Monday, August 25, 2008

Debt Rattle, August 25 2008: Unprecedented Power

G. G. Bain Mott Street 1910
Mott Street in New York's Little Italy, now Chinatown

Ilargi: Oh, they’ll keep spouting bits of nonsense for a long time to come, it’s like a genetic reflex. Economists are selected for their ability to lie straight-faced.

But cracks are showing. After Willem Buiter told the Fed to get its head out of the Wall Street bankers’ asses - as if he doesn't know it was born that way-, Israel central banker Stanley Fisher left Jackson Hole saying problems wouldn’t be fixed by next year this time, at the next meeting.

Which is a bit of a new take for Da Boyz. That's why Bernanke doesn't say it himself, but gets someone else to do it for him. Always safe in case of later reminders.

Forward Libor rates tell the story a lot clearer. No positives until at least after June 2010. And since anything beyond that would be too much of a gamble to be a valuable compass, don't count on a recovery even then.

The trust is gone, everybody knows that all the others are hiding behemoth size additional losses; they know because they also hide them themselves.

And it’s now crystal obvious that Fannie and Freddie will need propping up. The only imaginable way this time is through -senior-preferred stock purchases by the Treasury. Little bitty problem there: it will wipe out what’s left in shaky not-marked-to-market reserves for an untold number of small US banks, who are all skull-deep in F&F paper.

By saving Big Mac and Mae West, the Treasury will blow away the available funds at the FDIC, which will then have to be bailed out in turn. That’s not problem solving, that’s problem shifting.

And what’s worse, that alone will get them close to the point where a $100.000 deposit guarantee is no longer feasible. That is one that they’ll prefer to leave until after the election. Just too messy.

Which leaves the urgent problem of Lehman and the inability to sell it, or give it away even when they throw in granite counter tops and a swimming pool.

They’ve always known the solution: in both Lehman’s and Fannie and Freddie’s case, they will pull down the share prices till there’s so little left, they’re literally no longer going concerns. Anyone still holding shares by then, Americans or foreigners, is too stupid to claim the right to anything at all.

What everybody still keeps missing is that the power the Fed and the Treasury have over the US financial system grows by the day, and has now reached historically unprecedented levels.

They alone decide who gets a bail-out and lives, or who gets shrunk and shriveled till death follows.

Libor Signals Credit Seizing Up as Banks Balk at Lending in Money Markets
Most of the bond strategists and salesmen that Resolution Investment Management Ltd.'s Stuart Thomson talked to last August expected the credit crunch to be long over by now. Instead, money markets show there's no end in sight, and it may even worsen.

"It's like an ongoing nightmare and no one is sure when we're going to wake up," said Thomson, a money manager in Glasgow at Resolution, which oversees $46 billion in bonds. "Things are going to get worse before they get better."

In a replay of the last four months of 2007, interest-rate derivatives imply that banks are becoming more hesitant to lend on speculation credit losses will increase as the global economic slowdown deepens. Binit Patel, an economist in London at Goldman Sachs Group Inc., said in an Aug. 21 report that nations accounting for half of the world's economy face a recession.

The premium banks charge for lending short-term cash may approach the record levels set last year, based on trading in the forward markets, where financial instruments are sold for future delivery. Back then, concern about the health of the banking system led investors to shun all but the safest government debt, sparking the biggest end-of-year rally for Treasuries since 2000.

"These problems going into year-end are likely to be worse this time round because of the amount banks have to refinance in December," Thomson said, citing a figure of $88 billion. "The suspicion is that banks are still hiding losses.The banking system relies on trust and at the minute there quite simply isn't any."

Banks are charging each other a premium of 77 basis points over what traders predict the Federal Reserve's daily effective federal funds rate will average over the next three months to lend cash. The spread is up from about 24 basis points in January, and may widen to 85 basis points, or 0.85 percentage point, by mid-December, prices in the forwards market show.

Former Fed Chairman Alan Greenspan said in June that this spread, which is the difference between the three-month London interbank offered rate for dollars and the overnight indexed swap rate, should serve as a measure for telling when markets have returned to normal.

A narrowing to 25 basis points in the so-called Libor-OIS spread would be viewed as a positive, he said. Forward markets signal that won't happen until sometime after June 2010.

The premium averaged 11 basis points, or 0.11 percentage point, in the 10 years prior to August 2007. Increased turmoil in the money markets may again serve as a catalyst for a surprise year-end rally in Treasuries like the one in 2007.

"The trade to do in December will be to get back into the most liquid thing you can find," such as Treasury bills or notes, said David Keeble, head of fixed-income strategy in London at Calyon, a unit of Credit Agricole SA, France's second- largest bank by assets. "We are having a period now of a second round of pressures on banks. It's weak economic growth which is now piling the pain onto the banks."

A year ago, 10-year note yields fell about half a percentage point to 4 percent between September and December, even though the median estimate of 65 economists surveyed by Bloomberg was for a rise to 5 percent. Treasuries returned 3.98 percent, versus 1.92 percent for company debt and a loss of 3.82 percent in the Standard & Poor's 500 Index, according to Merrill Lynch & Co. And just like last year, economists and strategists are again calling for an increase in yields.

The median of 52 estimates in a Bloomberg survey between Aug. 1 and Aug. 8 was for 10-year Treasury yields to rise to 4 percent by the end of 2008. The yield on the benchmark 4 percent note due in August 2018 closed at 3.87 percent last week, rising from 3.31 percent after the Fed engineered the bailout of Bear Stearns Cos. in March and inflation accelerated to the highest level in 17 years. The yield was 3.86 percent as of 10:33 a.m. today in Tokyo.

"The credit crunch remains the centerpiece of our bond strategy," said Resolution's Thomas. He said he's bullish on Treasuries maturing in five years or less. Banks began to hoard their cash when rising defaults on subprime mortgages led two Bear Stearns hedge funds to seek bankruptcy protection on July 31, 2007, as creditors forced them to liquidate at least $4 billion of securities tied to the loans.

Then on Aug. 9, 2007, Paris-based BNP Paribas SA halted withdrawals from three investment funds because it couldn't "fairly" value their subprime debt holdings and the European Central Bank took the unprecedented action of offering to pump unlimited cash into the banking system. The BNP funds had about 1.6 billion euros ($2.2 billion) of assets.

Losses and writedowns on securities related to home loans to people with poor credit now exceed $504 billion at financial institutions. Last month Treasury Secretary Henry Paulson was forced to seek congressional authority to inject unlimited capital into Fannie Mae and Freddie Mac, which are responsible for about 42 percent of the $12 trillion U.S. home loan market, after their shares tumbled about 90 percent, wiping out some $54 billion of stock market value.

Trust among banks remains low even after the Fed cut its target rate for overnight loans to 2 percent from 5.25 percent in September and created three emergency lending programs, including the Term Auction Facility, or TAF. In total, the Fed has provided almost $1 trillion of emergency loans. The Fed's most recent lending survey released Aug. 11 said that more banks tightened credit standards for consumers and business borrowers since April as defaults and delinquencies on home loans climbed.

"The problem is much more systemic than was widely anticipated a year ago," said Michael Darda, chief economist for MKM Partners LLC in Greenwich, Connecticut. "Not only bank balance sheets but home balance sheets are under pressure due to falling house prices."

The seizure in the credit markets and rise in short-term borrowing costs this year triggered questions over the validity of Libor, a benchmark administered by the London-based British Bankers' Association and used to calculate rates on $360 trillion of financial products worldwide. The Bank for International Settlements in Basel, Switzerland, said in March some members of the BBA may have understated their borrowing costs to avoid being seen as having difficulty raising financing.

"Libor markets aren't reflective of the entire banking system but of three or four major banks that continue to have pressure on liquidity," said Saumil Parikh, a money manager who helps oversee $688 billion at Pacific Investment Management Co., in Newport Beach, California. "That spreads to the entire system because you are not really sure who you are going to end up lending to through the Libor market."

