by traditional investors, as these investors are currently projecting much lower levels of future profits than in previous years," Fannie Mae said in an August filing with the Securities and Exchange Commission.

Fannie Mae, for its part, would be able to unload credits that are weighing on its balance sheet and forcing it to take losses. Selling them would bring earnings into the firm that might offset the amount of money Fannie Mae has to borrow from the Treasury Department. It could also help free up Fannie Mae's balance sheet so the company can finance more housing loans. A key issue will be how much of a discount Goldman plans to pay for the tax credits, especially if the terms are seen as generous to the bank.

Washington officials are likely to look at the deal with a skeptical eye. One reason: Approving it could further the perception that policy makers have taken steps in the last year that aided Goldman above other banks. For many in Washington still in the grip of populist fervor, Goldman has become a symbol of how Wall Street's recovery has outpaced that of Main Street, at taxpayer expense. The Federal Reserve waived normal rules to allow Goldman and Morgan Stanley to quickly become bank holding companies last year, protecting them from some of the financial-market trauma that befell Bear Stearns and Lehman Brothers. The government injected $10 billion into Goldman through the Troubled Asset Relief Program. The bank was also helped by the bailout of American International Group Inc., through contracts Goldman had with the giant insurer.

Goldman was one of the first Wall Street banks to pay back its government cash and has either paid or set aside $16.7 billion in compensation and benefits for employees through the first nine months of 2009. "As we see American workers' dreams of retirement being delayed and postponed and vanquished, and we see them losing their homes, as we see them losing their small businesses, we see record profits over at Goldman Sachs," Rep. Luis Gutierrez (D., Ill.) told Treasury Secretary Timothy Geithner at a congressional hearing Thursday.

Fannie Mae hasn't sold tax credits in at least a year. Citigroup Inc.'s bank division bought a $676 million portfolio from Fannie Mae in 2007, consisting of funds owning 382 properties with 31,050 rental units. The Treasury has invested a combined $96 billion in Fannie Mae and Freddie Mac since the companies were taken over in September 2008, and it is unclear when either company might be able to repay any of the money. Fannie Mae lost $37.9 billion in the first six months of 2009.

Fannie Mae August delinquencies jump
Fannie Mae, the largest provider of funding for U.S. home mortgages, said on Friday that delinquencies on loans it guarantees accelerated in August, while its mortgage investment portfolio grew in September from the previous month. The delinquency rate on loans in its single-family guarantee business rose 0.28 percentage point to 4.45 percent in August, the most recent data available. That was well above the rate a year earlier when it was 1.57 percent.

The multifamily delinquency rate was unchanged at 0.56 percent in August, but a year earlier, it was 0.16 percent. For September, Fannie's mortgage investment portfolio grew by an annualized 22.4 percent rate, totaling $792.7 billion, for an annualized 0.9 percent increase in the year-to-date, the Washington, D.C.-based company said in its monthly summary. In September 2008, the portfolio was $761.4 billion. The company's total mortgage portfolio increased at a 5.2 percent annualized rate in September to $3.243 trillion, for an annualized 5.7 percent increase year to date.

Fannie Mae said it provided $67 billion in liquidity to the market through net retained commitments of $7.8 billion and $59.2 billion in mortgage-backed securities issuances. Fannie Mae mortgage-backed securities and other guarantees grew at a compound annualized rate of 6.9 percent during the month to $2.821 trillion, for an annualized 10.8 percent increase year to date. Issuance of mortgage-backed securities decreased to $59.2 billion from $62.1 billion the previous month. Liquidations decreased to $44.6 billion, the company said.

In early September 2008, the U.S. government seized control of Fannie Mae and its smaller rival, Freddie Mac, amid heightened worries about shrinking capital at the congressionally chartered companies. The current agreement with the U.S. Treasury has the retained portfolios at Fannie Mae and Freddie Mac capped at $900 billion until December 31, 2009 when they are to start declining by 10 percent per year until they reach $250 billion.

The government has been relying heavily upon Fannie and Freddie in its efforts to stimulate the U.S. housing market by buying more mortgage loans, easing refinancing and helping homeowners avoid foreclosure. After suffering the worst downturn since the Great Depression, the hard-hit U.S. housing market has been showing signs of stabilization. Home price declines have moderated in many regions of the country. In fact home prices have risen in some regions, according to some indexes.

9 more U.S. banks fail; $2.5 billion hit for FDIC fund
Nine more U.S. banks, all owned by the same Illinois holding company, were closed Friday by regulators, and the Federal Deposit Insurance Corp. said U.S. Bank of Minneapolis would assume their deposits. The closings brought the 2009 total to 115 in 2009 -- the first year since 1992 that more than 100 banks have gone under. The banks as of Sept. 30 had combined assets of $19.4 billion and deposits of $15.4 billion, the FDIC said. The deposit insurance fund will take an estimated $2.5 billion hit, the FDIC said.

All nine banks were subsidiaries of FBOP Corp., a holding company based in the Chicago suburb of Oak Park, Ill., according to the FDIC. Privately held FBOP, which originated as the parent company of First Bank of Oak Park, wasn't involved in Friday's closures, the FDIC said. The FBOP subsidiaries that were closed Friday were identified as Bank USA, Phoenix; California National Bank, Los Angeles; San Diego National Bank, San Diego; Pacific National Bank, San Francisco; Park National Bank, Chicago; Community Bank of Lemont, Lemont, Ill.; North Houston Bank, Houston; Madisonville State Bank, Madisonville, Texas; and Citizens National Bank, Teague, Texas.

It is Japan we should be worrying about, not America
Japan is drifting helplessly towards a dramatic fiscal crisis. For 20 years the world's second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending – and allowing it to push public debt beyond the point of no return.

The rocketing cost of insuring against the bankruptcy of the Japanese state is telling us that the model has smashed into the buffers. Credit default swaps (CDS) on five-year Japanese debt have risen from 35 to 63 basis points since early September. Japan has suddenly decoupled from Germany (21), France (22), the US (22), and even Britain (47). Regime-change in Tokyo and the arrival of Yukio Hatoyama's neophyte Democrats – raising $550bn (£333bn) to help fund their blitz on welfare and the "new social policy" – have concentrated the minds of investors at long last. "Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan," said Albert Edwards, a Japan-veteran at Société Générale.

Simon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised "a real risk that Japan could end up in a major default". The IMF expects Japan's gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014. This has been manageable so far only because Japanese savers have been willing – or coerced – into lending for almost nothing. The yield on 10-year government bonds has been around 1.30pc this year, though they jumped to 1.42pc last week.

"Can these benign conditions be expected to continue in the face of even-larger increases in public debt? Going forward, the markets capacity to absorb debt is likely to diminish as population ageing reduces saving," said the IMF. The savings rate has crashed from 15pc in 1990 to near 2pc today, half America's rate. Japan's $1.5 trillion state pension fund (the world's biggest) has become a net seller of government bonds this year, as it must to meet pay-out obligations. The demographic crunch has hit. The workforce been contracting since 2005.

Japan Post Bank is balking at further additions to its $1.7 trillion holdings of state debt. The pillars of the government debt market are crumbling. Little wonder that the Ministry of Finance has begun advertising bonds in Tokyo taxis, featuring Koyuki from The Last Samurai. If Japan's bond rates rise to global levels of 3pc to 4pc, interest costs will shatter state finances. No one knows exactly when a country tips into a debt compound trap. But Japan must be close, even allowing for the fact that liabilities of the state Loan Programme (FILP) have fallen by 40pc of GDP since 2000.

"The debt situation is irrecoverable," said Carl Weinberg from High Frequency Economics. "I don't see any orderly way out of this. They will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this." Mr Hatoyama inherited a country that was already hurtling into sovereign "Chapter 11". The Great Recession has eaten up 27pc in tax revenues. Industrial output is down 19pc, even after the summer rebound; exports are down 31pc; the economy is 10pc smaller today in "nominal" terms than a year ago – and nominal is what matters for debt.

Tokyo's price index fell 2.4pc in October, the deepest deflation in modern Japanese history. Real interest rates have risen 300 basis points in a year. It reads like a page from Irving Fisher's 1933 paper, Debt Deflation Causes of Great Depressions. The Bank of Japan seems oddly insouciant. It will end its (feeble) quantitative easing in December by suspending purchases of corporate debt, much to the fury of the Finance Ministry. "This is incredibly dangerous," said Russell Jones from the RBC Capital Markets. "The rate of deflation is shocking. The debt dynamics are horrible and there is the risk of a downward spiral."

Tokyo has let the yen appreciate violently – 90 to the dollar, 13 to the Chinese yuan – giving another twist to the deflation knife. Top exporters are below break-even cost, says RBS. The government could stop this, as it did in a wave of manic dollar purchases from 2003-2004. It could print money à l'outrance to stave off deflation. Yet it sits frozen, like a rabbit in the headlamps. Japan's terrible errors are by now well known. It failed to jettison its mercantilist export model in time. It resisted the feminist revolution, leading to a baby strike by young women. It acquiesced in a mad investment bubble (like China now) in the 1980s, stealing growth from the future.

It wasted its immense fiscal firepower, scattering money for 20 years on half-baked spending projects to keep the economy afloat. QE was too little, too late, and this is the lesson for the West. We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy. Does Downing Street understand this? Does the White House? Does the European Central Bank? Clearly not.

Vote on Extending Homebuyer Credit Delayed Over TARP
The U.S. Senate won’t vote until next week at the earliest on proposals to extend both an $8,000 tax credit for first-time homebuyers and unemployment benefits for the nation’s jobless. The administration endorses an extension. Senate action was delayed by a Republican demand that a vote be allowed on an amendment to end the Treasury Department’s Troubled Asset Relief Program at the end of this year.

Senate Majority Leader Harry Reid, a Nevada Democrat, balked yesterday at the demand by Senate Minority Leader Mitch McConnell, a Kentucky Republican. Reid also took procedural steps to end debate and schedule Senate action on extending the homebuyer tax credit and the unemployment benefits. "I think the first-time home-buyer credit is a great example of funding that’s helped to stabilize the housing market and should be extended," Jared Bernstein, chief economist to Vice President Joe Biden, said on Bloomberg television. Treasury Secretary Timothy Geithner gave his support yesterday.

Lawmakers announced plans earlier this week to attach the tax-credit proposal to a pending bill on the unemployment benefits. The $8,000 tax credit, enacted earlier this year as part of the $787 billion economic stimulus package, is set to expire at the end of November. The lawmakers want to extend the credit until April 30. Their proposal would also expand it to allow higher-income Americans and some who already own homes to qualify for the break.

Homebuyers who have lived in their prior residences for at least five years may receive a credit of $6,500 under the plan, said Senate Finance Committee Chairman Max Baucus. Also, couples earning as much as $225,000 and individuals as much as $125,000 would qualify for the extended break, Baucus said. That’s up from a $75,000 limit for individuals and $150,000 for couples. "The success of the American economy is closely tied to the success of the housing market; by helping to stabilize the housing market, the homebuyer tax credit has helped to shore up the economy as it begins to recover," said Baucus, a Montana Democrat. "This would enable an even greater number of potential homebuyers to take the credit."

Lawmakers said they want to prevent home sales from slipping as the economy struggles to recover from the worst drop in home prices since the Great Depression. More than 1.2 million borrowers have claimed $8.5 billion of the $13.6 billion set aside for the homebuyer tax credits this year, according to the Treasury Department. The Obama administration, in endorsing the extension yesterday, said the credit has helped stabilize the nation’s housing market. The tax break "brought new families into the housing market and contributed to three consecutive months of rising home prices," Geithner said in a statement.

The measure would require those receiving the tax break to remain in their new homes for three years and they would have to repay the credit if they don’t. Those buying homes worth more than $800,000 wouldn’t be eligible for the credit, said Baucus. Lawmakers also said they won’t extend the break beyond the new April 30 deadline. "The American people should understand this -- and the affected industries -- this is the last extension," said Senator Johnny Isakson, a Georgia Republican who cosponsored the plan. "Tax credits like this only work by creating the sense of urgency to take advantage of them."

Isakson estimated the new plan would cost $10.2 billion. Senate Banking Committee Chairman Christopher Dodd said the plan wouldn’t add to the government’s budget deficit because lawmakers plan to finance it by delaying a tax break for multinational companies scheduled to take effect next year. The bill that would include the tax-credit plan calls for extending unemployment benefits by 14 weeks in all states and by an additional six weeks in states with the highest jobless rates. That bill has been stalled for weeks because of an ongoing dispute between Reid and McConnell over amendments to the measure.

McConnell yesterday dropped his demands for votes on amendments related to immigration and the community activist group ACORN. He held firm on his push for the TARP-related amendment. The proposal would remove Geithner’s ability to unilaterally extend the TARP program beyond its Dec. 31 expiration date to October 2010. "It seems to me there should be a better time to have this debate," Reid said. Any legislation the Senate passed would have to be reconciled with a House-passed bill last month that didn’t include the tax-credit provisions and provides more limited unemployment benefits. Reid said House Majority Leader Steny Hoyer, a Maryland Democrat, assured him that "they will accept what we’ve talked about with first-time homebuyers."

Ross, Soros See 'Huge' Commercial Real Estate Crash
Billionaire investor Wilbur L. Ross Jr., said today the U.S. is in the beginning of a "huge crash in commercial real estate." "All of the components of real estate value are going in the wrong direction simultaneously," said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. "Occupancy rates are going down. Rent rates are going down and the capitalization rate -- the return that investors are demanding to buy a property -- are going up." U.S. commercial property sales are forecast to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s, according to property research firm Real Capital Analytics Inc.

The Moody’s/REAL Commercial Property Price Indices already have fallen almost 41 percent since October 2007, Moody’s Investors Service said Oct. 19. Billionaire George Soros, speaking today at a lecture organized by the Central European University in Budapest, said a "bloodletting" may be coming for leveraged buyouts and commercial real estate. "The American consumer will no longer be able to serve as the motor for the world economy," said Soros, 79. His comments came in the same week that Capmark Financial Group Inc. filed for Chapter 11 bankruptcy protection after originating $60 billion in commercial property loans in 2006 and 2007.

Ross, the 71-year-old chairman and chief executive officer of WL Ross & Co. LLC, said in an interview on Bloomberg Radio that he would use "extreme caution" before putting money into commercial real estate, especially office space, because properties are losing tenants. U.S. office vacancies hit a five-year high of almost 17 percent in the third quarter, while shopping center vacancies climbed to their highest since 1992, according to the property research firm Reis Inc. "I think it’s going to take quite a while to work itself out," Ross said.

As of Oct. 15, Ross said he had spent less than $100 million of at least $1.5 billion available to him under the Public-Private Investment Program, an investment pool of private and government money for purchasing distressed assets from financial institutions. Ross used the funds he spent so far to purchase residential mortgage-backed securities, he said in a Bloomberg Television interview. WL Ross was among a group of firms that agreed Oct. 6 to buy $4.5 billion of Corus Bankshares Inc.’s real estate. Starwood Capital Group LLC and TPG led the group to buy the assets of the Chicago-based lender, which was seized by federal regulators Sept. 11 after its investments in construction loans for condominiums went bad.

In 2007, Ross ventured into the declining residential property market, winning an auction for the home-loan servicing unit of Melville, New York-based American Home Mortgage Investment Corp. He agreed to pay between $435 million and $500 million for the right to collect payments and maintain escrow on about $45.3 billion of home mortgages. Dubbed the King of Bankruptcy by clients during his quarter century at the Rothschild investment bank, Ross entered the U.S. home mortgage business as an increasing number of borrowers quit making payments and profits sank in loan servicing.

"Our methodology is to make a great big list: What’s every thing we can think of that’s either wrong with the industry or that we just plain don’t like about it," Ross said today. "Then we start work on another list. If we had control of this industry, what would we do to fix each one of those problems?" he said. "Once we feel that there is a reasonable likelihood that the second chart kind of equals the first chart, that’s when we get ready to do something."

U.S. Home Vacancies Rise to 18.8 Million on Defaults
About 18.8 million homes stood empty in the U.S. during the third quarter as banks seized properties from delinquent borrowers and new home sales fell in September. The number of vacant properties, including foreclosures, residences for sale and vacation homes, rose from 18.4 million a year earlier and 18.7 million in the second quarter, the U.S. Census Bureau said in a report today. The record high was in the first quarter, when 18.95 million homes were vacant. The homeownership rate, meaning households that own their own residence, stood at 67.6 percent.