Restrictive lending makes it harder for growth to accelerate in U.S. economy, where gross domestic product may slow to 1.5 percent this year, according to the median forecast of 76 contributors in a Bloomberg survey that puts a greater weighting on most recent estimates.

Meanwhile, Europe's GDP unexpectedly fell 0.2 percent in the second quarter, while Japan's economy shrank at an annual rate of 2.4 percent in the same period. The crisis is "not over and I'm not exactly sure when it's going to end," Nobel Prize-winning economist Myron Scholes said Aug. 21 at a conference in Lindau, Germany, featuring 14 Nobel laureates in economics.

Central Bankers See More Credit Losses
The world's top central-banking officials and scholars believe the yearlong credit crisis has yet to run its course, with continued turmoil likely in banking and housing, Bank of Israel Governor Stanley Fischer said.

"It was clear from what was said that most people here don't believe the financial crisis is necessarily over or close to being over," Fischer said today in the closing speech at the Federal Reserve's annual symposium for central bankers in Jackson Hole, Wyoming.

Since the start of 2007, banks and other financial institutions have reported $504 billion in losses and writedowns stemming from the collapse of the U.S. subprime mortgage market. Participants at the mountainside conference discussed ways to stabilize financial markets and avert future crises.

"There were continuing concerns about housing and how much further those prices have to fall," Fischer said at the conference, hosted by the Kansas City Fed bank and attended this year by central bankers from more than 40 countries.
Fannie Mae and Freddie Mac, as well as some banks, were a focus of concern among central bankers and other conference participants, Fischer said.

The two mortgage-finance companies, which own or guarantee about $5 trillion of the $12 trillion of outstanding U.S. home loans, have reported mounting credit losses this year, prompting the U.S. Treasury to set up a backstop for the firms. "There is some fear that something else may happen in the system," resulting more from the fact that the crisis "has now spread to the real economy," Fischer said.

Fischer is a former vice chairman of Citigroup Inc. and an official with the International Monetary Fund. As a professor at the Massachusetts Institute of Technology, he advised now-Fed Chairman Ben S. Bernanke on his doctoral thesis in the 1970s.

Bernanke said yesterday in the symposium's opening speech that "the financial storm that reached gale force" last year "has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment." Jean-Claude Trichet, president of the European Central Bank, said today in a comment from the audience that "we still are in a market correction."

The financial crisis has revealed ways to "to listen better and filter warnings better in the future," Fischer said. The turmoil was "widely expected," he said, citing economists including Nouriel Roubini, a former Treasury official known for his bearish views. "Nouriel was only off actually by a year and a half or so," Fischer said.

While the crisis may be the worst since the Great Depression, "in real terms we're not looking at anything exceptional," he said. "We're not even looking at anything very serious relative to recessions of the past."

Hoping Roubini is proven wrong
It’s hard to forget your first Nouriel Roubini experience. Fifteen months ago, I watched an Asian Development Bank audience in Kyoto squirm and fidget as the chairman of Roubini Global Economics LLC gave his bleak, contrarian opinion that the global financial system was about to hit a wall.

“After listening to you, I feel like a need a drink or a hug or something,’’ I joked to him afterward. Roubini gets a lot of such quips, and as his direst predictions about a once-in-a- lifetime bust in the US economy come ever closer to reality I find myself hoping he’ll be proven wrong.

Hats off to Roubini. How many times in the past year did we hear people say “this credit crisis is containable” or “the worst is over” or “subprime-loan problems won’t spread to other asset classes,” and the like? Roubini didn’t waver, and he took considerable flack for it.

That said, Asia had better hope Roubini’s economic fears are proven wrong. Ditto for the gloomy predictions of Oppenheimer & Co. analyst Meredith Whitney, who recently was toasted on the cover of Fortune magazine. Perhaps the magazine-cover curse will kick in and the attention being tossed at Roubini, profiled last week by the New York Times, and Whitney means the worst really is over. Of course, they might say it’s just a matter of public perception catching up with the reality — a financial system in tatters.

One reason to think Roubini won’t be proven wrong is his argument that the problem isn’t the subprime mortgage market — it’s a subprime US financial system. Fixing the problems sending financial contagion around the globe will require tough decisions in Washington and reforms in Wall Street’s securitization system. And that’s hardly happening.

How far Wall Street’s reputation has fallen since the collapse of Bear Stearns Cos. was revealed by the Aiful Corp. saga. Japan’s biggest consumer lender by assets threatened to sue Lehman Brothers Holdings Inc. in June after analyst Walter Altherr called Aiful “arguably insolvent’’ in a report.

Lehman retracted the report earlier this month, yet not before Japan’s investment community had a good chuckle. The fourth-largest U.S. securities firm, with a share price down 79 percent this year, calling another institution shaky? Talk about the proverbial pot calling the kettle black.

Even the best-case scenario for Asia looks gloomy. As analysts like Mark Matthews of Merrill Lynch & Co. in Hong Kong point out, the next few years will see Asia-Pacific markets excluding Japan “muddle along”. Wasn’t it just a year ago that investors were claiming Asia had decoupled from the US economy?

The reasons Asia should hope Roubini eats some crow are many. For one, the region remains too reliant on exports. While Asia made some progress boosting domestic demand, slowing US growth will chip away at living standards from Seoul to Jakarta. For another, emerging markets may slide further if global investors become even more risk adverse.

Mark Mobius, executive chairman of Templeton Asset Management, may indeed be right to call the decline in emerging- market stocks “overdone”. Still, a deep recession in the world’s biggest economy could accelerate those losses. Asia central banks amassed trillions of dollars of currency reserves in recent years, a move that won’t seem illogical if Roubini is proved correct. That cash will be needed to provide insurance to global investors that the region won’t see a repeat of its 1997 crisis.

A decade ago, Asia was exporting financial contagion potent enough to send the Dow Jones Industrial Average down hundreds of points here and there. These days, the US is returning the favor, just as Diwa Guinigundo, deputy governor of the Philippine central bank, predicted to me a year ago. Hats off to Guinigundo; he was absolutely right.

Where do we stand now? “One year later, in the US the lack of improvement in the money markets is still taking center stage,” Roubini said yesterday. And the Federal Reserve, on top of cutting its benchmark interest rate 325 basis points, continues to expand its liquidity facilities “without significant impact on credit creation”.

That’s affecting emerging markets. For example, Roubini said, “the global credit crisis has exacerbated home-grown liquidity squeezes in countries like South Korea”. The question is how Asia would weather further weakness in the US. China’s boom has provided some cushion, yet officials in Beijing are busily working to tame inflation. It also would be a mistake to think a US recession won’t slam China.

So here’s to Roubini for having a good couple of years of economic prognosticating. And here’s to hoping he’ll be less right in the future. Asia’s prosperity may depend on it.

Britain’s small shareholders lose $90 billion on investments in one year
Britain's millions of private shareholders have had £48 billion wiped off the value of their investments since the credit crunch hit last summer.

Amateur investors who plunged money into familiar brands and those who clung to privatisation and demutualisation stocks were the worst hit, financial advisers say. Shrewder investors who picked less-well-known mining and oil companies prospered.
Ben Yearsley, the investment manager for Hargreaves Lansdown, said: “You've had the popular names and free shares falling, which has added up to a torrid year for private shareholders.”

Research by Capita Registrars indicates that total private shareholdings hit a peak of £209 billion in May last year. By July last year, however, they were down to £196.4 billion and at the end of last month they had shrunk to £161 billion. Investors sold only £1 billion of shares in the year to July, which means that the decline was due almost entirely to the plunging value of their holdings rather than to their flight from the market.

The slump in share prices has added to the souring of consumer confidence. Feeling poorer, asset owners are less inclined to spend. Declines in house prices have wiped a further £400 billion from personal wealth levels in Britain over the past year, according to PricewaterhouseCoopers. Retail investors held only 10 per cent of the stock market at the end of last month, the lowest proportion in years.

Roger Lawson, of the UK Shareholders Association, said that it had been a poor year for small investors, particularly those who held on to free shares acquired in demutualisations. Financial stocks have been the worst affected by the credit crunch. “Private shareholders tend to be buy-and-hold investors, whereas the big institutions have been dumping shares and short-selling, which has driven share prices down further,” Mr Lawson said. “Private investors have been left holding the baby.”

Mr Yearsley said that retail investors' taste for recognisable brands had also cost them dearly. “All the big household names have been hammered,” he said, noting that companies such as BT, Marks & Spencer and British Airways tended to be most popular with private shareholders.

Some investors, however, timed the commodities market to perfection and made a £230 million profit since last July, Capita said. The registrar said that investors bought £1.5 billion of oil, mining and gas stocks between last August and March this year. Oil and gas shares peaked in May, up 23 per cent compared with the previous July, while mining stocks soared by 57 per cent.

Private shareholders dumped £1.2 billion of natural resources stocks in May, at the top of the market, and then sold a further £350 million in June. John Roundhill, director of Capita Registrars, said that by the end of July retail investors' holdings of commodities stocks were flat on the previous July, at slightly less than £50 billion.

He said: “Far too often private investors are derided for simply following market trends. Time and again our research shows this isn't true.” Retail investors began to get nervous about an economic downturn two years ago and started selling cyclical stocks, such as banks, industrials and consumer services, according to Capita.

US prime mortgage defaults worsen faster than subprime
Delinquency rates on many better quality US mortgages last month outpaced those on the subprime loans that helped spark the US housing crisis, Standard & Poor’s reports showed on Friday.

Total delinquencies on prime “jumbo” loans and “Alt-A” loans made in 2007 rose at a 7.3 per cent and 9.12 per cent rate, respectively, from June, the rating company said. These loans require less proof of repayment but were made to borrowers with credit scores above subprime. For subprime loans, the rate of delinquency rose 7 per cent last month.

Overall, delinquencies on 2007 prime jumbo loans rose to 3.22 per cent in July, while Alt-A loan delinquencies increased to 14.56 per cent, S&P said. Defaults on subprime loans from last year hit 31.25 per cent.

The housing slump, now in its third year, has surprised many mortgage companies, such as Freddie Mac, as its effects erode more creditworthy loans. Potential downgrades to such loans, including top-rated ones, have put mortgage bond markets further on edge in recent weeks as they await rating company reviews, investors said.

S&P in late July increased its loss assumptions on many types of mortgages, including doubling the projections for the Alt-A sector. The company aims to complete reviews using its new assumptions “within a few weeks, as opposed to a few months,” said Robert Pollsen, an analyst at S&P in New York.

Delinquencies on loans made in 2006 exceed those of 2007, probably because of the longer period from origination.“The more recent vintages are suffering more performance related issues sooner, and to a greater degree,” Pollsen said.

In a positive note for prime jumbo loans, serious delinquencies, including loans more than 90 days past due, foreclosures and bank-owned real estate, increased at a slower rate in July, Pollsen said.

UK on borrowed time
Debt Freedom Day - the date when the UK produces enough income to cover our collective consumer borrowings - will not arrive until 8 January - next year. A decade ago, we achieved financial liberty this weekend, on 23 August, five months sooner.

Research by accountant Grant Thornton shows that borrowing on loans, credit cards and mortgages has gone up by 7.3 per cent to £1,444bn over the past 12 months, ahead of GDP at £1,410bn.

Although much of the personal debt is secured against property, more people are likely to find their borrowings unmanageable in coming months as the housing market falls and the economy slows. GDP growth ground to a halt in the three months to June, ending Gordon Brown's boast of uninterrupted expansion since Labour came to power.

Debt freedom for individuals may come much later than January, if at all. GT predicts personal insolvency figures could reach 120,000 this year. Some 100,000 were declared insolvent last year, compared with 24,000 a decade earlier.

Mike Gifford, a personal insolvency partner at GT, said: 'Typically there is a lag between individuals facing tough financial circumstances and when they become insolvent. It will be the next six to 12 months which reveal how seriously the credit crunch has affected people.'

ECB To Alter Auctions to Prevent Banks 'Gaming the System'
The European Central Bank will announce changes to the rules governing its money-market auctions in coming weeks to head off the risk of abuse by financial institutions, council member Yves Mersch said.

"At the margins there can still be cases where you see dangers of gaming the system," Mersch said in an interview on Aug. 23 in Jackson Hole, Wyoming. "The Governing Council has been discussing the whole issue" and has agreed on a "certain amount" of refinement to the existing rules, he said.

ECB officials have become increasingly concerned that banks are taking advantage of collateral rules that are broader than those used by the Federal Reserve and the Bank of England. The danger is that banks struggling to sell securities damaged by the credit-market turmoil will dump them on the ECB and become overly reliant on central-bank funds.

Dutch policy maker Nout Wellink said in an interview with the Het Financieele Dagblad newspaper published Aug. 21 that banks shouldn't become too dependent on the ECB for funding. "It's not a broad-based revolution," said Mersch, who is attending a meeting of central bankers and financial officials organized by the Fed.

"We are satisfied with our framework. But since there are always on the margins evolutions, we have to adjust our framework regularly to market practices." "The precisions" planned by the ECB "concern some instruments," Mersch said, declining to elaborate. Unlike the Fed and the Bank of England, the ECB hasn't had to change its operation rules since the credit crisis began.

"The ECB is in an unenviable situation," said Paul McCulley, a fund manager at Pacific Investment Management Co, in an interview at Jackson Hole. "The lender of last resort should be just that, a last resort, and not a permanent provider of funds to the private sector."

Central bankers including Federal Reserve Chairman Ben S. Bernanke met in the Teton Mountain retreat at the weekend to discuss ways to address the past year's credit rout. ECB President Jean-Claude Trichet said "we are still in a market correction" and Bank of Israel Governor Stanley Fischer said the crisis has yet to run its course.

Spain's banks in particular are struggling to attract investors as a decade-long property boom ends and mortgage delinquencies soar to the highest in at least six years. Investors demand higher rewards to buy bonds backed by Spanish mortgages than any other home loans in Europe. The ECB lent Spanish banks a record 49.4 billion euros ($73.1 billion) in July.

The ECB's money-market system is also attracting demand from outside the euro region. The Frankfurt-based central bank said in June it will accept asset-backed bonds sold by Macquarie Group Ltd., Australia's biggest securities firm, and backed by Australian consumer loans as collateral.

U.K. mortgage lender Nationwide Building Society said Aug. 18 it's planning to expand into Ireland, a member of the euro region, to take advantage of "funding opportunities." Banks with operations in the countries sharing the euro can raise funding from the ECB by pledging certain types of collateral including asset-backed securities. Bonds backed by mortgages and other assets accounted for 18 percent of the ECB's loan collateral at the end of 2007, up from 4 percent in 2004, Fitch Ratings data show.

"It has been suspected for some time that banks could be taking advantage of the broad collateral framework since they no longer publicly place asset-backed securities and these securities now only serve as collateral in central bank funding," Michael Schubert, an economist at Commerzbank AG in Frankfurt, wrote in a note to investors today. "This means that a necessary market correction in the ABS segment is being put off."

The ECB lends to banks mostly through the main refinancing operations maturing in one week. Longer-term auctions provide financing to banks during three- and six-month periods. Mersch said the central bank prefers to tackle any individual instances of abuse with "moral suasion."

"Our framework is complex, and if we can warn people that this is not acceptable beforehand, and they adjust in due time, we would be satisfied," Mersch said. While the ECB hasn't yet taken "specific action," the central bank plans to strengthen its powers. He didn't say what that action might be.

Mersch said the ECB's response to any abuse case "would not necessarily be a question to be discussed publicly." The financial crisis is taking its toll on Europe's economy, which contracted in the second quarter. Mersch said "the question is whether the slowdown will last a little bit longer" and Bundesbank President Axel Weber, who was also in Jackson Hole, said Aug. 22 the current quarter may show "some weakness." The economy may expand below its potential rate of 2 percent "into next year," he said.