The worst U.S. housing crash since the Great Depression has led to a record number of foreclosures and shaved almost a third off property values. The S&P/Case-Shiller Index of 20 cities in August was 29 percent below its 2006 high, after rising for four consecutive months. "We are bumping along the bottom of the housing market," said James Lockhart, vice chairman of WL Ross & Co. and the former director of the Federal Housing Finance Agency. "There is the potential for another swing down."

Sales of new U.S. homes fell 3.6 percent in September to an annual pace of 402,000, the Commerce Department said yesterday. That was lower than the 440,000 median forecast of 75 economists surveyed by Bloomberg News. The percentage of all U.S. homes empty and for sale, known as the vacancy rate, rose to 2.6 percent from 2.5 percent in the second quarter. It hit an all-time high of 2.9 percent in the first and fourth quarters of 2008, the Census Bureau said.

There were 130.3 million homes in the U.S. in the third quarter, according to the report. In addition to the 2 million empty properties for sale, the report counted 4.6 million vacant homes for rent and 4.6 million seasonal properties that are only used for part of the year. Foreclosures are included in a part of the Census Bureau that also includes vacation homes intended for year-round use and homes that are unoccupied because they are under renovation or tied up in legal proceedings. There were 7.7 million such properties empty in the first quarter, up from 7.5 million a year earlier, the report said. Foreclosures could also be counted as vacant homes for sale or rent, or as owner-occupied properties if lenders have not yet evicted previous owners, the federal agency said.

Companies have shed more than 7 million jobs since the recession began in December 2007, cutting demand for homes and eroding the consumer spending that makes up about 70 percent of the world’s largest economy. In September, the unemployment rate rose to 9.8 percent, the highest in more than a quarter century. U.S. foreclosure filings climbed to a record in the third quarter as lenders seized more properties from delinquent borrowers, according to RealtyTrac Inc. in Irvine, California. A total of 937,840 homes received a default or auction notice or were repossessed by banks, a 23 percent increase from a year earlier, the data company said.

U.S. banks in the second quarter held $34 billion of properties acquired through foreclosure, including repossessed homes and condominium projects gone bust, according to the Federal Deposit Insurance Corp. in Washington. That’s almost double the $18.9 billion of real estate a year earlier.

Central banks chill asset rally
The liquidity tide is turning. Authorities across large parts of the world have either begun to tighten the spigot or are taking steps to wean their economies off emergency stimulus. This is a treacherous moment for markets. Oil-rich Norway raised rates a quarter point to 1.5pc on Wednesday, the first European country to move since the crisis. Governor Svein Gjedrem said asset prices have "risen sharply and probably excessively". The Norges Bank is taking pre-emptive action to choke off a property bubble, though manufacturing remains sluggish. The era of "asset targeting" has begun.

Australia took the plunge earlier this month. It dodged recession over the winter and has since been lifted by China's torrid demand for commodities. Israel kicked off in August. Teun Draaisma, Morgan Stanley's equity strategist, said investors should move with care as central banks awaken. A study of 19 "bear market" rallies over recent decades shows that bourses tend to tip over as the US Federal Reserve starts tightening. Equities fall back 25pc over the next 13 months on average. It is unlikely to be better this time. "Given the amount of leverage in the economy, little changes in rates can have a disproportionate impact. The poor state of government finances, the high supply of bonds, and the fear of inflation could further exaggerate a bond market sell-off once tightening starts," he said.

Timing is tricky. Stock markets began to fall four months before the first rate US rise in 2004, but they did not tip over until the tightening started in 1994. Japan's Nikkei index in the 1990s slumped each time Tokyo drained fiscal stimulus, most notoriously by raising VAT from 5pc to 9pc in 1997 - a warning for Britain as the VAT cut expires in January. Mr Draaisma thinks global bourses may rise further before peaking, though asks whether it is worth trying to squeeze the last drops of profit from an aging rally. "We expect the sweet spot to last a bit longer. Sentiment is not ultra-bullish yet," he said.

Even so, markets are skittish. Fears of "shock therapy" from the Fed are rising after a string of comments by Fed hawks (not Ben Bernanke) hinting that rates may come sooner and harder than expected. There is little doubt that the spike in yields on 10-year US Treasuries above 3.5pc on Monday - rasing the benchmark cost of money for the global system - was a trigger for Wall Street's sell-off this week. Funds are fretting as the Fed winds down its programme to cap bond rates through "credit easing". The $300bn (£181bn) blitz on Treasury debt ended yesterday: the $1.25bn purchase of mortgage debt expires in March. Rob Carnell from ING said the Fed risks a serious error if it backs away from its pledge to keep rates ultra-low for an "extended period", as rumoured. "The phrase is dynamite. It should be handled with extreme caution," he said.

John Higgins from Capital Economics said the Fed soaked up 39pc of the total $719bn in net debt raised by Washington between April and September. "With vast quantities of issuance still required for financing the budget deficit, investors are nervous," he said. The hope is that commercial banks will fill the Fed's shoes. Chartists had their own reasons for taking profits. The S&P 500 index of stocks has hit resistance after regaining half the losses of the bear market, a key technical barrier. A dive in the US Conference Board's confidence index and a relapse in US homes sales did the rest.

Meanwhile, Asia is preparing a cool douche for markets. In a sense, this as a sign of strength. The lost output of the crisis has been recouped in the region (bar Japan). China and Korea are on fire. But it poses a risk to speculative plays. India's central bank has ordered lenders to boost reserves to choke off liquidity, a precursor to rate rises. Singapore, Korea, Hong Kong, and Taiwan have begun to rein in property booms. China's bank regulator curbed consumer loans this week. Qin Xao, head of China Merchants Bank, said the country's property and stock markets are in danger of spiralling out of control after loan growth of $1.27 trillion over the last nine months. "It is urgent that China shifts from a loose monetary policy stance to a neutral one," he said.

The core problem is that near-zero rates in the West are too low for the catch-up economies of the Pacific region, Mid-East, and Latin America. Dollar liquidity is sloshing through the emerging world. This is what happened in the early 1990s when Fed stimulus caused Mexico and others with dollar pegs to overheat, leading to the tequila crisis two years later. The scale is greater this time. Beijing may soon find that the advantages of holding down the yuan to gain export share - "stealing jobs", says Nobel economist Paul Krugman - is outweighed by loss of control over prices. Variants of this story are occurring in over 40 countries linked to the dollar. There was a time when it was enough to watch the Fed and Europe's central banks for clues on the global credit cycle. Now we must pay close attention to Asian and Latin tigers as well. They are already growling.

Moody’s May Downgrade Mortgage Bonds With New Outlook
Moody’s Investors Service said it’s planning a review of U.S. home-loan securities that will likely lead to another round of rating changes based on a new view that property prices won’t bottom until next year’s third quarter. The firm will boost its loss projections by "significant" amounts for prime-jumbo, Alt-A, option adjustable-rate and subprime mortgages backing bonds issued between 2005 and 2008, also after seeing higher losses per foreclosure than expected, Moody’s said today in a statement. Recent data showing rising home prices doesn’t prove the slump is over, the company said.

"The overhang of impending foreclosures and the continued rise in unemployment rates will impact home prices negatively in the coming months," New York-based Moody’s said. Since the first quarter, the company has assumed in its mortgage-bond ratings that housing prices would bottom at the end of this year. Ratings reductions typically boost the capital needs of bondholders such as banks and insurers and force some investors to sell debt. Moody’s and Standard & Poor’s, criticized by lawmakers for assigning top grades to mortgage debt proven too high by later defaults, have already cut ratings on hundreds of billions of dollars of notes in the $1.7 trillion market for so- called non-agency mortgage bonds, which lack government backing, lowering many securities multiple times.

While Moody’s update will result in a "significant" change in the amount of losses it projects for the underlying loans, in "many cases" the securities have already been lowered into rating categories appropriate for a range of expected shortfalls to bond investors, so the grades may not change much, Debashish Chatterjee, a senior vice president, said. That’s particularly true for Alt-A debt, he said. The company has been continuously reviewing individual bonds based on the worsening performance of their loans.

Moody’s will begin taking ratings actions on securities this quarter and continue through March, according to the statement. Bonds from 2005 will be most affected, with subprime securities generally less vulnerable, the company said. Jumbo mortgages are larger than Fannie Mae or Freddie Mac, the U.S. government-supported mortgage companies, can finance. Their limits are $417,000 in most areas and as much as $729,750 in expensive regions. Subprime mortgages were offered to borrowers with the worst credit records. Alt-A loans, a step above, were given to borrowers seeking atypical terms, such as a lack of income verification. Option ARMs offer initial minimum payments that fall below the interest borrowers owe, creating growing balances and potential spikes in monthly bills.

Banks Get New Rules on Property
Federal bank regulators issued guidelines allowing banks to keep loans on their books as "performing" even if the value of the underlying properties have fallen below the loan amount. The volume of troubled commercial real-estate loans is skyrocketing. Regulators said that the rules were designed to encourage banks to restructure problem commercial mortgages with borrowers rather than foreclose on them. But the move has prompted criticism that regulators are simply prolonging the financial crisis by not forcing borrowers and lenders to confront, rather than delay, inevitable problems.

The guidelines, released on Friday by agencies including the Federal Deposit Insurance Corp., the Federal Reserve and the Office of the Comptroller of the Currency, provide guidance for bank examiners and financial institutions working with commercial property owners who are "experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties." Restructurings are often in the best interest of both lenders and borrowers, the guidelines point out. The new rules don't reverse existing rules. Rather they are more explicit than regulators have been in the past about how banks should deal with restructuring issues. Banks in recent months have been peppering agencies with questions about this as the number of problem loans has soared.

Regulators have been expressing increasing concern that problems in commercial real estate could unglue the nascent economic recovery by slamming financial institutions with billions of dollars in new losses. FDIC Chairman Sheila Bair told a Senate subcommittee earlier this month that reworking the terms of these loans could help banks avoid larger losses. She likened it to the push regulators made last year for banks to rework troubled residential mortgages.

About $770 billion of the $1.4 trillion commercial mortgages that will mature in the next five years are currently underwater, according to Foresight Analytics. As of last week, 106 banks had failed this year, the most since 1992—the peak of the savings-and-loan crisis. Regional and community banks especially have been paying dearly for their aggressive push into commercial real-estate lending during the boom years. The new guidelines are targeted primarily at the hundreds of billions of dollars worth of loans that are coming due that can't be refinanced largely because the value of the properties have fallen below the loan amount. In many of these situations, the properties are still generating enough income to pay debt service.

Banks have generally been keeping a lid on commercial real-estate losses by extending these mortgages upon maturity. However, that practice, billed by many industry observers as "extending and pretending," has come under criticism by some analysts and investors as it promises to put off the pains into the future. Now federal regulators are essentially sanctioning the practice as long as banks restructure loans prudently. The federal guidelines note that banks that conduct "prudent" loan workouts after looking at the borrower's financial condition "will not be subject to criticism (by regulators) for engaging in these efforts."

In addition, loans to creditworthy borrowers that have been restructured and are current won't be reclassified as "high risk" by regulators solely because the collateral backing them has declined to an amount less than the loan balance, the new guidelines state. Critics say the new rules are yet another example of a head-in-the-sand approach by regulators, pointing to the relaxed accounting standards last year that enabled banks to avoid marking the value of the loans down. This is doing long-term damage to the economy, they say, because it ties up bank capital, preventing them from resuming lending.

Critics say a wiser approach would be for regulators and banks to deal with problems quickly like the Resolution Trust Corp. did in the early 1990s during the last commercial real-estate crash. Back then, the RTC helped purge the financial system of toxic mortgages. The new guidance "gives people a long time to figure out they're not going to pay it back," said Douglas Durst, a leading New York City developer. "We are in a period where nothing is happening," he said, adding that banks are "not making any new loans because they have this bad debt on their books and not writing it down and getting rid of it."

Mother of all carry trades faces an inevitable bust
by Nouriel Roubini

Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable. This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March. People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.

Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage- backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles. While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable.

Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran.

As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed. This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.

Fed Ends Treasury Buys That Capped Rates, Stabilized Housing
The Federal Reserve completed its $300 billion Treasury purchase program today amid signs the seven-month buying spree helped stabilize the housing market and limited increases in borrowing costs. Yields on the benchmark 10-year note, which help determine rates on everything from mortgages to corporate bonds, never rose above 4 percent after the central bank began acquiring the debt. They are less than half a percentage point higher than the day before the program was announced on March 18, even though the U.S. sold a record $1.25 trillion in notes and bonds, more than double the amount in the year-earlier period.

"The Fed’s purchases likely restrained rates from rising faster during the April through June period when 10-year notes went to about 4 percent," said George Goncalves, chief fixed- income rates strategist in New York at Cantor Fitzgerald LP, one of the 18 primary dealers of U.S. government securities that trade with the Fed. The purchases were the first of U.S. Treasuries by the central bank to keep borrowing costs low since the 1960s. The Fed joined its counterparts in the U.K. and Japan in extraordinary debt-buying programs, broadening efforts to unlock credit and end the worst recession since the 1930s after cutting the benchmark U.S. interest rate to a range of zero to 0.25 percent.

The Fed bought $1.936 billion in debt today through eight securities maturing from December 2013 to September 2014, according to a Federal Reserve Bank of New York statement. Longer-maturity Treasuries rallied the most since 1962 when the Fed said March 18 it would start buying the securities. That day, Treasury 10-year yields fell almost half a percentage point to 2.52 percent as the Fed surprised investors by expanding the debt purchase portion of its so-called quantitative easing policy, which already included $1.45 trillion of agency and mortgage-backed debt. While yields subsequently rose to an intraday high of 4 percent on June 11, they have since fallen back, to 3.47 percent today, according to BGCantor Market Data.

Demand is returning to housing after the industry shaved an average of 1 percentage point from gross domestic product each quarter since the start of 2006. Sales of existing U.S. homes surged a record 9.4 percent in September to a 5.57 million annual rate, the highest in more than two years, the National Association of Realtors in Washington said Oct. 23. Mortgage rates for 30-year fixed home loans averaged 5 percent in the week ended Oct. 22, down from as high as 6.63 percent last year, according to McLean, Virginia-based Freddie Mac. The rate was 5.05 percent in March.

Corporate bonds yield 5.9 percent on average, down from 10.3 percent in March, according to Merrill Lynch & Co. index data. Borrowers have sold $1.11 trillion in U.S. corporate bonds in 2009, the fastest pace on record, according to data compiled by Bloomberg. Fed Chairman Ben S. Bernanke and his fellow policy makers indicated last month for the first time since August 2008 that the economy is accelerating, even as they recommitted to keep rates "exceptionally low" for an "extended period."

The Commerce Department said today that the U.S. economy grew in the third quarter for the first time in more than a year. Gross domestic product expanded at a 3.5 percent pace from July through September, exceeding the median estimate of economists surveyed by Bloomberg News, after contracting in the previous four quarters. "The Fed also happens to be exiting the Treasury market at a good time," Goncalves added. "Other markets, such as equities, which performed well due to the expansion of the Fed’s balance sheet are retreating and that will provide a backstop for the Treasury market."

The Standard and Poor’s 500 index of stocks, which rallied 57 percent from a 12-year low on March 9, has slipped 3.5 percent from this year’s high on Oct. 19. Speculation the gains outpaced the prospects for earnings and economic growth has weighed on share prices this month. Fed policy makers said at their August Federal Open Market Committee meeting they would slow the pace of Treasury purchases in a effort to "promote a smooth transition in markets." The program was originally scheduled to end last month.

"Yields rallied when the Fed said they wouldn’t be buying more Treasuries because of a decline in inflationary risks associated with the perceptions that the Fed was monetizing the government debt," said Michael Pond, interest-rate strategist in New York at primary dealer Barclays Plc. "Foreign investors had begun to be spooked by those risks during the second quarter." Policy makers likely realized that, by concentrating purchases in mortgage-related debt, "they could more directly influence consumer borrowing costs in specific areas," Pond said.

The difference in yield between 10-year Treasury Inflation Protected Securities and 10-year notes is 1.97 percentage points, compared with an average of 2.18 over the past five years. The gap, known as the breakeven rate, suggests investors expect inflation to remain low over the life of the securities. Fed purchases have helped buttress demand as the U.S. sells record amounts of debt to finance a budget deficit that exceeds $1 trillion for the first time. Total sales of Treasuries will increase to $2.38 trillion in the fiscal year that began Oct. 1, from $1.81 trillion in the prior 12 months, primary dealer Goldman Sachs Group Inc. said in a report on Oct. 20.