At the same time, "you shouldn't be getting too hung up about the volatility in quarter-to-quarter GDP readings," Weber said. Weber and Mersch both said inflation will exceed the ECB's 2 percent limit next year, with Weber saying there's a "substantial risk' that price pressures will persist. The ECB will publish revised projections next month.

Job losses, homelessness, bankruptcy ... the outlook's grim but just be glad we're not Italian
All agree we're close to recession. The revised GDP figures released last Friday pretty much confirmed that two successive quarters of negative growth – where the economy shrinks, which is the conventional definition of "recession" – cannot be far away.

In case you hadn't noticed, the economy ground to a halt in the second quarter of the year, and almost every leading indicator suggests that activity will slow further over the next year. But how bad will things get? And what will be the consequences?

Things don't look great, but we needn't get too apocalyptic either. Let's take a peak at the dark side first. While household spending fell last quarter, by 0.1 per cent, by far the biggest drag on the economy is the decline in investment. In the first three months of 2008 it was down by 1.5 per cent on the last quarter of 2007; it has now dropped by another 5.3 per cent. That magical, elusive ingredient – confidence in the future – seems to be ebbing away.

There is a further point worth making here: cuts in investment – buying new kit for offices, factories, design studios, farms and the public services – will reduce economic growth way into the future. As we spend less on renewing the productive capacity of the economy, so we reduce our ability to create wealth in the months and years ahead.

In particular, we will suffer from the sharp decline in construction; the long-term housing shortage in the UK is about to get a little bit worse. This slump in investment will damage, permanently, the productive capacity of the economy and reduce its long-term rate of growth. The recession of 2008-09, even if it turns out to be short and shallow, will cast a long shadow.

So far, so miserable. The brighter news is that we are at last getting some benefit from the pound's 12 per cent devaluation since last summer. Exports are down, in truth, because of the general slowdown in the world economy, and especially in the eurozone, our largest trading partner and itself not far from recession.

But imports are down even more. The sad thing is that we're not selling as many of our wonderful Minis, bottles of Scotch and Norman Foster buildings abroad as we would like, but the situation would, we can safely conclude, be an awful lot worse if it hadn't been for sterling's tumble.

So the weak pound is doing us good, and pushing the UK economy towards a much needed rebalancing in favour of exports and manufacturing. Leaving the export/import side of things to one side, the UK's "domestic" economy is already in recession, having seen two quarters where the positive contribution from net trade exceeded the negative impact of lower domestic demand.

The UK's trading performance is becoming a source of relative strength rather than weakness. Maybe that shouldn't be such a surprise. Historically, the traditional route for the UK economy out of recession has been through trade.

The awful conditions of 1973-74 (oil was dear then too) were followed by the great depreciation of 1976 and an impressive (for the time) recovery; the recession of 1979-81 was accompanied by an absurdly high exchange rate (around $2.50 to £1), and sterling's subsequent decline to dollar/pound parity helped fuel the boom of the later 1980s; and our ejection from the Exchange Rate Mechanism in 1992 paved the way for the glorious 63 successive quarters of growth, which have just ended.

It's a compelling pattern – and one that it would not now be possible to repeat had we joined the euro a few years ago. Sadly, the Italians, Europe's other great devaluers, no longer have that option and endure economic misery as a result.

But what of the future? By far the best forward facing set of statistics are supplied by the Chartered Institute of Purchasing and Supply. Every month it polls thousands of managers at the sharp end of British business, tracking confidence, pricing, recruitment intentions and, crucially, forward orders.

The data gives us an excellent idea as to what will soon be happening "out there". The Bank of England certainly takes CIPS surveys seriously, and so should we. All the indicators are pointing firmly downwards, and some of the other survey evidence is even more frightening.

Comparing the current crop of numbers with those from the last recession, from 1989 to 1992, is a scary exercise. We see that almost all of the figures are lower now, some markedly so. The most startling, if understandable, difference comes from the credit crunch and the crisis facing the banks, which has pushed confidence levels in the financial services sector to record lows. It has been the engine of growth; now it has overheated and exploded.

Thus, the consensus among economists is that growth this year will average 1.4 per cent, well below recent trends, and in 2009 will slow to 0.9 per cent. This points to a couple of quarters of contraction. The Bank of England predicts "broadly flat" growth and concedes the possibility of outright recession. Strong growth will return some time in 2010, maybe just in time for a general election, maybe not.

In any case, as the Governor of the Bank, Mervyn King, memorably put it recently, we are in for a "difficult and painful" year. Living standards may fall, a product of high inflation and slow wage growth. The depreciation of sterling that will help keep the economy from the worst ravages of a slump will cut the real value of your salary.

These factors, incidentally, will help keep rises in unemployment to a minimum, and the UK's flexible labour market will turn out to be its one great strength. Indeed, a market so flexible that excess labour simply gets on a coach back to Poland and Lithuania is nothing short of an economic miracle. The public finances will remain a messy but positive contribution to growth.

Nonetheless, jobs will go, homes will be repossessed and there will be forced selling of houses worth less than the mortgages on them.

For an unlucky minority, nothing less than homelessness and bankruptcy lies ahead. That, I am afraid, is how bad things are going to get.

Fannie, Freddie Woes Vex Experts And Leave U.S. Hard Choices
Some of the nation's top economists figure the government's response to Fannie Mae and Freddie Mac has come to a critical turning point: They expect Treasury will be forced to inject funds into the two firms, but they're not sure whether pulling the trigger will be enough to bolster the sagging economy.

The woes of the two mortgage-lending giants were the talk of the Federal Reserve Bank of Kansas City's annual mountainside conference here in Jackson Hole, Wyo. When the central bankers, academics and Wall Street economists met a year ago, the housing-market troubles had just begun to deepen global-credit problems.

Since then, government officials around the world have repeatedly intervened by injecting liquidity into markets. Their actions may have prevented a much deeper financial meltdown, but they haven't ended the crisis. The fundamental problem: Home prices continue to decline sharply. That is leading to more homeowner defaults and foreclosures, which further knock down real-estate values.

The price declines are hitting banks that hold mortgage-related securities, ultimately restraining credit and slowing the overall economy. "It's simply not clear -- at least not clear to me -- what will stop this self-reinforcing process," Harvard economist Martin Feldstein told conference participants.

In the U.S., the Fed created or expanded lending programs to financial firms and engineered a controversial rescue of the investment bank Bear Stearns. The Fed also cut its short-term interest-rate target sharply over the past year, to 2% from 5.25%. Even so, mortgage rates are now higher than they were a year ago. With the Fed low on ammunition, Congress and the Treasury will have to carry more of the burden, many conference goers said.

"The primary focus to date has been on the provision of liquidity" by lending to financial institutions, former Treasury Secretary Lawrence Summers said in an interview. "The measures that affect capital -- either by supporting asset values, injecting public funds or strengthening economic performance -- are increasingly important for the future."

Although Fannie and Freddie weren't the subject of the formal discussions at the conference, their future was the subject of much hallway and dinner discussion. Fed officials acknowledged what other economists around them believed -- that the lending giants needed public funds as well as private ones.

"They've already gone too far to the edge of the cliff," said Allan Meltzer, a Carnegie Mellon University economist. With their stock prices continuing to decline, Fannie and Freddie face increasing difficulty raising capital from private sources. The market's expectation that a government injection of funds would wipe out existing shareholders is pressuring their stock prices even further.

That leaves Treasury Secretary Henry Paulson with lousy options. He won congressional approval last month to support the firms through credit lines or by injecting capital. The firms are wary of such aid, though, because at the very least it would signal that they are at the end of their rope. Treasury action may also involve a form of nationalization, which wipes out shareholders entirely.

The companies argue that they can meet regulatory requirements and won't need the government cash. So long as they can roll over their debt, they pose less risk of destabilizing broader financial markets. But that's a minimalist outcome. Under that scenario, they wouldn't have much ability to support the mortgage market -- their reason for existence -- by buying up mortgages and freeing up lenders to make more loans.

If the government invested heavily in the two mortgage companies, they might be able to bring mortgage rates down. But the government doesn't want to turn on the spigot, which could turn into a flood of red ink. That's because Fannie and Freddie, which own or guarantee half the nation's mortgages, continue to face losses on their mortgage portfolios as house prices decline.

Remaking the companies would be tough political slogging, too. They are both chartered by Congress, which is itching to cut short its session so members can campaign. Plus, a new president may want to take a fresh look at the problem. "Some form of intervention is going to be very difficult to avoid," said Lewis Alexander, chief economist at Citigroup. "There aren't easy options from here, but the one that supports the mortgage market is going to override."

Even without the mortgage problems, the economy faces tough times. Consumer spending is expected to remain under pressure as the job market weakens and higher energy prices sap incomes. Growth in exports, which has helped to underpin what meager growth there has been, could diminish with the strengthening dollar and a slowing global economy.

"The crisis has now spread to the real economy, and who knows what will happen as a result," said Bank of Israel Gov. Stanley Fischer, a former top official at the International Monetary Fund and Citigroup. "The crystal ball at this stage is unusually unclear." This much is coming into focus: The economy's wounds caused by the housing crisis probably won't be healed completely by the time central bankers gather here again next year.

Korean Development Bank refuses to rule out Lehman Brothers bid
Korea Development Bank (KDB) has refused to rule out bidding for Lehman Brothers, the Wall Street investment house, but has hinted that any approach would not be imminent. In an interview over the weekend, KDB sought to play down an earlier statement in which it had said that it was open to an approach on the bank.

It said: “We are just at an early stage of privatisation, and we are weak at investment banking by international standards. In the long term, we should strengthen that weakness.” Lehman Brothers is under intense scrutiny on Wall Street and remains the most exposed of the big banks to troubled fixed-income assets and to American commercial and residential property.

The bank, which is headed by Richard Fuld, one of the longest-serving bosses on Wall Street with 15 years at the top, is expected to reveal a $2 billion (£1.08 billion) net loss when it reports its third-quarter figures in the middle of September. It is also expected to write off another $3 billion of assets in an attempt to sort out its balance sheet.

It is understood that Mr Fuld has already drawn up plans to try to sell a stake in the bank's lucrative fund management unit, which includes Neuberger Berman, and had preliminary talks with the South Korean bank last week. At the time, the Koreans walked away over price, prompting one banking analyst to tell his clients that Lehman Brothers was ripe for a hostile takeover.

All the Wall Street banks are suffering from the slide in M&A activity, weak equity markets and near-frozen fixed-income markets. Lehman Brothers, with more than $75 billion of leveraged loans, commercial property investments and other suspect assets, is regarded as one of the weakest.

It reported to have funding lines in place for more than a year ahead and to have plenty of liquid assets, but analysts believe, nevertheless, that it may feel obliged to go back to its shareholders for fresh equity. It has already raised $11.9 billion in the past six months.

Korean regulator warns against Lehman purchase
A top regulator on Monday voiced concern about state-run Korea Development Bank's (KDB) interest in buying a global bank, saying it should be just a "cheerleader" and let local private banks take the lead in any such purchase.

KDB said on Friday it was open to the acquisition of an overseas financial institution, naming Lehman Brothers Holdings Inc as one of its options. The comments sent Lehman's share price up 12 percent on the day.

"I think that KDB might have considered forming and leading a consortium (to buy Lehman Brothers)," Financial Services Commission (FSC) Chairman Jun Kwang-woo told reporters. "But it appears burdensome for a state-run institution to play a leading role (in the purchase of a foreign company) and take risks which may be more than financial."

Cross-border acquisitions by South Korean companies should be led by the private sector and state-run institutions such as KDB should play a "cheerleader role", Jun said. "My point is that state-run institutions may take a catalyst role in pursuing these kinds of deals."

Jun also said that KDB needed to consider its priorities before pursuing global expansion, pointing out that stabilization of the domestic financial markets might be the most urgent issue. When asked about the status of KDB's possible interest in Lehman, one of Wall Street's victims of the subprime mortgage meltdown, he said: "That would be an international marriage. Would you get married just after one or two blind dates?"

KDB has not publicly confirmed that it directly approached Lehman. The government is planning to privatize KDB by 2012, a process it hopes will help turn it into a global investment bank.

Investor doubt over Lehman hedge fund assets
Private equity firms looking at buying Lehman Brothers' asset management business are expressing doubts about the unit's minority stakes in several hedge funds.

Lehman is considering a variety of options to raise cash before its mid-September earnings report, which analysts expect to include writedowns of up to $4bn. The possibilities include a sale of a stake in Lehman itself or the sale of all or part of its asset-management arm or its commercial real estate portfolio.

Lehman shares were up 5 per cent yesterday after a Korea Development Bank official was quoted by Reuters as saying it would be "open" to acquiring Lehman. The Financial Times reported on Thursday that KDB had talked to Lehman about buying a 50 per cent stake but failed to reach an agreement, according to people familiar with the negotiations.

The price under discussion was about 50 per cent above Lehman's book value. Less specific discussions between Lehman and China's Citic Securities also broke down, the people familiar with the talks said. Lehman's asset management arm is considered to be its crown jewel, but potential privateequity buyers are mainly interested in the core of that business, Neuberger Berman, a traditional equity investor.

These investors say they are less interested in acquiring Lehman's minority stakes in hedge funds such as D E Shaw, GLG and Ospraie. GLG and Ospraie have veto power on a sale of Lehman's stakes in them, and they might be willing to buy the stakes back at bargain prices, officials say. D E Shaw declined to comment.

Selling assets is tricky for Lehman. If it sells them for less than its own estimates of their value, it could be forced to mark down the value of other holdings, forcing it to raise even more capital.

Lehman bought the hedge fund stakes in recent years when valuations of such companies were at their cyclical peak. Lehman took a $100m second-quarter write-down on its stake in publicly listed GLG, indicating that its other hedge funds stakes lost value. GLG, with $23bn in assets under management, said during the second quarter that the value of its investments would have to rise by about $740m for it to be able to earn its "carry" - the 20 per cent of profits hedge funds keep once they have reached a certain performance level.

Since GLG reported second quarter results, hedge funds, in general, have performed poorly. Hedge funds were hurt in July as oil prices fell and bank shares rebounded because many were still positioned to benefit from rising energy prices, a falling US dollar and financial turmoil.

The rout intensified in August and the carnage spread to hedge funds employing a variety of strategies, managers of funds that invest in hedge funds say. Andor Capital Management, a hedge fund with about $2bn under management, said this week it was shutting down

Lehman chief in race against time
Lehman Brothers chief executive, Dick Fuld, is in a race against time to rebuild the investment bank's battered balance sheet and set out a reason for the company to remain independent amid growing calls for new leadership or a sale of the company.

Mr Fuld, the longest-serving chief executive of an independent Wall Street bank, will this week redouble his efforts to find buyers for major assets, as Lehman prepares to close the books on another quarter of multibillion-dollar losses.

The company is hawking a stake in its profitable asset management business to private equity investors, and is in talks to sell some or all of its $40bn (£21.6bn) commercial property portfolio. Mr Fuld has also considered selling an equity stake in the overall group to sovereign wealth funds – the pools of capital amassed by emerging market governments.

All the talks, however, are bogged down in a dispute over value, with Lehman Brothers refusing to accept the knockdown prices on the table for its assets. Shareholders hope that the stand-off will be broken before Lehman reports its third-quarter results in the middle of next month, when another hole is expected to open up in the company's balance sheet.

With $60bn of mortgage-related investments still on its books, analysts believe that another $3bn-$4bn writedown could be on the cards. The group's overall loss for the quarter could be $1.8bn.