Bids at yesterday’s record $41 billion sale of five-year notes exceeded the amount offered by 2.63 times, the highest so- called bid-to-cover ratio since October 2007. The two-year notes sold the day before drew the strongest demand since August 2007. "Having the Fed buy $300 billion in Treasury debt has supported the market," said Ward McCarthy, chief financial economist at primary dealer Jefferies & Co. in New York. "Knowing that the Fed has been on the buy-side of the market increased the confidence level of private sector investors in owning Treasuries."

Our Out-of-Whack Economy and the Happy Talk Propagandists
Dave Lindorff

If you listen to the happy-talk folks at Treasury and the Fed, and on the tube, you'd think things had finally turned a corner. The economy grew at a 3.5% annualized rate in the third quarter that ended September 30. "The Economy is Back in Gear" shouted the headline on an article by CNN senior writer Chris Isadore. "The recession ended unofficially in September," said a reporter on NPR.

There was some mention of the fact that earlier in the week there were reports that consumer confidence had fallen, foretelling a sluggish Christmas retail season, and that new home sales slipped an unanticipatedly high 3.6% in September, when analysts had been expecting a rise in sales. Meanwhile, new unemployment claims filed during the third week of October jumped to 531,000, well above the predicted 520,000, indicating that the official unemployment rate is likely to top 10% in the next Department of Labor report due out in early November. As well, fully one-third of the nation's homeowners were now said to be "underwater," meaning that their outstanding mortgage balances are greater than the current value of their homes. Not surprisingly, foreclosures are continuing to surge.

How to explain this seeming oxymoronic situation? Well, that positive economic growth figure, which comes on the heels of a 6.4% decline in GDP in the first quarter and a .7% decline in the second quarter, is, according to government analysts, actually largely the result of two government stimulus programs -- the "cash for clunkers" program that induced people to rush out and buy a new car (usually a much smaller, cheaper and, for the carmakers, less profitable one than they had been buying in prior years), and the $8,000 new home tax credit, which led a lot of people to rush out and buy a first home.

The thing about those two stimulus programs is that they don't so much expand economic activity as they push it forward. That is to say, a person who takes advantage of the cash-for-clunker program is generally someone who owns a worn-out junker and needs to buy a new vehicle anyhow, so what the government subsidy does really is just push that purchase forward. Once the program ended, sales of cars plummeted (not to mention that the bulk of the payments went to people who purchased foreign cars, so the economic boost was just for dealers in the U.S., not carmakers). The same is true with houses. Very few people would make the decision about whether to buy a home or not based on just $8,000, but the availability of an $8,000 government subsidy for a limited time would lead people to push forward their plan to purchase a home.

What that means is, don't count on this "recovery" to last into next year. The cars that needed to be bought have been bought, and the homes that people wanted to buy have been bought. The car subsidy is gone now, and even extending the home buying subsidy, as the realty industry lobby is pressing Congress to do, isn't going to induce that many more people to buy.

Meanwhile it's worth noting an oddity about this "recovery" being trumpeted in government and media. The relationship between the dollar and the stock market has become very strange. If you look back to 2007 at stories on these two things before the financial crisis hit, and earlier, you'll see myriad articles explaining that the dollar and the U.S. stock market tend to move in tandem. This was always explained as being because as the dollar strengthens, foreign investors want to put their money into dollar-denominated assets. Similarly, if the dollar weakened, analysts would write confidently that the stock market would be hurt as investors pulled their money out of U.S. equities to invest in markets denominated in appreciating currencies.

Now, the analysts say that as equities strengthen, the dollar will fall, but if equities fall, the dollar will appreciate. The reason for this new inverse relationship should be cause for considerable alarm. Why? In fact, it turns out that the last eight months of a rising equities market has been largely the direct result of a shrinking dollar. This is because so much of the sales and earnings of companies in the S&P 500 and the much narrower Dow Index are earned overseas, denominated in foreign currencies, but accounted for on the books of these U.S.-incorporated firms in dollars, that as the dollar declines in value, corporate sales and earnings appear to be growing. Reportedly, as much as 80 percent of the appreciation in the S&P Index since last March 9 when the market hit bottom can be attributed to the dollar's fall against major world currencies.

Financial writers and reporters on TV don't mention this tectonic shift. They just report the new relationship (Stocks up, dollar down; stocks down, dollar up) as though that's the way it's always been. But actually, this is a phenomenon that has normally been characteristic of Third World, so-called "developing" economies. That it has become characteristic of the U.S. economy since the end of 2008 should be cause for concern.

So don't be conned by the happy talk salesmen at the Fed and Treasury and in the White House, or by their propagandists in the news media, who are trumpeting the latest GDP growth figure as a sign that the recession is over, apparently in the hopes that people will run out to the mall and start spending (in those remaining stores that don't have their windows taped or covered in plywood). What we've seen was a blip on the chart, engineered by a couple of "going out of business" sales by the car and housing industry.

Real unemployment -- measured the honest way it used to be 30 years ago, to include those who have given up looking for work or who are working part time involuntarily -- is hitting 20% (for those who are bad at math, that's one out of five working-age Americans). Foreclosures are hitting a record. Half of laid-off workers are cashing out their 401(k)s in order to buy food. State and local governments, both major employers, are hitting a wall as tax collections plummet and federal stimulus funds run out. This is not the foundation for a renewal of economic growth; it is the precondition for a renewed or prolonged recession.

And if the dollar continues its slide, which is likely given the U.S. huge budget deficits and trade deficits, as well as the Federal Reserve's inability to raise interest rates (a move that could strengthen the dollar but which would crush the economy), all those things that Americans buy abroad that are no longer made at home, as well as the oil that is imported, will cost that much more, driving consumers further into the hole. And remember, 70% of U.S. GDP is consumer spending, a result of our decimation of our industrial base.

Recession ending? Don't bet on it.

What's Still Wrong with Wall Street
Are you furious? If not, you should be. The giant financial institutions that make up Wall Street have been bailed out, thanks to trillions of dollars of our money, and are on track to hand out record-breaking multibillion-dollar bonuses while millions of regular folks are hurting. Even outside the gilded halls of Wall Street, there's no shortage of good cheer: many economists say the Great Recession has ended, and Federal Reserve Chairman Ben Bernanke keeps seeing "green shoots" in the economy.

But the only green shoots that many non–Wall Street types have seen lately are the weeds sprouting in the parking lots of abandoned malls. Unemployment is marching toward 10%, and house foreclosures are still rising. If you're a day late with your credit-card payment or overdrawn by a few bucks on your ATM card, the bank (which your tax money helped bail out) is still sticking you with obscene fees and charges. Hence the question that so many of us are asking: Where's my bailout?

Welcome to Round 2 of Main Street vs. Wall Street. The divide is the worst I've seen in my 40 years of writing about finance. In a new TIME poll, 75% of the respondents say they believe Wall Street will revert to business as usual, 67% want the government to force pay cuts, and 59% want more government regulation. Main and Wall are never going to love each other. And they probably shouldn't, because their interests aren't identical. But if we're going to get through this mess as a society and regain our prosperity, Main Street and Wall Street need to understand each other. And they don't.

Too many people on Wall Street are acting in an arrogant, clueless and tone-deaf way, huffily treating any criticism of their pay and practices and perks as an attack on the free-enterprise system. Wall Streeters like to say (and may even believe) that they're helping humanity — which occasionally happens, but only by accident — rather than being out to make the most money they can.

Without a doubt, the financial meltdown and its ensuing horrors began on Wall Street. However, Main Street is not a totally innocent lamb in all this. Yes, the greedheads tempted us with mortgages and other products we couldn't afford. But you could have said no, as many of us did. And you could have tried to live within your means or, better yet, below them, instead of falling prey to financial fantasies.

While it feels great to be outraged by these fat bonuses and whack the pigs by restricting — or seeming to restrict — the pay at outfits that have taken government bailout money, it's a bit pointless too. Because to some extent, Wall Street's pay and its problems really are misunderstood. (Stop snickering! It's true.) Even though "Wall Street" means the nation's big financial and investing operations, not a geographical location, a disproportionate number of Street people live in Manhattan. Things in the desirable parts of that borough are expensive beyond belief, especially if you have children and feel the need to send them to $40,000-a-year private schools. But these people choose to live in Manhattan.

In the real world (outside New York City), a bonus is generally a payment for extraordinarily good performance. But on Wall Street, what's called a bonus is generally part of base pay. That's especially true for worker bees, who far outnumber CEOs. (The word bonus is a remnant from the days when Wall Street was made up of partnerships. Now that Wall Street's largely owned by public shareholders, it should have long since dropped bonus for contingent compensation or something similar. But hey, the Street, as I said, is tone-deaf.)

Paying a $25 million or $30 million bonus to a Goldman Sachs or JPMorgan Chase or Morgan Stanley higher-up this year is obscene because none of these firms would exist if our government and others hadn't stepped in to save the world financial system. If these companies have all that money around, largely courtesy of us, they ought to send it to the U.S. Treasury. But paying a $250,000 bonus on top of a $150,000 salary to a worker bee is a different story.

More important, at least when it comes to the bailed-out businesses, the notion that there's a correlation between excessive pay and excessive risk-taking isn't quite accurate. It may be true in the case of hedge funds or leveraged-buyout — which call themselves private-equity (PE) — firms or some parts of stricken outfits like AIG, Citi and the former Merrill Lynch, now part of Bank of America. But hedgies and PEs aren't covered by pay czar Ken Feinberg's ukases.

It's a different story at intelligently run companies like Goldman. They make money by understanding risk and managing it. If the firm as a whole doesn't make money, the traders and risk takers don't either. The two biggest basket cases — AIG and Citi — got into trouble not because they took risks; they got into trouble because they didn't know they were taking risks. The two divisions at AIG that brought down the firm — financial products and stock-lending — didn't understand what they were doing. Financial products wrote credit-default swaps — sorry I'm not pausing to explain them, but most eyes would glaze over if I did — that they thought were riskless but turned out to be ultra-risky.

The stock-loan department, AIG's other disaster, took the cash it got for lending out stock owned by AIG and invested the money in esoteric securities rather than in risk-free Treasuries, the standard practice. The idea was — I'm not kidding — to make an extra one-fifth of 1% in interest. When the esoterica, which the stock-loan folks thought was riskless, crumbled, so did the firm.

The likes of Citi owned AAA-rated mortgage securities they thought were as safe as Treasury securities. That's what AAA means — or what they thought it meant. But since the rating agencies screwed up royally by not analyzing the securities properly — a whole other story — Citi et al. got whacked. Don't forget, too, that a fair number of Wall Streeters got wiped out because their wealth was tied to their firm's stock price. Dick Fuld, the former CEO of Lehman, had shares and options worth about $1 billion at their peak.

He got less than $1 million when he sold them after the firm went bankrupt. (He still took home, before taxes, $490 million from his stock-based compensation, so don't cry for him.) James Cayne, CEO of the defunct Bear Stearns, was in a similar situation. If Fuld and Cayne had known their firms were as badly at risk as they proved to be, don't you think they'd have sold as much stock as they could before their firms imploded?

In the end, the problem isn't really pay; it's competence. The CEOs didn't understand the fine print. These firms collapsed out of ignorance fueled by avarice — a particularly toxic combination. Under the circumstances, Feinberg is doing the best he can. But what he's doing is more symbolic than real (although symbolism does matter). Meanwhile, genuine reform of the financial system is bogging down. Wall Street wins again.

Some bankers now have the attitude of, What's the problem? The crisis is over. Get out of our way and let us get back to business. This is especially true of those who don't owe the government any money. The conventional thinking is that the $700 billion of Troubled Asset Relief Program (TARP) money was the beginning and will be the end of the bailout. TARP lent $238 billion to more than 680 banks, according to SNL Financial, a research firm; 44 of these banks have repaid a total of $71 billion. Thus, there's less than $170 billion, a relative pittance, of TARP money invested in banks.

So when the likes of Goldman Sachs or JPMorgan Chase, which were well capitalized and well run, say they didn't really need TARP money in the first place, that's more or less accurate. However, that doesn't mean that Goldman, JPMorgan and every other bank in the country weren't bailed out. Had the world economy melted down and more giant institutions failed, even strong firms like Goldman would have gone under. In July, Goldman acknowledged this, more or less, when it graciously — yes, graciously — paid a full price of $1.1 billion to redeem stock-purchase warrants it gave the government for lending it $10 billion of TARP money.

Indeed, these banks ought to acknowledge that the government saved them. For starters, they ought to stop gouging the vulnerable among us with overdraft fees and credit-card games. "Reform" is supposed to take effect early next year, but banks have accelerated their gouging since the legislation passed. In a more macro way, Goldman and Morgan Stanley in particular were facing the equivalent of a bank run in September 2008, as fear-stricken hedge funds for which they were prime brokers pulled out their assets. The firms would have been toast if the government hadn't allowed them to become bank holding companies overnight, giving them access to almost unlimited funds that the Federal Reserve makes available to banks.

So, you see, the real bailout wasn't TARP. It was lending and guarantee programs from the Fed and the Federal Deposit Insurance Corp. The Fed had a mere three borrowing programs before the crisis started in the summer of 2007, when two Bear Stearns hedge funds failed. At the height of the bailout, there were no fewer than 13 programs. The New York Fed had to post them on its website sideways, using teensy-weensy type, so they would print out on a single sheet of paper.

Main Street has paid a price for the ultra-low interest rates the Fed has kept in place to encourage banks to lend and to keep commerce flowing. Cheap money is nice for lenders and borrowers — but it's devastating for savers, especially for retirees who use interest income to supplement Social Security. If you had $500,000 stashed away — not a bad nest egg — you could earn a no-risk $20,000 to $25,000 annually (before taxes) two years ago buying bank CDs or short-term Treasury securities. Now you earn less than $5,000 in an average one-year CD, about $2,000 in a one-year Treasury. This offers retirees unpleasant choices: reduce their standard of living, eat into their principal or take greater risks to restore the lost income.

None of the people who presided over the catastrophes at the likes of Citi and AIG and Merrill Lynch are likely to go to jail. That's because incompetence and arrogance aren't criminal offenses. If that seems a bit unfair, so does the government's rescue program that saved some and not others, depending on political and social criteria. The most recent example: Delphi Corp., GM's former parts division that was spun off a decade ago, which recently emerged from bankruptcy proceedings. White collar Delphi retirees are having their pensions whacked, but United Auto Workers pensioners are being made whole.

That's harshly arbitrary, as is the fact that UAW jobs have been saved, at least for now, thanks to $60 billion of government money flowing into GM and Chrysler. Meanwhile, other companies have been allowed to croak. I can see how on macroeconomic grounds, it makes sense. Letting GM and Chrysler go under would have devastated the industrial Midwest and deprived millions of retirees of their postemployment health care.

But if I were a white collar Delphi retiree, I'd be over the moon with rage. Ditto if I'd been a steelworker in Pennsylvania whose health care and pension were eviscerated when Bethlehem Steel failed. If I worked at one of the 106 nongiant banks that the government has allowed to fail this year, throwing thousands of people out of work, I'd be furious at the government for saving the big insolvent outfits but not mine.

And what about those bankers? Just because I'm not proposing we immediately hang everyone on Wall Street from the highest tree, don't think I'm a Street symp. Make no mistake; I'm livid at the Street, which is inflicting pain on people who don't deserve it and ruining things for moderates like me, who believe in markets but with intelligent regulation. And did I mention gouging people before new credit-card rules come in? I did. It's obscene.

I'm also angry because it's hugely difficult for even the most qualified people to get mortgage loans. Not to mention how hard it is for small and medium businesses. Having lent too much too easily, banks now don't want to lend at all — except to Uncle Sam. In fact, much of the money that taxpayers have pumped into the financial system has ended up at banks that are lending it back to the government by buying Treasury securities. Isn't that great? We make money available to the banks at 0%, they lend it to the government at a markup, and they make money off our tax dollars, whining every step of the way.

Then there are the blinders. Goldman Sachs, everyone's favorite piñata these days, explains that its bonus pool is so high because it sets aside half its profits for compensation (which includes salaries and benefits as well as bonuses.) Other firms have similar formulas. Well, excuse me. This isn't a normal time or a normal year. Just because you've done something in the past doesn't mean you have to do it now.