The future of Lehman Brothers has become one of the central questions on Wall Street, where some of the most recognisable names in US finance are reeling from the effects of the credit crisis. Lehman has had the weakest balance sheet of all the independent investment banks since the smaller rival Bear Stearns went under in March.

Although an investor-relations blitz by Mr Fuld, giving analysts unprecedented information on the company's holdings and capital position, and a $6bn emergency fundraising in June have prevented a Bear Stearns-style crisis of confidence, investors are still demanding Lehman shrink its operations to reduce risks. With its once-lucrative business in mortgage-related bond trading now a shadow of its former self, Lehman's core operations are unlikely to soon generate a sharp reversal of fortune.

Last week, it was reported that Lehman had pulled away from selling a 50 per cent stake in the company to the South Korean government's Korean Development Bank after the failure to agree a price, but there is pressure on Mr Fuld to return to the table. Lehman shares jumped 15 per cent on Friday after the KDB said it was considering an outright takeover of a US investment bank, but it tried later to temper speculation it would make a hostile bid and Lehman shares ended up more modestly.

Dick Bove, the respected analyst at Ladenburg Thalmann, added to the pressure on Mr Fuld by suggesting that, if the chief executive refused to sell assets or a stake at current prices, shareholders could take matters into their own hands and encourage a hostile bid.

Lehman chief faces internal coup
Richard Fuld's days as Lehman Brothers chief are numbered as a plan is being hatched within the troubled Wall Street investment bank to strip him of his executive duties.

The planned coup comes amid rumours a Korean investor is planning either a sizeable investment in Lehmans or an outright acquisition of the firm. Shares in Lehman Brothers, which have lost more than 80 per cent of their value this year because of the bank's disastrous foray into the sub-prime mortgage business, surged 12 per cent at one point on Friday as talk of an imminent acquisition gripped the market.

All it took was a seemingly innocuous comment from a spokesman at the Korean Development Bank in Seoul who said the company is 'considering all kinds of options, including Lehman'. Whether a Lehman suitor emerges or not, well-placed sources within the bank are certain that Fuld is set to hand over the reins before the end of the year. 'He is involved less and less with day-to-day executive affairs, and his credibility is shot,' one senior Lehman source said.

Fuld, one of the best-paid executives on Wall Street, is responsible for forcing the bank deeply into the sub-prime mortgage-related debt market. The bank has written down billions of dollars of bad loans and many analysts believe it will write down some $4bn more in its third-quarter results in a few weeks. Its exposure to such toxic debt trading is second only to Bear Stearns', which collapsed earlier this year.

Despite Fuld's best efforts, the bank's plight has been the talk of Wall Street all summer. Speculation about asset sales, investments by sovereign wealth funds and outright acquisition have gathered pace in recent days. It has also been speculated that the bank is hawking around a sizeable stake in its Neuberger Berman asset management business, bought for $2.6bn in 2003. Its value is said to have ballooned to more than $10bn in just five years.

A spokesman for Lehman Brothers declined to comment about Fuld's future, about the possible sale of a piece of Neuberger or about the sale of a stake in the bank to the KDB. Insiders pointed out, however, that Bart McDade, Lehman's relatively new chief operating officer, has assumed many of Fuld's former duties.

Again, Lehman would not comment about McDade's future at the bank. A source close to the chief operating officer would only say that there 'had been no conversations' about his becoming chief executive.

Fannie and Freddie crisis is Paulson's big moment
Hank Paulson's handling of the crisis at Fannie Mae and Freddie Mac is emerging as the main issue that will shape the legacy of the former chief executive of Goldman Sachs as US Treasury secretary.

Over the past 10 days, expectations have been mounting that Mr Paulson will have to make use of the virtually unlimited powers he was given by Congress in late July to rescue the two stumbling governmentsponsored mortgage companies with taxpayer money.

Treasury officials continued to work on the issue of Fannie and Freddie throughout the weekend, highlighting the urgency of the matter after shares in Fannie fell 36 per cent and shares in Freddie lost 46 per cent last week. One senior executive at a large US bank told the Financial Times that he expected the Treasury would have to move ahead with some form of intervention before the Labour Day holiday - a week from today.

Warren Buffett, the billionaire investor and chairman and chief executive of Berkshire Hathaway, declared "the game is over" for Fannie and Freddie in a CNBC interview on Friday. The form and success of any intervention could indelibly colour Mr Paulson's record at Treasury because of the size of the institutions and the key place they occupy at the intersection of business and politics.

"I think this may well be the defining event [in Mr Paulson's tenure]," says Doug Elmendorf, a former Treasury official and Federal Reserve economist now at the Brookings Institution, a think-tank in Washington. Only a few weeks ago, before Mr Paulson left for a family trip to the Beijing Olympics, the need for intervention was by no means a foregone conclusion and the former Goldman chief appeared to have played his hand masterfully, considering the circumstances.

The Treasury's hope, which appeared to be materialising, was that its powers to extend more credit to Fannie and Freddie and invest in their equity, thereby strengthening the implicit guarantee that the government stood behind the two companies, would be sufficient to bolster confidence.

"If you've got a squirt gun in your pocket, you probably will have to take it out. If you have a bazooka in your pocket and people know it, you probably won't have to take it out," Mr Paulson told the Senate banking committee in July.

But by the beginning of last week, Mr Paulson's theory was increasingly being undermined by the markets, as investors essentially called the Treasury's bluff not just by bringing down the equity prices but also by showing limited appetite for debt and preferred stock issued by Fannie and Freddie.

Critics have said that the main flaws in the Treasury plan include its failure to address the long-term status of Fannie and Freddie and the uncertainty surrounding the fate of investors in the lower echelons of the capital structure, including junior debt holders.

Nevertheless, Mr Paulson has so far eluded widespread blame for misreading the market reaction. One Democratic aide in Congress said policy with regard to Fannie and Freddie was in "uncharted waters". Many lawmakers had expressed similar confidence last month that the new powers would not have to be used.

Mr Elmendorf of Brookings warned that if the government did intervene, this might appear as a defeat for Mr Paulson in the short run, but eventually could lead to fixing a "long-standing problem at a comparatively small cost". He added: "On the other hand, if the companies scrape by and no government money is needed, the operation will likely be viewed as a success in the short run but a crucial missed opportunity in the long run".

American investors catch a cold from frozen auction-rate securities
All Serge Birbrair wanted to do was to pay his daughter's college fees. For the retiree, who fled the former Soviet Union in 1979, funding his child through university was not only a matter of principle but one of pride.

Having saved and invested sensibly for decades, paying the fees should not have been a problem. But that was before he invested in auction-rate securities (ARS), investments that have seen $675,000 of his hard-earned money frozen, out of reach, in illiquid assets, which he can do nothing about.

Birbrair is not alone. He is one of hundreds of thousands of Americans caught in the country's ARS scandal, a scandal that has hit the headlines in recent weeks after investment banks such as Merrill Lynch and Citigroup agreed to buy back those frozen ARS from hard-done-by investors.

Until September 2007, the bulk of Birbrair's liquid assets were in money-market accounts that could be accessed almost as readily as cash, which was important as he lives on the interest, and could need the money at any time.

So when a batch of his certificates of deposits - a popular retail investment product known as CDs in the US - expired at the end of September 2007, he sought the advice of his local UBS financial adviser in nearby Boca Raton, Florida, inquiring about a possibility of a similar product with cash-like qualities.

"He recommended I invest the money in student loan auction-rate securities," says Birbrair, who, although not new to ARS, was new to the fact that they could be issued by student loan companies, having in the past invested in those issued by local authorities, so-called municipal issuers.

Before investing the $675,000 in five separate ARS issues, Birbrair asked questions as to why the interest rate on such securities appeared to be so high, and why student loan companies were now involved in issuing the securities, when they hadn't been the last time he'd invested in them around five to six years ago.

Satisfied with the answers, he took the plunge, and was happy with his decision. Until mid-February. "Like everybody else on February 14 [the day the auction-rate securities market froze], I was caught and could not liquidate. It made me feel like the whole world was coming to an end," he admits, especially given that 20pc of his assets were caught up in the freeze.

Birbrair was a victim of the collapse of the $345bn ARS market, a market that promised its investors healthy interest rate returns and near-instant access to their money. The ARS market is a perfect example of the way in which investment banks sold products that were little understood. In spite of their infamy, however, ARS are nothing new.

Since the early 1980s, major US banks have been involved in providing products for local state governments and state transport authorities, known as municipals, that essentially reduced financing costs by selling debt into the auction-rate bond market rather than issuing long-term bonds.

Although such bonds often had redemption dates some 30 years off, the interest was reset at auctions every seven, 28 or 35 days, typically resulting in lower interest rates. For an institutional or corporate investor, ARS provided short-term debt products, which yielded a little more than money-market funds, and could easily be cashed in on the date of the next auction, which was never more than a month away.

What changed, however, was not only that the investor base evolved to include more individuals and charities but that the nature of the securities transformed.

By January 2008, a month before the ARS market collapsed, only half - $175bn of $345bn - the bonds came from municipal issuers, with the remainder coming from student loan companies ($85bn), collateralised debt obligations ($20bn), as well as closed-end funds and others. In short, a market that once depended on the AAA-grade credit qualities of city and state authorities had been weakened dramatically.

The ARS market had become home to what it is now referred to as "toxic" debt - in the form of sub-prime mortgage loaded CDOs and with bonds from student loan companies, a sector whose investment credentials rapidly worsened as the US economy tanked.

Worse still, in the final six months before the ARS market collapsed, the asset class became more attractive - as Birbrair found to his cost - because the bonds began to pay to what is known as a "maximum" or penalty interest rate as some of the weekly or monthly auctions began to fail due to a lack of appetite from investors.

The market freeze in February was a result of a number of factors, not least concern over the health or otherwise of the municipal bond insurers - the so-called monolines - which were on the verge of potential collapse following a series of multi-billion-dollar writedowns and credit downgrades.

As normal investors pulled out of the ARS auctions, the only thing propping them up were a number of banks that acted as liquidity participants, but which by the middle of February had had enough. More than 1,000 separate auctions failed in just one week in February.

As the stories of the victims began to emerge - including 402 US companies such as Google and Starbucks that had invested in the securities - a plethora of regulators began to look into what had gone on. Led by New York attorney general Andrew Cuomo, accusations of widespread mis-selling and mis-marketing of ARS products to individuals emerged, allegations that have never been publicly proven and that all the banks involved deny.

But in the past fortnight, investigations by the various regulators, including the US Securities and Exchange Commission, have come to a head, leading to a number of settlements with household names such as Goldman Sachs, Deutsche Bank and UBS, offering to buy back up to a collective $56.5bn of ARS, and paying hundreds of millions of dollars in fines.

The settlements are good news for those who have been affected - given that the individuals and charities will be made "whole". Gallingly, though, banks will potentially be able to use the Federal Reserve's discount window to trade such illiquid assets for more liquid ones. In other words, American taxpayers' money could be used to fund the ARS through the Fed, allowing the banks involved to borrow money for other needs at the discount rate.

Back in southern Florida, Birbrair, who has led an online campaign to raise the profile of ARS victims, now at least hopes he will get his money back, but isn't confident until he has it in his hands. "I'm 100pc certain that if Andrew Cuomo didn't straighten them out, I'd still be waiting for my money."

A UBS spokesman declined to comment on Birbrair's case, but points out: "Since the breakdown in the ARS market, UBS clients have been offered multiple liquidity options, including the ability to borrow 100pc against the par value of their ARS holdings." UBS stresses that it was the first firm to announce a comprehensive settlement for all clients.

Birbrair says that to make ends meet, his family has cut back on travel and expenses, and generally tried to spend less to ensure it has enough money to pay the fees, which run into tens of thousands of dollars.
"I will never let any investment bankers handle my money again," he vows, a comment that is likely to echo the sentiment of hundreds of thousands of other ARS victims. "I am lucky this time. I am not sure I will be again."

Wall Street fears the worst as US housing sales continue to fall
Wall Street will this week brace itself for further disappointing figures from the US housing arena when numbers for sales of existing and new homes are released on Monday and Tuesday.

After economic data last week showing the UK on the brink of recession, attention will be on the US, with minutes from the Federal Reserve's interest rate-setting committee and GDP numbers also due to be released.

Worse than expected figures are likely to rein in the US dollar, which has soared against the pound recently. Economists predict that sales of new homes in the US will have once again fallen back in July to around 525,000, a further fall from June.

On Friday, the Federal Reserve chairman, Ben Bernanke, gave a much-needed fillip to Wall Street when he claimed that the threat of inflation in the world's biggest economy had receded. A combination of lower growth, lower oil and commodity prices and a strong dollar had, he said, all contributed to reducing the threat of spiralling prices.

His comments came as speculation grew that the US Treasury, led by the Treasury Secretary, Hank Paulson, is set to bail out the failing mortgage giants Freddie Mac and Fannie Mae, with a further package that most believe to be quasi-nationalisation.

The investment guru Warren Buffett said "the game was now over", since the government's blank cheque had encouraged riskier lending, meaning that investors in the groups were likely to lose all their money. Talk of a bailout for Freddie and Fannie came alongside rumours that the ailing investment bank Lehman Brothers could be bought by the Korea Development Bank.

Meanwhile, in the UK, figures from the Office for National Statistics showed zero economic growth in July. The statistics suggest that Britain's economy is teetering towards the official definition of a recession – two quarters of negative growth. The downward revision brought to an end a 16-year run of growth in the UK and prompted a further weakening of sterling to its lowest levels against the euro for 12 years.

Economists warned that stagnation had made a cut in the cost of borrowing, currently at 5 per cent, more likely. The Bank of England's Monetary Policy Committee meets on 4 September to decide the direction of rates.

Sales of existing homes up, but inventories at record high
Resales of U.S. single-family homes and condominiums rose in July but inventories also increased, reaching record levels, data showed Monday.

Resales rose 3.1% last month to a seasonally adjusted annual rate of 5.0 million, the highest level in five months, the National Association of Realtors reported. The gain was stronger than expected. Economists surveyed by MarketWatch had anticipated that sales would rise to 4.91 million. Sales have been relatively stable over the past year at around a 5 million annual pace.
Even though higher in July, resales have sunk 13.2% in the past year. Sales in June fell a revised 2.8%, compared with the initially estimated 2.6% decline. July's sales rose in three of the four regions, rising 9.7% in the West, 5.9% in the East, and 0.9% in the Midwest, according to the NAR's data. Sales dropped 0.5% in the South.

Sales of single-family homes rose 3.1 to a 4.39 million annual pace. Condo sales rose 3.4% to 610,000 annualized. Lawrence Yun, chief economist for the NAR, shied away from declaring a bottom to the existing-home market, saying that there was too much uncertainty. July's inventory of unsold homes on the market rose 3.9% to a record 4.67 million units, representing a supply of 11.2 months based on the current sales pace. The inventory figures are not seasonally adjusted.

A sharp increase in condo inventory accounted for the gain in July. Inventories of condos rose to a record 769,000 units. Projects started before the housing market recession began are coming on line, creating gluts in some markets. "Inventories are very high relative to sales rates, and would probably be even more so if all those wishing to sell their home actually had the house on the market instead of pulling it off in the face of weak demand and eroding prices," said Josh Shapiro, chief U.S. economist at MFR Inc.

The overhang of existing homes for sale is expected to continue to put downward pressure on house prices. In July, the median sales price fell to $212,400, down 7.1% in the past year. "Any real improvement is still a long way off; price to keep falling," wrote Ian Shepherdson, chief U.S. economist at High Frequency Economics in a note to clients. Until housing prices stabilize, experts believe that the credit crunch could worsen.