Firms could take care of the people down their food chain but allow the people at the top to go without bonuses again. Instead of doing that, it's going to be business as usual even though the times aren't usual. People who grab every penny they can, using taxpayer money, aren't true capitalists. True capitalists are long-term greedy, to use Goldman's favorite slogan, trying to maximize their take over the long run. The short-term greedy aren't capitalists, they're pigs. And as they say on Wall Street, pigs get slaughtered.

How to Fix It
So what's to be done? In general, the Federal Government has been too passive about fixing the real problems, not too activist. That said, here are a few rules of the road for Wall Street and Main Street:
1) Break up institutions that are too big to fail so that we can allow them to fail. I don't know exactly how to do this — does anyone? — but that's how we solve the problem of letting the small fry fail while saving the wounded whales. Perhaps, as many have urged lately, we can start by reviving elements of the Glass-Steagall Act that kept old-fashioned banks out of the far riskier investment business. And out of big trouble. As we've seen, most of the giant rescued institutions didn't understand their problems until it was too late, so how do you expect a regulator to see trouble coming?

2) Tell the truth, and play it down the middle. Yes, demonizing others — "pointy-headed liberals," "Wall Street pigs," "socialists" or Fox News — is satisfying and helps mobilize the demonizer's political and ideological base. It also helps the demonized do the same. But divide-and-hope-to-conquer is horrible social policy, and we ought to shun anyone, from "senior officials" to Fox News to MSNBC, who does it.

3) Put not your faith in the Fed or Uncle Sam. During the 1982-2000 stock-market boom and the long economic expansion, people foolishly began to think that government officials like former Fed Chairman Alan Greenspan (formerly the "Maestro" and the man who helped save the world, now Alan Who?) — were looking after their interests. They weren't. Greenspan's job was to protect the world financial system and the economy, not you. Ben Bernanke's job is the same as Greenspan's.

4) And for heaven's sake, don't put your faith in Wall Street. Never, ever. Left to its own devices, the Street will go to excess, as we've seen from two bubbles (tech stocks and houses) that have burst within the past decade and two more that are in the process of popping: commercial real estate and leveraged buyouts. Even though there are plenty of decent people on Wall Street, the Street's primary interest is its own well-being, not yours. Don't forget that. You'd better take care of yourself, because there's no one else to do it.

Proposal aims to curb raids on 401(k)s
US lawmakers were set to propose a new law on Wednesday that would discourage people from raiding their retirement savings early to see them through tough financial times or to splash out on expensive items. The robustness of the US retirement system has come under close scrutiny since the financial crisis crushed the value of many so-called "defined contribution" pension plans such as 401(k)s, which invested in the markets. Legislators have already proposed bills trying to improve transparency, particularly over fees and conflicts of interest.

Herb Kohl, chairman of the Senate special committee on ageing, was on Wednesday set to go one step further and propose a law that would discourage people from dipping into their 401(k)s before they retire, which can seriously reduce the pot of money they have to live off in old age. Some 15 per cent of Americans between the ages of 15 and 60 raid their 401(k) retirement savings plans, either by taking a "hardship withdrawal", borrowing money from it or simply cashing it out when they leave their employer. Some fear that more people will be driven to do this as unemployment mounts and people struggle to pay bills and other expenses, though the Government Accountability Office has found no evidence of this.

"Americans’ retirement savings have taken a huge hit due to the recession," said Mr Kohl last month after the GAO released a report into so-called "leakage" from plans. "Despite the financial hardships many are facing, people need to resist raiding their 401(k) because it can be a really bad deal for them over the long-run." Taking money from 401(k)s can incur a 10 per cent tax penalty as well as fees and the loss of compound interest the account would otherwise have accrued. The GAO study found that a low-earning 35-year-old who took a $5,000 hardship withdrawal would forgo 12 per cent in retirement savings.

Mr Kohl’s bill, which has yet to be introduced, was expected to ban products such as "401(k) debit cards" – a niche item that allows people to dip frequently into their savings. It would also increase the interest rate that people have to pay on so-called 401(k) loans – when they effectively borrow money from themselves and are required to pay it back with interest. The bill would cut the number of loans people can take at one time, and eliminate a provision that stops people contributing to their 401(k) for six months after taking a hardship withdrawal, which the GAO found was ultimately damaging rather than helpful.

The Senate ageing committee is also investigating "target date funds" which have become the most popular default option for people automatically enrolled into 401(k)s. These plans are intended to shift from riskier investments such as stocks into safer ones such as bonds as the saver ages. But the financial crisis exposed a big disparity in such funds: 2010 target funds had anything from 21 to 79 per cent of their investments in stocks, for example, meaning some were badly hit when Wall Street tanked last year.

Hard Times in the City of Sin
The financial crisis has mauled Las Vegas like no other city. What was once the land of luxury and excess is now the home of empty houses and broken dreams. While the city and its investors keep hoping for a turnaround, others see long, lean years ahead. The bar on the 64th floor of the Mandalay Bay Hotel offers what could arguably be the best view of Las Vegas at night. A mile-long strip of brightly colored neon lights and gigantic, floodlit casinos glitters through the bar's floor-to-ceiling windows. Still, as you survey the otherwise dazzling city of nocturnal light, you can see conspicuous patches of darkness dotting the landscape.

One of these black craters is the construction site for the Fontainebleau Hotel casino and the 4,000 rooms it is supposed to offer. When the investors ran out of money, 70 percent of the project had already been completed. If you look diagonally across the street, you can see the site of what is supposed to be the Echelon complex. Only eight of its planned 57 stories were completed before the construction cranes pulled out. There is even a dark, gaping hole next to the Trump Tower. A twin had been planned for the site, but it will most likely never be built. Las Vegas, the global symbol of gambling and glitz, is hurting.

Over the last two decades, no other American city grew as quickly as Las Vegas. In 1980, it had 460,000 inhabitants; now it has 2 million. Nowhere else was the boom wilder, consumption more excessive and the delusions of grandeur more extreme. New houses and apartment complexes shot up by the tens of thousands. Dozens of new casino hotels were built, many of which boasted 2,000, 3,000 or even 4,000 rooms. Celebrity chefs came to the city to open satellites of their famous restaurants, while junk shops gave way to stores offering exclusive fashion labels. During that era, the strip was crowded until even 4 a.m., mainly with drunk, carefree Americans who could hardly believe they could walk around outside with a beer in their hand, that they could still smoke in public establishments and that there were swimming pools where women could go topless.

In a country notorious for its puritanical bent, Las Vegas is an anything-and-everything-goes kind of place. But now, the recession has blasted open one of its deepest craters here in this city surrounded by the Mojave Desert. Las Vegas now has the country's highest rate of home foreclosures, and more than 70 percent of homeowners here owe more on their mortgages than their houses or condos are worth. Since 2006, the average home price has dropped by a half. Unemployment, on the other hand, has risen -- from about only 3 percent to over 13 percent. The city's luxury hotels have seen tens of thousands of reservations cancelled. Major casino operators are deeply in debt. In the spring, one of them, the MGM, barely escaped from having to declare bankruptcy.

In the meantime, economists are already warning that the collapse of the US residential real estate market could be followed by a similar disaster in commercial real estate. And if that bubble bursts, it will hit Las Vegas first. For more than two decades, banks, investment funds and financials firms attracted by the chance to make hefty profits and a seemingly limitless boom pumped billions of dollars into the city. They supplied the financing for casinos, shopping centers and entertainment venues. One of Las Vegas's biggest investors was Deutsche Bank. Germany's largest bank is seen as one of the three major players in the local construction industry and in the financing of casinos and hotel complexes worth billions. Indeed, the Frankfurt-based banking giant is mentioned as an investor in connection with many major projects in the city.

To almost everyone -- and especially the Germans -- Las Vegas seemed recession-proof. But now, since the summer of 2008, gambling revenues have dropped by more than 10 percent (see graphic) after having plunged to as much as 25 percent in the months immediately following the bankruptcy of Lehman Brothers. The city's future is now uncertain. There are still plans on the table to add 40,000 new hotel rooms to the 140,000 ones that already exist by 2012. The pending development projects are valued at $20 billion (€13.6 billion). But now people are wondering who needs all the additional rooms anymore and who will provide the financing for them. Even the city's wealthiest residents, who have consistently topped the lists of America's richest people, must now keep a close eye on the assets they have left.

For example, Sheldon Adelson, the owner of the Las Vegas Sands Corporation, whose assets include the luxury Venetian Resort, has seen his company's stock value plummet from $149 to $1.38 a share. Kirk Kerkorian, who has been one of the most important investors in Las Vegas since 1955, has been forced to sell many of his holdings in industrial companies, such as the automaker Ford. MGM Mirage, the city's largest casino operator, is almost $14 billion in debt and has only staved off bankruptcy with difficulty. The banks, which once fueled the city's growth with attractive loans, are now much less willing to part with their money. "Ownership structure on the Strip five years from now is going to look different from now," says Rich Moriarty, director of the Union Gaming Group, which advises financial investors, hedge funds and banks on investing in Las Vegas.

At first glance, Vegas doesn't seem to be particularly hard-hit by the crisis. The casinos resonate with the incessant "ding-ding-ding" of thousands of betting machines. Gambling and alcohol go hand-in-hand, and some gamblers are already drinking at 11 a.m. The casinos are windowless in order to deliberately keep out daylight and, consequently, a sense of time. Lured by drastically reduced hotel rates, the curious are returning to Vegas; but they are spending less. Double rooms in famous luxury hotels --  such as the Mirage, which was home to the entertainment duo Siegfried and Roy for many years -- can now be had for less than $100 a night. Many hotels are renting their rooms at prices below cost -- which is better than not renting them at all. The visitors who are coming to Las Vegas now don't go out to dinner in the casino, Moriarty says. "It is a lower quality customer. They go across the street to the mall to have dinner rather than stay on the property."

Ironically, over the last decade, the trend in Las Vegas has put an increased focus on luxury. In some restaurants, appetizers go for $30, while the hottest nightclubs regularly won't let people in who aren't willing to fork over $400 for a bottle of liquor. With its new foray into luxury tourism, Las Vegas has moved miles away from its first few successful decades. Those were the wild years. Since banks and corporations didn't want to be associated with gambling, only the Mafia was willing to invest in casino development. Those were the years when criminals like Bugsy Siegel, Meyer Lansky and Anthony Spilotro openly controlled the city and when crooners like Frank Sinatra and Dean Martin performed in relatively shabby venues, such as the Desert Inn.

It wasn't until the 1980s, when Wall Street discovered the gambling oasis in the Mojave Desert, that the casinos and hotels became not only flashier, but also more sophisticated. "The entire amount of new supply is all high-end, luxury rooms," says Moriarty. For Alan Feldman, the head of communications at MGM Mirage, there is only one option: "We have to expand the market." Feldman wants to attract people from new target groups, including the "cosmopolitans" and "urban elites" -- in other words, those for whom Las Vegas has always been, as Feldmen says, "too kitschy" or "unreal". If only a small percentage of Americans can be convinced to come to Las Vegas, as Feldman hopes they will be, even the new hotel rooms will soon be full.

At the same time, the city's tourism officials have stepped up their efforts to attract visitors from abroad, who have traditionally only accounted for about 15 percent of guests. For example, tourists from Germany have almost no effect on the city's total number of visitors. The few that do come to Las Vegas are usually on their way to the nearby Grand Canyon. Things look much different in the city's financial world. Deutsche Bank has "massive exposure" in Las Vegas, to the tune of a figure of double-digit billions, says Moriarty, who launched his own business with a partner this spring after having managed Deutsche Bank's investment banking arm in Las Vegas for years.

Since the end of 2008, Deutsche Bank has even been in direct control of one of the city's largest construction projects. At the time, the developer of the Cosmopolitan Resort & Casino could no longer service a $760 million loan, so Deutsche Bank acquired the 3,000-room behemoth for $1 billion. "They are even picking out the wallpaper," themselves, says one insider. The banks are doing everything not to lose their investments. Even so, the bankers will still not be able to operate the casino themselves. Instead, they will have to hire a professional with a license to run a gaming operation. The resort is scheduled to open in 2010. Deutsche Bank already took a €500-million ($741 million) write-off on the property in the second quarter of 2009.

Likewise, as a result of its other lending projects in the city, the bank actually has a hand in financing its competitors. For example, the owners of the Fontainebleau Hotel Corporation were convinced that the Germans wanted to "destroy" their Las Vegas development project. Construction was halted in the summer on the 3,800-room complex, which was 75 percent complete, after an $800 million loan, of which Deutsche Bank held a significant portion, was withdrawn. In May, the owners of the Fontainebleau sued Deutsche Bank, accusing it of trying to "minimize competition with the Cosmopolitan." It was for this reason, they claim, that the bank "aggressively pushed for" other lenders, including the crisis-shaken German bank HSH Nordbank, to back out of the deal.

Deutsche Bank calls the allegations "baseless." Meanwhile, Fontainebleau, struggling with a possible bankruptcy, has withdrawn some of its charges, but it hasn't abandoned its lawsuit. Even without the Fontainebleau suit, the Frankfurt-based bankers are already likely to encounter major problems with their casino. The CityCenter, which is the largest private development project in the United States, is being built right near the Cosmopolitan. Designed by a number of famous architects, including Daniel Libeskind, Helmut Jahn and Norman Foster, the CityCenter comprises three luxury hotels with a total of 6,000 rooms, thousands of condominiums, dozens of restaurants and a number of gambling facilities. The huge development, a joint venture of MGM Mirage and investors from Dubai, will cost $8 billion. The plan almost imploded in the spring for lack of funds, but now the center is slated to open after all next spring.

To fill the mammoth developments, the owners hope to attract more trade fairs and corporate events. Las Vegas is the world's largest meeting and convention city. In 2008, more than 22,000 events took place there, ranging from large-scale affairs, such as the International Consumer Electronics Show (CES) with its 140,000 visitors, to the annual meeting of the American Society of Anesthesiologists. And then there are thousands of company meetings large and small, many of them little more than trips meant to reward deserving employees who, after a meeting in the morning, can spend the rest of the day gambling and drinking.

For years, such meetings helped sustain the city. And that was the case until a new president came on the scene and -- in a single sentence --  declared Las Vegas the country's most dangerous spot for companies. "You can't go take a trip to Las Vegas or go down to the Super Bowl on the taxpayers' dime," President Barack Obama said at a televised town hall meeting in February. A short time earlier, details had emerged about how Wells Fargo, a major US bank, had booked a 12-day company event in the city -- after having been saved from bankruptcy with billions in government bailout funds.

In the end, Wells Fargo canceled the event -- and many other organizations followed suit. "They are trying to make it out that Las Vegas has become this toxic city you can't even go to," complains Phil Cooper, a leading event manager. In the first quarter of 2009 alone, more than 400 conferences and trade fairs were cancelled. "I certainly was not happy about it. What it did is put the imprimatur on Las Vegas being a place of excess," says Las Vegas Mayor Oscar Goodman, a lawyer who became a celebrity while defending the city's most notorious gangsters. In fact, Goodman plays himself in "Casino," Martin Scorsese's 1995 Oscar-nominated film about the Las Vegas underworld. But this hasn't stopped city residents from electing him to three terms as mayor.

Can today's Vegas even be compared with the city in its wild years, when it was dominated by the Mafia rather than Wall Street? The big corporations have made it more impersonal, says Goodman, as he glances at the hundreds of photos on his office wall that show him with famous people, such as Bill Clinton and Michael Jackson. "I liked life in the old days better," says Goodman. "I'd like to be able to shake a person's hand and have a deal rather than have a contract in writing. I think with the shakeout we are having now, many of those corporate properties will go into private hands and that will be more like the old Las Vegas."

If you're looking for the old Las Vegas, it can still be found north of "the Strip," in neighborhoods beyond the sparkle of the casinos. These are the neighborhoods where run-down wedding chapels advertise their services by claiming that Elvis Presley got married there once, and where the gamblers seem as seedy as the decades-old small gambling houses, where old people with pale faces and empty-looking eyes spend hours in front of slot machines that cost only two cents a game. But the new, modern Vegas demands a different clientele. It needs companies and businesspeople, the kind who burn through their expense accounts and spend a few days having fun on the company's dime.

Since this spring, the city has invested millions in an advertising campaign that also focuses directly on businesses. For example, according to a 10-page ad the city placed in the Wall Street Journal, "Business meetings in Las Vegas offer the best value proposition on the planet." It sounds a little desperate. And no wonder: With each empty room, more and more jobs in Las Vegas are threatened. The rule of thumb is that each hotel room equals two and a half jobs. Tens of thousands of jobs have already been lost. Las Vegas is now surrounded by empty developments with names like Azure Canyon and abandoned bedroom communities in the "Mediterranean style." Richard Plaster, one of the city's top developers, says that 30,000 houses -- or the equivalent of a new small city -- were built every 12 months. Parts of Las Vegas are only five or six years old.

The houses were all built along roughly the same lines: five rooms, three baths and two garages. There is plenty of space around Las Vegas. Most are now dark and empty -- either because they were never lived in or were quickly abandoned. Every month, there are foreclosures on an average of 2,000 buildings. It's eerily quiet on the freshly paved streets. They have names like "Evening Melody" and "Dancing Breeze," names meant to evoke a pleasant life in a place where it never gets cold. Here and there, empty or half-developed properties form voids in the endless rows of houses, like gaps in a row of teeth. Plaster is convinced that "there are long, hard times ahead."

Winter crisis could see UK 'run out of gas in hours'
The UK could run out of gas within six hours this winter, the Observer has learned. The revelation has sparked a row between the Conservatives and Labour over who is doing more to keep the heating on. Last winter, the UK was left with only three days of reserves when foreign energy companies started exporting gas to supply their European customers after Russia cut supplies that used a pipeline through Ukraine.

A spokeswoman for Ed Miliband's energy and climate change department said that under a civil contingency act he had the power to halt exports from the UK if the Queen had signed the order. Charles Hendry, the shadow energy minister, told the Observer that the current minimum requirements on companies to keep gas in storage were not tough enough to safeguard the security of the UK's energy supplies. Labour hit back this weekend, accusing the Conservatives of "blighting progress" on building more gas storage facilities by blocking planning reforms proposed by the government.

If its storage facilities are full, the UK has enough gas supplies for about 16 days, based on average demand. France's storage capacity would last a maximum of 91 days and Germany's 73 days. But National Grid has told energy companies that they only need to fill tanks by a minimum of 2.3% this winter. If all gas imports to the UK ground to a halt, for example if Gazprom turned off supplies to Europe, and supplies from the North Sea were disrupted, this amount would keep the country's households and businesses supplied for just six hours on a cold day. In France, regulators require companies to keep their facilities at least 85% full from November.

Unlike France and Germany, the UK has direct access to dwindling gas fields in the North Sea which provide about half the country's gas needs and ensure some security of supply. National Grid also said the government had powers in an emergency to order North Sea operators to boost production. But fields are already operating at 90% capacity. UK energy companies do not have access to storage facilities in Europe, unlike their foreign counterparts.

National Grid said its minimum requirement for gas storage was based on ensuring the smooth and safe operation of the network, rather than security of supply. It said it had the power to slow the rate of withdrawal of supplies, but admitted it could not order companies to replenish stocks once tanks became depleted. Businesses could be cut off to keep households supplied, it added. The system assumes the market will deliver sufficient supplies by sucking in gas to the UK when demand is high. Hendry said: "We are concerned at the low levels of gas storage. Existing requirements on energy companies to maintain a minimum level of storage are clearly not sufficient to ensure the UK's security of supply, especially as we become increasingly dependent on imported gas."

A Labour spokeswoman said: "Alarmism from the Conservatives is designed to hide the fact that they have no coherent energy policy. As the North Sea gas declines, we need more gas storage, more import capacity and more low-carbon generation, all of which is happening. The Tories' opposition to planning reform will blight progress on this and all the other low-carbon measures we need."

A social timebomb is set to explode in Britain
One of my favourite moments from the television series The Wire comes towards the end of the first season. Two of the police officers who have been monitoring drug dealers arrive one morning to find that the area is deserted: no one is selling drugs, no one lounging on the street corners. "Maybe we won," suggests one cop.

The reality, of course, is that this is only an interlude: the dealers have been lured away to an inter-gang basketball game. But I was reminded of that sense of false optimism this week, at a Royal Society of Arts discussion on youth unemployment. Someone asked Stephen Timms, Financial Secretary to the Treasury, why, when her organisation tried to provide a job centre with opportunities for young people, those working there insisted they didn't have enough applicants of the appropriate age. "Maybe," said Mr Timms, "you have to see that as a good sign."
It was little wonder that his comment provoked gasps of disbelief. When it comes to youth unemployment, there is precious little good news. The number of people aged under 25 and out of work is now just below a million – around one in five. This is up by 184,000 in the past year, and still climbing. As everyone apart from the minister could see, the absence of youngsters from a job centre reflects not a let-up in the problem, but shortcomings in the bureaucracy intended to combat it. According to Professor David Blanchflower, a labour market expert and former Bank of England policy-maker, it is highly likely that overall unemployment – currently just under 2.5 million, or 7.9 per cent of the working population – will climb to 3.4 million within a couple of years.

That would be higher than in the early 1980s, when the unemployment crisis was seen as just that – a social challenge of paramount importance, a cause for protests and riots. Yet so far, there has been far less handwringing, let alone any bold policies to deal with the issue. This perplexing state of affairs owes something to three factors. First, unemployment lags behind the rest of the economy, so we are not aware of how bad the picture will get, convincing ourselves that the flexibility of the labour market – the ability of firms to cut hours and pay – will save us.

Second, most of those losing their jobs are not those who find it easy to get their voices across – they are the young, the lower-paid, in the Midlands or the North. Third, economic policy before the 1980s had been explicitly aimed at fostering near-full employment; today's focus on inflation means unemployment is regarded as less of an issue. Yet this is an issue of paramount importance. The labour market is facing two crises: an immediate spike in unemployment, and a longer-term sclerosis after the slump is over. The first is primarily an economic issue, the second a social one, but both are due to government failure.

First things first: we must brace ourselves for further deterioration in the labour market. The most recent figures suggest that the picture is improving: by some measures, unemployment has actually stopped rising. But don't be fooled. For a start, many "discouraged workers" who would previously have been categorised as unemployed have been labelled "economically inactive". Include them, plus those forced to shift to part-time work, and the true jobless total is 5.6 million, or just under 15 per cent of the working population: not far below the 17 per cent level in the US.

But there could be worse to come. The best way to work out what will happen to unemployment in a recession is to look at productivity – economic output per worker. Given there are fewer people in work, you'd expect that productivity would have risen, as those still in work took up the slack for absent colleagues. But in fact, productivity has fallen by almost 5 per cent, implying that firms have kept workers on despite there being less for them to do.

Andrew Lilico of the think-tank Policy Exchange estimates that if employment shrinks to match the real level of demand in the economy, another two million will be on the dole. That would be a nasty enough prospect even if things had been hunky-dory before the crisis. But youth unemployment had been rising over the course of a decade: whether due to age discrimination laws, or the failings of the education system, employers have been luring old workers out of retirement rather than taking on youngsters. This problem – massively exacerbated by the recession – will burn a hole in the core of our economy and society if unchecked. Study after study has shown that youngsters who cannot find work are far more likely to enter permanent joblessness than someone who has already been in the labour market.

The Government must find ways of encouraging companies to take on youngsters rather than grandparents. It must also – as Prof Blanchflower has suggested on these pages – find the money to keep more children in school, perhaps by immediately raising the leaving age to 18, or to create a system of national community or civic service. Extreme ideas, yes. But we still haven't yet absorbed how extreme this unemployment crisis will be.

High street banks to be broken up
Three new banks are to appear on Britain's high streets as part of a major break-up of the sector to be announced by the Government this week, The Sunday Telegraph has learned. Alistair Darling, the Chancellor, will confirm over the next few days that Royal Bank of Scotland (RBS) and Lloyds Banking Group, both of which are majority-owned by the taxpayer, will be split up. Many of their assets will be sold off in deals which ministers will present as fulfilling Gordon Brown's promise that the taxpayer would get "pay back" for the multi-billion pound Government bail out of the sector last year.

Assets to be sold could include Cheltenham & Gloucester, currently owned by Lloyds, and RBS-owned NatWest branches in Scotland. The three new-look banks, all of which have their roots in smaller-scale high-street operations of the past, will be:
  • The TSB, the old Trustee Savings Bank whose branches were bought up by Lloyds. These will now be resurrected across the UK.
  • Williams & Glyn's, which had a brief period of operation in the 1970s and 1980s. Owned by RBS, it will be formed of hundreds of the Scottish group's English branches.
  • BankCo, the "good bank" portion of the entirely state-owned Northern Rock, which will include retail deposits, mortgages, and branches. Ministers are keen to sell the operation off as soon as possible.

Treasury sources have told The Sunday Telegraph that the move will be announced to the House of Commons after the European Union made it clear that the state aid pumped into Lloyds Banking Group and RBS meant that they had to be reduced in size.

Officials said the move would increase competition on the high street and would mean a better deal for customers looking for mortgages or current accounts which did not charge fees. They added that the announcement would mean the break-up of the established "monopoly" over retail banking of the high street giants – whose numbers also include Barclays, Santander (owners of Abbey) and HSBC. Stephen Hester, the chief executive of RBS, discussed the final details of the plan personally with Gordon Brown as the two men travelled back to London from separate meetings on the same Eurostar train on Friday afternoon.

Under the deal, the new institutions will not be allowed to be taken over by any purchaser which currently owns a British retail bank. Ministers will stop this happening using their powers as controlling shareholders in Lloyds, RBS and Northern Rock, rather than by new regulations. Instead, likely purchasers will come in from the US, Australia or the Middle East. The Daily Telegraph revealed that nearly half of all current accounts held in Britain, some 3.7 million, now involve fees for those who use them. "What we are talking about here is basically three new banks," a senior Treasury source said. "We want a better deal for the taxpayer after all the investment that they have made.'

The official said that any sale of the new banks would take a considerable period, and that nothing would be completed before the next general election which must be held by June next year. The sale should generate considerable profits for the Government but officials are remaining tight-lipped on the possible amounts. As well as losing TSB, Lloyds is also likely to sell Cheltenham and Gloucester bank and Intelligent Finance, its online banking arm. RBS is likely to sell its NatWest branches in Scotland and its card-payment business, as well as its insurance arm including Churchill, Direct Line and Green Flag. There is still a debate about RBS's American retail bank, Citizens, which Mr Hester has said is not on the table.

News of the deal comes after a tumultuous week in banking, with Lloyds announcing that it is planning a £21 billion rights issue and hopes to exit the Government's banking insurance scheme, the Asset Protection Scheme. RBS, which got £20 billion of taxpayer support, will remain within the scheme. The Government's move will be seen as highly political, an attempt to pile pressure on the Conservatives over their failure to support the banking bail-out a year ago.

Critics are likely to view it as a knee-jerk reaction, however. Lord Oakeshott of Seagrove Bay, the Liberal Democrat Treasury spokesman, said: "The Government is struggling from one short term fix to the next. "It is completely the wrong thing to do now and not in the taxpayer's interest. It is madness to float the good bits of Northern Rock off for blatant political advantage. Private bankers will pick the plums out of Northern Rock and leave taxpayers with the lemons."

UK businesses still starved of lending as money supply slows
Bank lending to smaller firms dropped by its biggest amount on record last month while consumers paid back unsecured borrowing for the third month running, the Bank of England reported today. Added to last week's weak third-quarter gross domestic product figure, analysts said the Bank of England was now more likely than not to announce an extension to its £175bn of "quantitative easing".

Bank officials have long maintained that they expect QE to boost money-supply growth, in particular lending to non-financial companies. But the figures showed this fell by 0.9% in September from the month before, or £14.6bn. On an annualised basis, lending was down by 1.7% over the quarter as a whole, the worst figure since records began in 1998. Headline M4 money supply grew 0.8% in September for an 11.6% annual rise, indicating a further slowing in the pace of expansion.

"Today's figures are perhaps the strongest indication yet that QE has failed to stimulate broad money and credit growth," said Colin Ellis, economist at Daiwa Securities. "Over the past month, the BoE has tried very hard to convince people that its QE programme has succeeded in boosting the economy. Certainly, there have been signs of life in financial markets – but they reflect much more than just the BoE's purchases, and, more importantly, there has been relatively little transition from improved financial markets to the real economy, in terms of lower interest rates for households and small firms."

Ellis thinks the Bank's monetary policy committee may be swayed by the data into expanding QE, an opinion shared by Howard Archer at IHS Global Insight. "Ongoing muted bank lending to companies, in tandem with the economy unexpectedly continuing to contract in the third quarter, puts serious pressure on the MPC to further extend the Bank of England's quantitative easing programme at their November meeting. We expect to see a £25bn extension to £200bn."

But total consumer credit remained subdued, as consumers repaid debt for a third consecutive month, although the repayment of £262m in September was less than the £373m repaid in August. Consumers borrowed a net £79m on their credit cards in September, the lowest amount since last December.

But mortgage approvals for house purchases rose faster than expected in September to their highest in 18 months. Approvals numbered 56,215 in September, up from 52,970 in August and above economists' expectations of a rise to 54,000. But they remained well below the average 93,000 a month seen between 1993 and 2009 and the 70,000-80,000 level that economists say is consistent with stable house prices.

Has the Canadian Government Become one of the Largest Backers of Risky Mortgages in the World?
There’s a familiar joke in my province that "B.C." stands for "bring cash". The sentiment is fueled by the far-above average house prices in most of the major urban centres in British Columbia. According to the CBC the average house price in Canada is about $330 000 whereas Vancouver is about $610 000. Prices are above Canadian averages in smaller B.C. urban centres like Victoria, Kelowna and Kamloops as well. Affordability hits Canadians hard, especially in B.C. The joke is that average Canadians can not afford to buy houses. For example, Stats Canada lists the average wage in Canada as $22.21 as of September 2009 or approximately $40000 per year.

According to the CMHC’s affordability calculator, a person making this wage can expect (with a 5% down payment; $100 per month heating cost; $250 dollar debt repayment; $150 property tax and assuming 4% over 30 year amortization) to be able to afford about a $200 000 house. I admit that I was generous with the numbers as often people have more than $250 debt especially with credit cards, line of credits, and car payments. With higher debt, the affordability drops significantly. This affordability is about $130 000 less than the average house price in Canada. Where I live, in Kamloops, $200 000 will usually buy you a small apartment or mobile home. This may be adequate for an individual but often these are too small for families who need 3 or more bedrooms. To make up for this both parents work usually work to buy a starter home or townhouse.

This is not new news to anyone. Most people are aware of the crunch and that two people need to work to pay a mortgage. However, are most people aware of how the government’s policy with CMHC may be contributing to this affordability crisis?

In Phoenix Arizona, a symbolic city of the American sub-prime collapse, one could expect to purchase a nice house for under $100 000. Phoenix is a great example because its unemployment number is nearly identical to Canada’s (8.6% in Phoenix according to the US Bureau of Labour and 8.4% in Canada according to Stats Canada). The major difference is that banks in Pheonix have clamped down on high-risk mortgages. Few banks are lending to people who are a high-ratio of debt to income and have small down payments. In Canada, you just need five percent down and an appropriate income.

The math is more complicated obviously, but the CMHC will back a mortgage, through insurance premiums, for a bank in Canada. There is low risk because if one defaults, the CMHC will cover the mortgage. As a consequence, we haven’t seen the housing price collapse like in the USA. Housing prices did drop last year, but never to rock-bottom prices and house prices are already above levels before the recession.

Banks do not risk losing money because they know that defaults are covered by the CMHC. Banks are much more willing to lend Canadians money and as such housing prices have stayed relatively level compared against the USA. Many Canadians are stretched thin but still securing mortgages.

This problem, however, is complicated because without the minimal rules like 5% down and 35 year amortization few individuals could afford to buy. If we went back to rules like 25% down and 25 year amortization, the market would be completely shut down to many individuals. We are, in a way, stuck with the lax mortgage rules because if the government implemented tough rules (like 25% down) we would probably have a housing crisis like America because no one would be able to buy at current house prices. Prices would have to drop drastically.

When the government in 2007 directed the CMHC to allow 40 year amortization and zero down we committed ourselves to high house prices. The recent 5% down and 35 amortization is a start but it is still relatively easy. Furthermore, many banks offer "5% cash back" mortgages to ease those without 5% into the market.

For me back in B.C. I’ll be scouring the MLS for cheaper houses but probably will be saving up for a long time to come up with a down payment to buy into the market. Will this government work to make houses more affordable or are we committed to high house prices for the foreseeable future as long as the Government of Canada remains, arguably, one of the largest backer of risky mortgages in the world?

Russia scraps gold sales plan for 2009
We can dwell on yesterday's happenings after we take a quick scan of the markets as they stand on this crisp Tuesday morning. Gold, still nervous, and still trading at under the $1040 level (namely, at $1038.00) - trying really to get up off the floor and dust itself off. Silver, down another 10 cents, breaking the $17 level, also still hoping for a recovery, following its worst drop in a month. Platinum and palladium, down a bit more. The former, at $1325, the latter at $327. The dollar, off a tiny fraction, but still orbiting very near the 76-mark on the index. Oil, up a third of a dollar, but not looking very strong.

At the end of the day, it will be concluded that trying to assign yesterday's turn in the markets to one single factor is an exercise in futility. However, if we allow for a combination of developments as having played a parallel role in what took place, we have a realistic chance of coming up with an explanation. That said, the markets (i.e. the players within them) have to yet convince us that this tectonic shift in sentiment is genuine, and that it is sustainable. A correction, this appears to be. Not a very significant one, as yet. If a trend reversal, then we could have locomotives followed by freight trains, coming full speed at various (dollar) shorts as well as (gold) longs in these markets. Now, then:

On the very day when Marc Faber was heard on Bloomberg radio pontificating about the target towards which the world's numeraire currency for trade is headed (zero!) in his opinion of course, something went wrong. Very wrong. Around the midday hour, the Dow transports broke, the S&P broke, the dollar-euro broke, and commodities broke.

If we can find the straw that broke you-know-what in the market haystack, well, that might very well be the announcement by ING to sell its insurance unit, pay back rescue funds, and get back to the business...of banking, as separate from 'other' activities. In so many words, you are witnessing the beginning of the resurrection of the essence of the Glass-Steagall Act.

The dismantling of ING- according to the FT- is one of the toughest interventions yet by Europe’s competition authorities, which waved through state aid to financial groups during the crisis but made clear these would be subject to scrutiny if they later appeared too generous. It is expected that the forced divestments will have repercussions for state-aided banks in Europe and the US as well as in the UK.

If the financial world needed a signal that the way forward will indeed be different, well, it appears to have received it yesterday. On that signal, many a market undertook a one-eighty on Monday.

Whether or not we will find out later if any central bank was out there with a fishing net, scooping up some very soggy dollars, that remains to yet be learned. We actually think the dollar has some more trials and tribulations to overcome near that 75 mark before the all-clear signal sounds. But, the end of the world as we know it, that, will not be. And, yesterday could indeed mark the pivot point from which we go forth.

We also think gold could still make some quick repairs here, especially if the news that Russia is scrapping its planned gold sales for 2009 due to the very news being leaked, is seen as another opportunity to pump up the metal by momentum funds. Guess Russia will just have to surprise the markets when that 'magic' level is once again reached - in its calculations.

" Russia had planned to sell the gold to plug its budgetary deficit, but has had to postpone plans indefinitely due to leaked information about the sale affecting the price of gold. "Due to the leak of the information the sale in the reported period and in the reported form will not take place," said the government agent for precious metals sales.

The sale, had it gone ahead, would have been Russia's first major bullion sale since the fall of the Soviet Union. The sale of 50 tonnes would have represented as much as 1.25 per cent of annual global gold consumption and could have raised up to $1.7 billion (£1 billion) at current gold prices. "

At this point, let us can turn it over to others who are in possession of clean magnifying glasses and sharp scalpels, and let them speak for what happened -any may yet happen- from their own unique angles.

We start off with a gold bug. Ned Schmidt. As previously stated, we will not see eye to eye with him on long-range targets, but is take on where things stand right now is well worth your scan:

"October 2009 has developed into a truly glorious month. For the first time in history the average monthly price for US$ Gold will exceed $1,000. Certainly all are celebrating such a wonderful event. Perhaps the most important aspect of this remarkable event is that the purveyors of price suppression and manipulation theories can now turn off the lights in their caves. Reality has crushed their misconceptions. If an $800 bull market is price suppression, give me some more!

The most glorious aspect of this breakout is the spawning of all sorts of fantasy calculations. The move of $Gold to a new high for some reason has revealed until now hidden relationships that justify any number for the future price of $Gold. These till now undiscovered relationships are allowing the creation of forecasts for Gold of more than $5,000, and even some in $6,000 range. Such forecasts can be verified by multiplying the price of $Gold on your birthday by the ratio of the length of your femur to the length of your largest toe."

Over to Elliott Wave, and their diagnosis (complete with the usual abundance of geometry) of the greenback and gold following yesterday's pyrotechnics:

"Let the "fireworks" begin. The initial move up from the bottom should be sharp, as over-leveraged dollar bears, and they are legion, scramble to cover their positions.

Initial resistance surrounds 77.50, the former "breakdown" level, but if there is strong enough short-covering, prices could vault through this area. The other important aspect to a dollar bottom is the implication to all the other markets that have been moving opposite to this senior currency.

The start of a major dollar rally should roughly coincide with a turn down in stocks, commodities, oil and the precious metals. So there are likely to be important trend reversals across nearly all major markets. The U.S. Dollar Index has no business being near the overnight low of 75.20 again if prices have indeed made a major bottom.

We’re starting to see a little "action" in the precious metals sector. Today’s [Gold] decline to $1037.30 eliminates the fourth-wave triangle pattern in the manner that we were originally counting. The break first of $1046.50, wave (c), then $1042.10, wave (a), increases the odds that gold has topped and started a significant down phase.

In order to confirm this assessment of gold’s new downtrend, prices should come under $1011.30, the previous wave i (circle) high registered on the night of September 30. Any break there will allow us to eliminate the alternate potential, shown on the second 240-minute chart above, which has prices ending wave iv (circle) after tracing out an "(a)-triangle (b)-(c)" pattern.Based on the pattern development over the past several hours, we are turning near-term bearish gold in anticipation of continued selling pressure. A sell off to below $1011.30 will confirm that Primary wave C (circle) is underway, with the downside target still "below $680." If prices rise above $1060.47 at any time, it will likely mean that wave v (circle) up to a new recovery high was underway, with a potential target of $1083-$1093."

Next up, a fund guy. Not a gold fund guy. And more math. As well as a bit of statistics. Written before the Monday events. Seen on Bloomberg:

"Gold’s record-setting rally "appears stretched" and investors shouldn’t count on a falling dollar to sustain the surge, according to Brian G. Belski, Oppenheimer & Co.’s chief investment strategist. While gold has risen as the dollar has dropped this year, the link "is being driven by momentum as opposed to traditional investment dynamics," Belski wrote today in a report. The ties between price moves in the metal and the currency have been relatively weak since 1970, he added.

The CHART OF THE DAY tracks the price of gold for immediate delivery and the Dollar Index, a gauge of the currency’s value against the euro, yen, pound, Swiss franc, Swedish krona and Canadian dollar. Belski calculated that gold and the dollar had a correlation of minus 0.2 in the past four decades. If the two were polar opposites, then the so-called correlation coefficient would approach minus one. It would be one if they moved in lockstep.

Gold did especially well when the dollar was also gaining, the report said. The metal’s price rose at a 41 percent annual rate on average in the first two years after the currency hit bottom. The average gain for the entire period was just 8.8 percent. "A speculative bubble" may be developing, Belski wrote. Consumer demand for gold has tumbled and mine production is little changed, and these trends don’t "appear to support current price levels," he added."

In the minutes following yesterday's closings, Mark Hulbert chimed in, over at Marketwatch. He watched the market. He wrote:
"The yellow metal's drop Monday was not as big a surprise as it might otherwise have appeared to be. That's because gold timers, after several months of skepticism that formed a wall of worry for gold's bull market to climb, earlier this month decided on balance to jump on the bullish bandwagon. This meant that, from the viewpoint of contrarian analysis, gold no longer had strong sentiment winds blowing in its sails.

Indeed, the October issue of the Hulbert Financial Digest emailed to subscribers on Oct, 15, argued that "at least from a contrarian point of view, the easiest money in gold's rally is now behind us." Ominously, gold timers on average are no less bullish today than they were in mid-October, despite the recent hiccups. The average recommended gold-market exposure among a subset of short-term, gold-timing advisers currently stands at 53.8%, unchanged from where it was on Oct. 15.

That exposure level is right in line with where gold exposure stood on each of the previous occasions over the last two years in which gold's rally failed. All this suggests to contrarians that gold still has some downside work to do before enough skepticism returns to provide a strong sentiment foundation for a resumption of gold's uptrend."

And, finally, the words of a mining company top banana or two. You can almost feel the excitement building. If these are miners, they must be making those Ned Schmidt projections based on arms, legs and toes. Not these ones. Wonder why. Something called fundamentals, as opposed to fund- a -mentals...

Mining Weekly has them opining that: "The recent gold price spike, which had seen gold trading at above $1 000/oz, was unlikely to be sustainable in the long run, as this had largely been driven by short-term factors, Harmony Gold chairperson Patrice Motsepe said in the group’s 2009 annual report, which was released on Monday. The gold price had reached a record above $1 070/oz in the middle of October. "

Harmony CEO Graham Briggs added that the gold price, in rand and in dollar terms, had been on a rollercoaster, with the prices not moving in unison. He told shareholders that the rand strength had seen the rand gold price decline to R231 000/kg in the past five months of the year ended June 30, 2009, down from R320 000/kg before. In the medium- to long term, Harmony is using a gold price of $750/oz and R225 000/kg for planning purposes. Motsepe said he expected the rand’s volatility to continue." The gents in question still see a chance for gold to be pushed up to $1100 in the near-term, but...

Back to the screens. US data still to come. Volatility still to come. Nerves starting to show. Until later,

Federal Reserve Policy Audit Legislation ‘Gutted,’ Paul Says
Representative Ron Paul, the Texas Republican who has called for an end to the Federal Reserve, said legislation he introduced to audit monetary policy has been "gutted" while moving toward a possible vote in the Democratic-controlled House. The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today.

"There’s nothing left, it’s been gutted," he said in a telephone interview. "This is not a partisan issue. People all over the country want to know what the Fed is up to, and this legislation was supposed to help them do that." The Fed, led by Chairman Ben S. Bernanke, has come under greater congressional scrutiny while attempting to end the financial crisis by bailing out financial firms and more than doubling its balance sheet to $2.16 trillion in the past year. The central bank is also buying $1.25 trillion of securities tied to home loans.

Paul, a member of the House Financial Services Committee, said Mel Watt, a Democrat from North Carolina, has eliminated "just about everything" while preparing the legislation for formal consideration. Watt is chairman of the panel’s domestic monetary policy and technology subcommittee. Keith Kelly, a spokesman for Watt, declined to comment and said Watt wasn’t immediately available for an interview. Watt’s district includes Charlotte, headquarters of Bank of America Corp., the biggest U.S. lender.

Paul said he intends to introduce an amendment to the bill when it comes to the House floor for a vote restoring the legislation’s original language. Representative Barney Frank, a Democrat from Massachusetts and chairman of the committee, said in interview that he intends to ensure legislation would provide a time lag between FOMC actions and the reporting of them. Such a provision would "lessen the market impact," he said on Oct. 20. "The importance is to see that there are no abuses and to judge what they did." The legislation will probably be included in a broader Democratic package of financial-regulation changes in the House, Frank said.

How Goldman secretly bet on the U.S. housing crash
In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting. Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies. Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws. "The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."

John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so the legality of Goldman's maneuvers depends on what its executives knew at the time. "It would look much more damaging," Coffee said, "if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless." Lloyd Blankfein, Goldman's chairman and chief executive, declined to be interviewed for this article.

A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like bets, called credit-default swaps, to "hedge" against a housing downturn. DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did."

For the past year, Goldman has been on the defensive over its Washington connections and the billions in federal bailout funds it received. Scant attention has been paid, however, to how it became the only major Wall Street player to extricate itself from the subprime securities market before the housing bubble burst. Goldman remains, along with Morgan Stanley, one of two venerable Wall Street investment banks still standing. Their grievously wounded peers Bear Stearns and Merrill Lynch fell into the arms of retail banks, while another, Lehman Brothers, folded.

To piece together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents, SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar with the firm's activities. McClatchy's inquiry found that Goldman Sachs:
  • Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated applicants' incomes to justify making hefty loans.
  • Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.
  • Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.
  • Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman alumni.

The firm benefited when Paulson elected not to save rival Lehman Brothers from collapse, and when he organized a massive rescue of tottering global insurer American International Group while in constant telephone contact with Goldman chief Blankfein. With the Federal Reserve Board's blessing, AIG later used $12.9 billion in taxpayers' dollars to pay off every penny it owed Goldman. These decisions preserved billions of dollars in value for Goldman's executives and shareholders. For example, Blankfein held 1.6 million shares in the company in September 2008, and he could have lost more than $150 million if his firm had gone bankrupt.

With the help of more than $23 billion in direct and indirect federal aid, Goldman appears to have emerged intact from the economic implosion, limiting its subprime losses to $1.5 billion. By repaying $10 billion in direct federal bailout money — a 23 percent taxpayer return that exceeded federal officials' demand — the firm has escaped tough federal limits on 2009 bonuses to executives of firms that received bailout money. Goldman announced record earnings in July, and the firm is on course to surpass $50 billion in revenue in 2009 and to pay its employees more than $20 billion in year-end bonuses.

For decades, Goldman, a bastion of Ivy League graduates that was founded in 1869, has cultivated an elite reputation as home to the best and brightest and a tradition of urging its executives to take turns at public service. As a result, Goldman has operated a virtual jobs conveyor belt to and from Washington: Paulson, as Treasury secretary, sent tens of billions of taxpayers' dollars to rescue Wall Street in 2008, and former Goldman employees populate some of the most demanding and powerful posts in Washington. Savvy federal regulators have migrated from their Washington jobs to Goldman. On Oct. 16, a Goldman vice president, Adam Storch, was named managing executive of the SEC's enforcement division.

Goldman's financial panache made its sales pitches irresistible to policymakers and investors alike, and may help explain why so few of them questioned the risky securities that Goldman sold off in a 14-month period that ended in February 2007. Since the collapse of the economy, however, some of those investors have changed their opinions of Goldman. Several pension funds, including Mississippi's Public Employees' Retirement System, have filed suits, seeking class-action status, alleging that Goldman and other Wall Street firms negligently made "false and misleading" representations of the bonds' true risks.

Mississippi Attorney General Jim Hood, whose state has lost $5 million of the $6 million it invested in Goldman's subprime mortgage-backed bonds in 2006, said the state's funds are likely to lose "hundreds of millions of dollars" on those and similar bonds. Hood assailed the investment banks "who packaged this junk and sold it to unwary investors." California's huge public employees' retirement system, known as CALPERS, purchased $64.4 million in subprime mortgage-backed bonds from Goldman on March 1, 2007. While that represented a tiny percentage of the fund's holdings, in July CALPERS listed the bonds' value at $16.6 million, a drop of nearly 75 percent, according to documents obtained through a state public records request.

In May, without admitting wrongdoing, Goldman became the first firm to settle with the Massachusetts attorney general's office as it investigated Wall Street's subprime dealings. The firm agreed to pay $60 million to the state, most of it to reduce mortgage balances for 714 aggrieved homeowners. Attorney General Martha Coakley, now a candidate to succeed Edward Kennedy in the U.S. Senate, cited the blight from foreclosed homes in Boston and other Massachusetts cities. She said her office focused on investment banks because they provided a market for loans that mortgage lenders "knew or should have known were destined for failure."

New Orleans' public employees' retirement system, an electrical workers union and the New Jersey carpenters union also are suing Goldman and other Wall Street firms over their losses. The full extent of the losses from Goldman's mortgage securities isn't known, but data obtained by McClatchy show that insurance companies, whose annuities provide income for many retirees, collectively paid $2 billion for Goldman's risky high-yield bonds. Among the bigger buyers: Ambac Assurance purchased $923 million of Goldman's bonds; the Teachers Insurance and Annuities Association, $141.5 million; New York Life, $96 million; Prudential, $70 million; and Allstate, $40.5 million, according to the data from the National Association of Insurance Commissioners.

In 2007, as early signs of trouble rippled through the housing market, Goldman paid a discounted price of $8.8 million to repurchase subprime mortgage bonds that Prudential had bought for $12 million. Nearly all the insurers' purchases were made in 2006 and 2007, after mortgage lenders had lifted most traditional lending criteria in favor of loans that required little or no documentation of borrowers' incomes or assets. While Goldman was far from the biggest player in the risky mortgage securitization business, neither was it small.

From 2001 to 2007, Goldman hawked at least $135 billion in bonds keyed to risky home loans, according to analyses by McClatchy and the industry newsletter Inside Mortgage Finance. In addition to selling about $39 billion of its own risky mortgage securities in 2006 and 2007, Goldman marketed at least $17 billion more for others. It also was the lead firm in marketing about $83 billion in complex securities, many of them backed by subprime mortgages, via the Caymans and other offshore sites, according to an analysis of unpublished industry data by Gary Kopff, a securitization expert.

In at least one of these offshore deals, Goldman exaggerated the quality of more than $75 million of risky securities, describing the underlying mortgages as "prime" or "midprime," although in the U.S. they were marketed with lower grades. Goldman spokesman DuVally said that Moody's, the bond rating firm, gave them higher grades because the borrowers had high credit scores. Goldman's securities came in two varieties: those tied to subprime mortgages and those backed by a slightly higher grade of loans known as Alt-A's.

Over time, both types of mortgages required homeowners to pay rapidly rising interest rates. Defaults on subprime loans were responsible for last year's housing meltdown. Interest rates on Alt-A loans, which began to rocket upward this year, are causing a new round of defaults. Goldman has taken multiple steps to put its subprime dealings behind it, including publicly saying that Wall Street firms regret their mistakes. Last winter, the company cancelled a Las Vegas conference, avoiding any images of employees flashing wads of bonus cash at casinos.

More recently, the firm has launched a public relations campaign to answer the criticism of its huge bonuses, Washington connections and federal bailout. In late October, Blankfein argued that Goldman's activities serve "an important social purpose" by channeling pools of money held by pension funds and others to companies and governments around the world.

For investment banks such as Goldman, the trick was knowing when to exit the high-stakes subprime game before getting burned. New York hedge fund manager John Paulson was one of the first to anticipate disaster. He told Congress that his researchers discovered by early 2006 that many subprime loans covered the homes' entire value, with no down payments, and so he figured that the bonds "would become worthless." He soon began placing exotic bets — credit-default swaps — against the housing market. His firm, Paulson & Co., booked a $3.7 billion profit when home prices tanked and subprime defaults soared in 2007 and 2008. (He isn't related to Henry Paulson.)

At least as early as 2005, Goldman similarly began using swaps to limit its exposure to risky mortgages, the first of multiple strategies it would employ to reduce its subprime risk. The company has closely guarded the details of most of its swaps trades, except for $20 billion in widely publicized contracts it purchased from AIG in 2005 and 2006 to cover mortgage defaults or ratings downgrades on subprime-related securities it offered offshore.

In December 2006, after "10 straight days of losses" in Goldman's mortgage business, Chief Financial Officer David Viniar called a meeting of mortgage traders and other key personnel, Goldman spokesman DuVally said. Shortly after the meeting, he said, it was decided to reduce the firm's mortgage risk by selling off its inventory of bonds and betting against those classes of securities in secretive swaps markets. DuVally said that at the time, Goldman executives "had no way of knowing how difficult housing or financial market conditions would become."

In early 2007, the firm's mortgage traders also bet heavily against the housing market on a year-old subprime index on a private London swap exchange, said several Wall Street figures familiar with those dealings, who declined to be identified because the transactions were confidential. The swaps contracts would pay off big, especially those with AIG. When Goldman's securities lost value in 2007 and early 2008, the firm demanded $10 billion, of which AIG reluctantly posted $7.5 billion, Viniar disclosed last spring.

As Goldman's and others' collateral demands grew, AIG suffered an enormous cash squeeze in September 2008, leading to the taxpayer bailout to prevent worldwide losses. Goldman's payout from AIG included more than $8 billion to settle swaps contracts. DuVally said Goldman has made other bets with hundreds of unidentified counterparties to insure its own subprime risks and to take positions against the housing market for its clients. Until the end of 2006, he said, Goldman was still betting on a strong housing market.

However, Goldman sold off nearly $28 billion of risky mortgage securities it had issued in the U.S. in 2006, including $10 billion on Oct. 6, 2006. The firm unloaded another $11 billion in February 2007, after it had intensified its contrary bets. Goldman also stopped buying risky home mortgages after the December meeting, though DuVally declined to say when.

Despite updating its numerous disclosures to investors in 2007, Goldman never revealed its secret wagers. Asked whether Goldman's bond sellers knew about the contrary bets, spokesman DuVally said the company's mortgage business "has extensive barriers designed to keep information within its proper confines." However, Viniar, the Goldman finance chief, approved the securities sales and the simultaneous bets on a housing downturn. Dan Sparks, a Texan who oversaw the firm's mortgage-related swaps trading, also served as the head of Goldman Sachs Mortgage from late 2006 to April 2008, when he abruptly resigned for personal reasons.

The Securities Act of 1933 imposes a special disclosure burden on principal underwriters of securities, which was Goldman's role when it sold about $39 billion of its own risky mortgage-backed securities from March 2006 to February 2007. The firm maintains that the requirement doesn't apply in this case. DuVally said the firm sold virtually all its subprime-related securities to Qualified Institutional Buyers, a class of sophisticated investors that are afforded fewer protections than small investors are under federal securities laws. He said Goldman made all the required disclosures about risks.

Whether companies are obliged to inform investors about such contrary trades, or "hedges," is "a very hot issue" in cases winding through the courts, said Frank Partnoy, a University of San Diego law professor who specializes in securities. One issue is how specific companies must be in disclosing potential risks to investors, he said. Coffee, the Columbia University law professor, said that any potential violations of securities laws would depend on what Goldman executives knew about the risks ahead.

"The critical moment when Goldman would have the highest liability and disclosure obligations is when they are serving as an underwriter on a registered public offering," he said. "If they are at the same time desperately seeking to get out of the field, that kind of bailout does look far more dubious than just trading activities." Another question is whether, by keeping the trades secret, the company withheld material information that would enable investors to assess Goldman's motives for selling the bonds, said James Cox, a Duke University law professor who also has served on the NYSE advisory panel.

If Goldman had disclosed the contrary bets, he said, "One would have to believe that a rational investor would not only consider Goldman's conduct material, but likely compelling a decision to take a pass on the recommendation to purchase." Cox said that existing laws, however, don't require sufficient disclosures about trading, and that the government would do well to plug that hole. In marketing disclosures filed with the SEC regarding each pool of subprime bonds from 2001 to 2007, Goldman listed an array of risk factors that grew over time. Among them was the possibility of a pullback in overheated real estate markets, especially in California and Florida, where the most subprime loans had been made.

Suits filed by the pension funds, however, allege that Goldman made materially false or misleading statements in its public offerings, failing to disclose that many loans were based on inflated appraisals and were bought from firms with poor lending practices. DuVally said that investors were fully informed of all known risks. "What's going to happen in the next few years," said San Diego's Partnoy, "is there's going to be a lot of lawsuits and judges will have to decide, should Goldman have disclosed more or not?"

Goldman takes on new role: taking away people's homes
When California wildfires ruined their jewelry business, Tony Becker and his wife fell months behind on their mortgage payments and experienced firsthand the perils of subprime mortgages. The couple wound up in a desperate, six-year fight to keep their modest, 1,500-square-foot San Jose home, a struggle that pushed them into bankruptcy. The lender with whom they sparred, however, wasn't the one that had written their loans. It was an obscure subsidiary of Wall Street colossus Goldman Sachs Group.

Goldman spent years buying hundreds of thousands of subprime mortgages, many of them from some of the more unsavory lenders in the business, and packaging them into high-yield bonds. Now that the bottom has fallen out of that market, Goldman finds itself in a different role: as the big banker that takes homes away from folks such as the Beckers. The couple alleges that Goldman declined for three years to confirm their suspicions that it had bought their mortgages from a subprime lender, even after they wrote to Goldman's then-Chief Executive Henry Paulson — later U.S. Treasury secretary — in 2003.

Unable to identify a lender, the couple could neither capitalize on a mortgage hardship provision that would allow them to defer some payments, nor on a state law enabling them to offset their debt against separate, investment-related claims against Goldman. In July, the Beckers won a David-and-Goliath struggle when Goldman subsidiary MTGLQ Investors dropped its bid to seize their house. By then, the college-educated couple had been reduced to shopping for canned goods at flea markets and selling used ceramic glass.

Theirs is an infrequent happy ending among the hundreds of cases in which subsidiaries of Goldman, better known for sending top officers such as Paulson to serve in top Washington posts, have sought to contain bondholder losses by foreclosing on properties and evicting delinquent borrowers. Goldman spokesman Michael DuVally declined to comment on individual cases or on the firm's new role in bankruptcy courts. Joining other Wall Street firms that bought millions of subprime mortgages, Goldman companies have gone to courts from California to Florida seeking approval to foreclose on the homes of middle- and lower-income Americans who couldn't keep up with their loans' soaring monthly payments.

Some borrowers were speculators or homebuyers who exaggerated their incomes on loan applications, thinking they'd always have an escape hatch because housing prices would keep rising. Others, however, were victims of fast-talking mortgage brokers who didn't explain that the loans' interest rates could rise to as high as 15 percent. Many borrowers who defaulted on their mortgages may never qualify for a home loan again. In court encounters, Goldman and other Wall Street firms have faced the impact of their own wheeling and dealing. Many of the families being put on the street never would've gotten their big mortgages if investment banks hadn't provided a seemingly insatiable secondary market for millions of loans to marginally qualified buyers.

Subprime borrowers were supposed to provide a safe income stream for investors who bought mostly high-grade, triple-A-rated bonds from Goldman and bigger subprime players, such as now-defunct Lehman Brothers and Merrill Lynch. Now, millions of these borrowers have defaulted on mortgage payments, contributing to a historic slump in home prices and depressing the bonds' value. Half the homes in some California neighborhoods have been subject to foreclosures or short sales, in which a home is sold for less than the mortgage balance, and either the seller or the lender takes a loss.

Earlier this year in Los Angeles, the Wall Street giant took possession of the home of Gladys Aguirre, a housecleaner who's married to a construction worker. Together, the couple listed monthly earnings of $7,480, including $3,480 from a job she'd held for two months. Aguirre originally took a $444,000 subprime mortgage on Sept. 1, 2005, from Argent Mortgage Co., a subsidiary of big subprime lender Ameriquest Mortgage Co., which shut down in 2007. The adjustable interest rate sent her monthly payments zooming to $3,800 from $2,479, and Aguirre couldn't keep pace on that loan or a $119,000 second mortgage. She filed for bankruptcy protection.

Aguirre's Los Angeles lawyer, Eber Bayona, declined to discuss her case, but said that subprime loans amounted to "setting up the person for failure" because interest rate adjustments hit borrowers with "shock payments." For example, he said, loan agents promised applicants that they could buy a $600,000 house for payments of $1,200 a month, and the buyers "never read the fine print ... (and) didn't know their interest would increase and that eventually they would lose their house and their money."

In San Fernando, Calif., Dina Alfero-Pacheo qualified for two mortgages totaling nearly $500,000, with monthly payments starting at $2,004. By 2007, the payments had grown to $3,761. In a bankruptcy filing early this year, Alfero-Pacheo said she was a bartender earning $3,800 a month. Goldman bought her first mortgage from Argent and recently got title to the house, which had sunk in value to $280,000 from more than $500,000.

In Orlando, Fla., Adela Mendez seems to be someone who would've known the risks when she took a $164,000 mortgage from Argent on her home in 2005 and a $75,000 second mortgage a year later. In a bankruptcy filing this year, she listed her occupation as a loan specialist for Washington Mutual, a leading subprime lender that collapsed last year. Not only did Mendez fall 11 months behind on her mortgage payments, but her home's value also plummeted to $100,000. Goldman Sachs Mortgage, which bought the Argent loan, took the house — and at least a 50 percent loss. Alfero-Pacheo and Mendez, whose cases are detailed in court records, couldn't be reached to comment.

The Beckers charged that in their case, Goldman engaged in years of obfuscation and resistance. "In bankruptcy court, they tried to portray us as incompetent or deadbeats,'' said Celia Fabos-Becker, blinking back tears as she sat with her husband in their living room, with boxes of mortgage-related documents surrounding them. The couple thought they'd made a safe bet in 2000 when they opened a retail jewelry business in two San Diego County areas populated mainly by military personnel.

The wars in Afghanistan and Iraq, however, brought big military call-ups, sapping their market. After a wildfire ravaged much of the area in 2002, the Beckers refinanced their house to generate some $70,000 in cash to prop up their two stores. They wound up with an adjustable-rate, subprime loan from WMC Mortgage Corp., an arm of General Electric's GE Money unit, and a 10.75 percent second mortgage with the same lender. A second wildfire in 2003 all but killed their business and left the couple reeling financially as interest-rate adjustments pushed the mortgage payments higher.

"We'd gotten to the point where I was cutting my own hair. I was cutting his on occasion," Fabos-Becker said. "And trolling the Goodwills," Tony Becker said. Tony Becker, an engineer, took short-term contract jobs amid the technology bust. Celia Fabos-Becker, meanwhile, found a provision in the mortgages that allowed the borrower to push payments to the end of the loan term in the event of a disaster such as the two fires. When she wrote to Paulson, however, lawyers for Goldman denied that it owned the Beckers' mortgages. So did Germany's Deutsche Bank, a trustee that was holding thousands of subprime mortgages Goldman had converted to bonds.

To stall foreclosure, the Beckers wound up negotiating "forbearance agreements" with Ocwen Loan Servicing, a Florida company, that required the couple to pay several thousand dollars under the threat that their house would be auctioned off in a week or a month, Fabos-Becker said. Their monthly payments rose to nearly $3,300 from $2,650. The couple already had taken Goldman and Morgan Stanley, another Wall Street firm, to arbitration over their $325,000 in stock market losses, accusing the investment banks of misleading investors about public offerings.

On the same day in June 2006, Goldman sued to end the arbitration, and Ocwen filed papers seeking to foreclose on the Beckers' home. In desperation, the couple filed for bankruptcy protection. With no money to hire an attorney, they acted as their own lawyers. As the months dragged on, Fabos-Becker finally found a filing with the Securities and Exchange Commission confirming that Goldman had bought the mortgages. Then, when a lawyer for MTGLQ showed up at a June 2007 court hearing on the stock battle, U.S. District Judge William Alsup of the Northern District of California demanded to know the firm's relationship to Goldman, telling the attorney that he hates "spin."

The lawyer acknowledged that MTGLQ was a Goldman affiliate. That was an understatement. MTGLQ, a limited partnership, is a wholly owned subsidiary of Goldman that's housed at the company's headquarters at 85 Broad Street in New York, public records show. In July, after U.S. Bankruptcy Judge Roger Efremsky of the Northern District of California threatened to impose "significant sanctions" if the firm failed to complete a promised settlement with the Beckers, Goldman dropped its claims for $626,000, far more than the couple's original $356,000 in mortgages and $70,000 in missed payments. The firm gave the Beckers a new, 30-year mortgage at 5 percent interest.

That lowered their monthly payment to $1,900, less than half the maximum $4,000 a month their subprime loans could've demanded. Fabos-Becker, 60, said that the trauma has left her hair "a lot grayer." Much of the stress would have been alleviated, she said, if a law required lenders to identify themselves, especially to borrowers facing hardships. "I take solace," Tony Becker said, "in knowing that I was up against the worst possible opponent — the biggest, strongest investment bank in the world."

Thirsty Plant Dries Out Yemen
More than half of this country’s scarce water is used to feed an addiction. Even as drought kills off Yemen’s crops, farmers in villages like this one are turning increasingly to a thirsty plant called qat, the leaves of which are chewed every day by most Yemeni men (and some women) for their mild narcotic effect. The farmers have little choice: qat is the only way to make a profit.

Meanwhile, the water wells are running dry, and deep, ominous cracks have begun opening in the parched earth, some of them hundreds of yards long. "They tell us it’s because the water table is sinking so fast," said Muhammad Hamoud Amer, a worn-looking farmer who has lost two-thirds of his peach trees to drought in the past two years. "Every year we have to drill deeper and deeper to get water."

Across Yemen, the underground water sources that sustain 24 million people are running out, and some areas could be depleted in just a few years. It is a crisis that threatens the very survival of this arid, overpopulated country, and one that could prove deadlier than the better known resurgence of Al Qaeda here. Water scarcity afflicts much of the Middle East, but Yemen’s poverty and lawlessness make the problem more serious and harder to address, experts say. The government now supplies water once every 45 days in some urban areas, and in much of the country there is no public water supply at all. Meanwhile, the market price of water has quadrupled in the past four years, pushing more and more people to drill illegally into rapidly receding aquifers.

"It is a collapse with social, economic and environmental aspects," said Abdul Rahman al-Eryani, Yemen’s minister of water and environment. "We are reaching a point where we don’t even know if the interventions we are proposing will save the situation." Making matters far worse is the proliferation of qat trees, which have replaced other crops across much of the country, taking up a vast and growing share of water, according to studies by the World Bank. The government has struggled to limit drilling by qat farmers, but to no effect. The state has little authority outside the capital, Sana.

Already, the lack of water is fueling tribal conflicts and insurgencies, Mr. Eryani said. Those conflicts, including a widening armed rebellion in the north and a violent separatist movement in the south, in turn make it more difficult to address the water crisis in an organized way. Many parts of the country are too dangerous for government engineers or hydrologists to venture into. Climate change is deepening the problem, making seasonal rains less reliable and driving up average temperatures in some areas, said Jochen Renger, a water resources specialist with the German government’s technical assistance arm, who has been advising the water ministry for five years.

Unlike some other arid countries in the region, like Saudi Arabia and the United Arab Emirates, Yemen lacks the money to invest heavily in desalination plants. Even wastewater treatment has proved difficult in Yemen. The plants have been managed poorly, and some clerics have declared the reuse of wastewater to be a violation of Islamic principles. At the root of the water crisis — as with so many of the ills affecting the Middle East — is rapid population growth, experts say. The number of Yemenis has quadrupled in the last half century, and is expected to triple again in the next 40 years, to about 60 million.

In rural areas, people can often be seen gathering drinking water from cloudy, stagnant cisterns where animals drink. Even in parts of Sana, the poor cluster to gather runoff from privately owned local wells as their wealthier neighbors pay the equivalent of $10 for a 3,000 liter-truckload of water. "At least 1,000 people depend on this well," said Hassan Yahya al-Khayari, 38, as he stood watching water pour from a black rubber tube into a tanker truck near his home in Sana. "But the number of people is rising, and the water is growing less and less."

For millenniums, Yemen preserved traditions of careful water use. Farmers depended mostly on rainwater collection and shallow wells. In some areas they built dams, including the great Marib dam in northern Yemen, which lasted for more than 1,000 years until it collapsed in the sixth century A.D. But traditional agriculture began to fall apart in the 1960s after Yemen was flooded with cheap foreign grain, which put many farmers out of business. Qat began replacing food crops, and in the late 1960s, motorized drills began to proliferate, allowing farmers and villagers to pump water from underground aquifers much faster than it could be replaced through natural processes. The number of drills has only grown since they were outlawed in 2002.

Despite the destructive effects of qat, the Yemeni government supports it, through diesel subsidies, loans and customs exemptions, Mr. Eryani said. It is illegal to import qat, and powerful growers known here as the "qat mafia" have threatened to shoot down any planes bringing in cheaper qat from abroad. Still, the water crisis could be eased substantially through a return to rainwater collection and better management, Mr. Renger said. Between 20 and 30 percent of Yemen’s water is lost through waste, he said, compared with 7 to 9 percent in Europe.

In Jahiliya and other areas around the capital, the World Bank is leading a project to change wasteful irrigation patterns. Mr. Amer, the farmer based here, proudly showed visitors his efforts to irrigate fruit and tomato fields using rubber tubes, instead of just funneling it through earthen ditches that allow most of the water to evaporate unused. Little hoses spray the crops with water instead of wastefully soaking them.

But he also pointed out two local wells where the water is dropping at the astonishing rate of almost 60 feet a year, causing the land to subside. Nearby, sinkholes in the arid soil of his property are growing longer and deeper every year. "We have been suffering for years from this," he said, gesturing at a cast-off drill rig that broke after going down too deep into the earth. The Yemeni engineers working on the World Bank project concede they have had tremendous difficulty convincing other farmers — and even government agencies — to take their efforts seriously.

"There is no coordination with other parts of the government, even after we explain the dangers," said Ali Hassan Awad. "Prosecutors don’t understand that drilling is a serious problem." Mr. Eryani, the water minister, takes the long view. Yemen has suffered ecological crises before and survived. The collapse of the Marib dam, for instance, led to a famine that pushed vast numbers of people to migrate abroad, and their descendants are now scattered across the Middle East. "But that was before national borders were established," Mr. Eryani added. "If we face a similar catastrophe now, who will allow us to move?


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Weaseldog said...

Mugabe says, "No GM conspirac was required."

There was a Goodyear Conspiracy. They were charged, convicted and given a modest fine for buying up streetcar systems and dismantling them to create demand for tires.

In your treatise on how unions ruined the railroad, you seem to forget that from day one, unions were invested in trucking and automotive manufacturing.

The teamsters were quite efficient in shutting down factories or simply diverting products that were subsequently 'lost', on accident.

In all of these discussions on Americans asking for too much money for their labor, and how that's the downfall of America, i admit, I have to agree with them.

Our problem is that we don't earn what the Chinese earn. If our top middle class wage earners, only brought in a few hundred dollars a week, with average wages of $35 / week, we could compete on the world stage.

And it looks that is where our owners are taking us.

Mugabe, how would you like to come work for me for $35 / week?

Anonymous said...

VK said...


I suspect most people would simply take this as, "The Lord will provide, so we don't need to worry."

So in what way are we supposed to interpret that quote? I did interpret it the way you suggested."

VK, this might help ...

"Do not lay up for yourselves treasures on earth, where rust and moth consume, and where thieves break in and steal; but lay up for yourselves treasures in heaven, where neither rust nor moth consumes, nor thieves break in and steal. For where thy treasure is, there also will thy heart be."


"... it is easier for a camel to pass through the eye of a needle, than for a rich man to enter the kingdom of heaven."

kjm said...

Carpe Diem - great post! I've had the same experience (growing up well-off in SoCAL) and come to the same conclusions. It's not money that matters, it's the person.

What I see, knowing some quite wealthy people (multiple millions) and knowing less wealthy people, is that very few seem truly happy regardless of financial situation.

For myself, I think happiness comes from letting go, not by hoarding. And perhaps that's what Jesus meant with his 'birds of the air' quote. The motive behind 'more' and behind storing up is insecurity. Insecurity is fear. Jesus also said 'fear not.'

scrofulous said...

Here's a beauty posted on Calculated Risk:

"WASHINGTON, DC -- Fannie Mae (FNM/NYSE) is implementing the Deed for Lease™ Program under which qualifying homeowners facing foreclosure will be able to remain in their homes by signing a lease in connection with the voluntary transfer of the property deed back to the lender."

An empty home is a rotting home and an equity sink for the lender.

When capitalism can't be grinding it is grasping.

Weaseldog said...

Mugabe, I think I understand what you mean about wages, competition, etc...

For instance, baseballs still sell for about the same inflation adjusted price that they always have.

Once they were made by hand in the USA by Americans. That cost more.

Now they are made in Costa Rica for about 88 cents a ball.

Yet the retail price didn't come down, while profits for a few individuals went way up.

Wait, that doesn't really prove your theory.

Look at income disparity between CEOs and the workers. The need to compete in pricing in a highly competitive market should really bring CEO salaries down.

But wait! It didn't!

What is actually happening is that competition in the markets is being squeezed out, so that the last few manufacturers standing can fix prices and shop the world for hte cheapest labor.

Your dream of the dirt wage worker and world economy with few consumers is coming true. I don't know why you want most of the people of the world to live in poverty and for commerce to end, because people can't afford to buy things, but I suppose you have your reasons.

jal said...

It is coming to pass as I foretold ... See I'm not that smart ... someone else thought of it too.

"Under Deed for Lease, borrowers transfer their property to the lender by completing a deed in lieu of foreclosure, and then lease back the house at a market rate.

See .., Freddie and Fanny do not have to write down the value of the property. They just keep getting the revenue stream in other form.

scandia said...

...been thinking about over population, about the comments that
religion encourages more babies, more mouths to feed, more collection plate donations.
However this is what nature does. When conditions become dire species have more babies as a strategy to increase selection for survival.Those that adapt to conditions survive, those that don't die off. To abort this strategy may have consequences we do not forsee. To arbitrarily limit our population so there is enough for everyone may result in the extinction we are trying to avoid?

Starcade said...

Of course, Weaseldog, you realize the immediate consequence of same:

Most people would then have no real reason to continue living at all, in the eyes of TPTB -- and, then, I think you can tell where that scenario goes rather quickly.

Craig Morris said...

There is a great story told by the dog Rowf in The Plague Dogs by Richard Adams:

Rowf's mother taught him that the world and all the animals were created by the Star Dog in the sky. He then created man to watch over the other animals. When he next visited the earth he found men abusing animals and warned them. On his second visit he again found men abusing animals and "cast him out", placing emnity between men and animals and saying that all other animals would have peace of mind, but man would believe in good and evil and would be forever in mental turmoil, questioning his actions. The Star Dog then asked if any animals would willingly go with man and share his fate. Only two volunteered, the dogs and the cats. Since then dogs and cats have hated each other as they vie for man's affection.

The whole book is a great read and proves conclusively that animals are intelligent :)

Unknown said...

Dave Cohen with another great article. As with Stoneleigh, I highly appreciate his abilities to perform systems analysis and explain his views in clear, basic language and with a personal style that's engaging to read.

Weaseldog said...

Yes, Starcade, I see where that goes.

But how many people are actually needed, to keep a wealthy man pampered? Is anyone outside his power base actually, immediately useful?

And to move to Scandia's question on over population...

Extinction can take two basic paths.

1. The line can die out.
2. The line can evolve into one or more new species.

Homo Sapiens have been around for such a short period of time, that there's little reason to believe that we're currently in stable form, for the long haul. Our environment keeps changing. First nature kept changing the environment, with ice ages, thawing, volcanic eruptions, etc...,

Then we changed our environment to suit us. We changed the rules by which we live, and how our evolutionary fitness is decided. We went from our evolutionary pressure being based on the hunter gatherer lifestyle, to the pressures being our fitness to live in large civilizations.

Evolution never stops, so we are changing over generations.

Now we come to the end of the petro-age, and we're looking at a population bottleneck ahead. With our descendants evolving in a harsh and denuded world as compared to the one we evolved on, who's to say that they will not evolve into one or more new species?

Evolution in response to changing environments is the rule, not the exception.

Josh said...

Cattle or Cattle Prod?

Cattle or Cattle Prod?

If I&S are right, then the video below is our future, and we all have a fundamental black and white choice to make: Cattle or Cattle Prod?

At the present time, we have the luxury of not choosing. But I'd heartily recommend spending some quiet time with your dark side, and asking what you truly believe - if you believe anything at all. Fighting the cattle prods will be futile, and the fellas wielding those cattle prods are our future, and they will undoubtedly live more comfortable lives than the cattle in the years ahead. Determining which side of the fence you end up on won't be as easy to decide as it seems today.

Punxsutawney said...

Carpe diem 5:58,

Maybe those wolfs were not looking for their next meal, but were afraid of becomming the next to get eaten instead? My experience with these individuals is that they can be very insecure, always afraid that someone is going to take there money / success / stuff away from them.

FYI - I spent a good chunk of my formative years in a well-to-do community in the hills between the valley and Malibu so I am quite familiar with much of what you are saying.

VK said...

@ FarmerAmber, Stoneleigh and Ahimsa

Many thanks for your interpretation, makes sense now. Work hard, leave the rest to God :)

carpe diem said...

Hi Ahimsa,

The TV evangelists are the really scary ones! Obviously they are there to profit and make as much money and accumulate as many toys as they can but in watching them one really questions their sanity.

Growing up with such close proximity to Hollywood and being in the thick of it I was fortunate to not get caught up but instead to become and observer of it all and decided early on to escape!

I do live a comfortable life in the mountains but find that less is really more. A roof over one's head, healthy food, fresh air, basic healthcare, strong family and community, a couple of wonderful dogs and a feeling of connection to the greater nature is a panacea - and really all one needs.

I highly recommend the books:
'Your Money or Your Life' by Joe Dominguez and Vicki Robin and the book 'Voluntary Simplicity' by Duane Elgin.

Simplify, Simplify, Simplify (Thoreau)

scandia said...

@ Weaseldog, thanks for your comments on evolution. Darn, I want to be around to see how it all plays out. Our species survives, our species is replaced, our species becomes extinct???
Oh well, back to the here and now of this lifetime.

EconomicDisconnect said...

The Fannie becoming a landlord story is another killer today. the government will control your education access, health care access, and possibly living space access as well. I wonder who would pay rent when the banks take up to 2 years to evict you on a foreclosure anyway? Think cash flow folks!

Bigelow said...

"I hate what the fundamentalist fanatics are doing to our country. It seems as though, if everybody doesn’t accept their version of reality, that somehow invalidates it for them."
-Jesse Ventura, I Ain't Got Time to Bleed

"There are more things in heaven and earth, Horatio, than are dreamt of in your philosophy."

Journalist: What do you think of western civilization?
Mr. Gandhi: I think it would be a good idea.

message_in_a_bottle said...

Lord bacon:
"The market can stay irrational longer than you can stay solvent."

How do you intend to bet against the market? If you want to make some real money you'll have to bet in significant size relative to your fortune.

If the position runs against you you'll incur significant paper losses --- will you have the stomach to ride them out?

If you bet through options you'll have to get the timing right too --- not easy to do.
It's the timing that most people cannot get right.

Note too that the market is down 30% from its all time high of 10 years ago --- not an obvious opportunity to short.

scrofulous said...

"People who are used to being rentiers (living off income from investments rather than from work) will find it increasingly difficult to do so,"

Yesireebob, there sure will be a lot more old retirement type folks eating from dog food cans in the coming days, unless of course that can isn't snatched from their hands, because as you say:

" I think that model [oil leverage] is coming to an end for most of the people who practice it,"

which, I would say, means everyone except maybe the few San that are still out in the desert.

NZSanctuary said...

KJ said...
"For myself, I think happiness comes from letting go, not by hoarding. And perhaps that's what Jesus meant with his 'birds of the air' quote.'"

That fits very closely with how I read it too. I suspect many such quotes have been either (a) altered, or (b) misinterpreted, in order to keep the "flock" dumbed down over the centuries, but there are plenty of gems still.

NZSanctuary said...

The Shadow said...
"Here's a beauty posted on Calculated Risk:"

This suggests the transfer of physical wealth (real wealth) to the few is gaining momentum...

Ilargi said...

New post up.

This one took me forever, apologies for that, and I don't even really know why.

There are quite a few must see videos.

carpe diem said...

Punx @4.15

Good point!

I don't get back to L.A. very often but compared to when I was growing up there in the 50's, 60's, it's gotten much worse.
It's hard to make sweeping statements but it really is a very 'superficial' world out there in lala land. Plus it's so built up. It used to be so undeveloped in the 50s with beautiful flora and fauna. The same can not be said for today.

carpe diem said...


Yes indeedy - letting go is the key!


Anonymous said...

Greetings Carpe Diem,

You're definitely fortunate to have escaped! Most people are not so blessed. John Robbins escaped as well. In the early '90s my family and I read his well documented book "Diet for a New America" (and watched the video), which finally convinced us to go vegan.

Yes, letting go is essential, but those of us who grew up with less must also learn not to covet wealth and luxury to begin with. Basically, our debt culture (buy it even if you cannot afford it!) demonstrates how successful the corporations have been in enculturating the masses with love for the affluent lifestyle and a desire to emulate that lifestyle, which is so detrimental to the Earth, other sentient beings, our spirits, and our wallets. Kids should be taught ways to resist this corrupt, corporate culture.

I personally grew up with less -- my parents didn't have a car and lived in a rented apartment. As a 19-year-old in college while being exposed to the '60s counterculture and learning about world hunger, the environment, and "limits to growth" (and aided by my Catholic upbringing -- "saints and sages loved lady poverty", etc.), I embraced and committed to a simple lifestyle.

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