Banks and other lenders have been unable to lend as their balance sheets have taken hits from the subprime mortgage crisis.
Now, the credit crunch has moved into a "second phase" in which banks will be hit by credit losses from credit cards, other consumer loans and business loans. This pressure will continue until house prices stabilize, economists said.

Two UK bank chiefs massively overdrawn on corporate headaches
Gary Hoffman and Richard Pym will need steady nerves to cope with their new appointments. Hoffman takes over as chief executive of Northern Rock - which suffered the ignominy of a government rescue - on 1 October, while Pym has shipped up as chief executive of Bradford & Bingley, whose travails include three stabs at raising money through a rights issue and a bail-out by its banking rivals.

Both also share one aim: to tart their banks up ready for a sale. Pym, a former chief executive of Alliance & Leicester, says his focus is 'very much on building the business' and insists that its portfolio of buy-to-let mortgages is 'very solid'. He is promising to outline his strategy when the bank produces a trading update in October.

But next week's half-year results are expected to underline the challenge even of stabilising the business, let alone rebuilding it. Bad debts are likely to have continued to mount - analysts are pencilling in £100m of provisions for the full year - while efforts to free up money for new lending by persuading borrowers coming up to the end of their fixed-rate deals to go elsewhere will have had only limited success.

Pym has said one of his priorities will be to review the bank's agreement with US finance group GMAC, under which it has to take on £350m of buy-to-let mortgages each quarter - mortgages which are turning sour. 'Clearly the challenge for B&B is restoring credibility of leadership,' says Ian Gordon, banking analyst at Exane BNP Paribas.

Pym avoided higher-risk areas such as buy-to-let while at A&L, but Gordon believes he will have to continue B&B's strategy of focusing on niches such as buy-to-let and self-certification mortgages, where buyers do not have to provide evidence of earnings, rather than trying to compete for conventional loans.

On the bare numbers, there should be a queue of buyers for B&B: its book value is more than twice its share price, which remains stubbornly around 50p. There are also still plenty of willing sellers of the shares: the dismal take-up of its rights issue means that rival banks such as Barclays and HSBC, who were corralled in to underwrite the deal, will end up with around 4 per cent stakes which they are likely to be keen to offload.

But competitors are preoccupied with putting their own houses in order, while financial buyers will want to see how the housing and buy-to-let markets settle before plunging in. Pym has secured a two-year pay deal worth £3m in guaranteed bonuses and options, but the betting is that the bank will no longer be independent when that ends.

Hoffman's immediate challenge is to repay the remaining £17.5bn government loan. Meanwhile, he will concentrate on shrinking the business. The plan drawn up by Ron Sandler, who will shift from executive to non-executive chairman when Hoffman arrives, envisaged the bank taking 2.5 per cent of the mortgage market, a dramatic fall from the 25 per cent it was lending in the first half of 2007, half of which would be funded by retail deposits.

By the end of June, its mortgage portfolio was £77bn compared with £90bn at the end of 2007. But it has proved far easier to ditch the good borrowers than the bad: its arrears and repossessions jumped four-fold in the first half of the year and it could end up with a rump of poor-quality loans no buyer will be interested in.

And Hoffman's efforts to attract retail deposits will have to abide by the strict anti-competitive rules drawn up when it was nationalised, which limit its ability to top the best-buy tables. The government swapped £3bn of Northern Rock's debt for shares, which implies that any buyer would have to pay at least that sum to avoid the taxpayer suffering yet more losses on the nationalisation process.

Like Pym, Hoffman is to be well rewarded: his base salary will be £700,000 and he also gets three annual payments of £400,000 to compensate for the bonus scheme he is leaving at former employer Barclays. If he succeeds in boosting the Rock's value above that £3bn, he will have earned it.

More chilling news for poor British homes as credit card repayments rocket
Hundreds of thousands of credit card users are set to see the minimum repayment on their plastic rocket to £25, a move that could hurt households struggling to repay their debts.

In October, credit card customers at Alliance & Leicester will see their minimum repayment terms switch from the lesser of 3 per cent or £5 plus any interest charges to the greater of £25 or £5 plus any interest charges.\While any move that shrinks the size of the underlying debt is to be welcomed, the hike will concern many households whose budget doesn't stretch immediately to such levels.

The changes will chiefly affect users with 0 per cent cards who have been paying the £5 minimum but now face a huge jump to £25, and those managing smaller credit card balances. In particular, lower-income households in careful control of their finances could find their monthly repayments leap to unmanageable levels.

A cash-strapped customer slowly paying off a £200 balance on a card with a standard annual percentage rate (APR) of roughly 16 per cent using the minimum repayment would currently pay about £6 - the 3 per cent fee. That will jump to £25; for homes where the daily finances are finely balanced, it could cause financial difficulties on top of soaring fuel and food bills.

'Such a move could cause problems with people who are managing their debt carefully, especially when everybody's income is so much tighter,' says Sean Gardner at price comparison site 'And because people are becoming more stretched, an increasing number are now paying back the minimum.'

MBNA, the credit card company that provides A&L with its cards, will roll out the same changes to other lenders it supplies, including Virgin Money and its own-brand customers. 'From a customer's point of view, the change is a good thing as the more debt they pay off, the better,' says an MBNA spokesman. 'But clearly, if some people can't afford to pay [the new minimum repayment] then they can come to us and we'll try to resolve it.'

But although the higher £25 minimum repayment could cause a measure of financial distress, the greater monthly sums will chip away faster at outstanding debt and slash the overall amount of interest to be paid.

Repaying credit card debt by spending just the minimum amount each month - usually 2.25 per cent of the outstanding sum - can leave you in debt for decades. Yet about 3.38 million people (11 per cent of borrowers in Britain) make only the minimum repayment, compared to 20.9 million (68 per cent) who repay their credit card bill in full, according to figures from the British payments body Apacs.

The danger stems from lenders' allowing borrowers to pay back a tiny percentage of the outstanding debt each month, rather than sticking to a set payment that eats into the underlying amount owing. This way, interest can continue to build up in the bank's coffers as the debt is slowly eroded over many years.

If you have the average UK credit card balance of £1,384 at 18.9 per cent and make the 2.25 per cent minimum repayment each month, it would take you a staggering 27 years and eight months to pay it all off; worse, you would pay £2,673 in interest charges, research by finance website shows.

'Imagine someone told you that your £1,384 purchase would cost you a total of £4,057 (including interest) and would take you nearly three decades to repay, you would think you'd be mad to entertain such a buy. But because consumers don't appreciate the real cost of their credit-card spending with low minimum repayments, many will just carry on regardless,' says spokesman Andrew Hagger.

'While credit cards, used correctly, can be a great way to ease a temporary cash flow problem, they can prove to be a real financial albatross if you slip into the habit of only repaying the absolute minimum.' Not every one will be fortunate enough to owe sums that tally with the national average, though, and for those owing thousands on a credit card, the minimum repayment trap can get ludicrously expensive.

According to consumer revenge website, a £3,000 debt at 17.9 per cent on a 2 per cent minimum repayment (£60 in your first monthly payment) would take 41 years to pay off and cost £6,400 in interest alone.

Debt charities, which have seen record numbers of heavily indebted individuals get in touch for advice on coping with their borrowing - which include credit cards, store credit, personal loans and loans secured on homes - are recommending that clients pay more than the minimum, even if it is just a few extra pounds each month.

Take that same balance of £1,384 at 18.9 per cent and minimum repayments of 2.25 per cent: if a borrower was to make the minimum repayment and an additional £10 each month, the time taken to repay the debt would shrivel by 20 years to seven years and eight months, and the borrower would pay just £890 in interest charges, Moneynet's research shows.

'It can make such a massive difference, and so we always advise people to pay over by a slight amount, even if it's just a couple of pounds,' says Frances Walker at the Consumer Credit Counselling Service (CCCS) debt charity. 'The real problems begin if you've more than one card and you are paying the minimum on both; you can get locked in for years and years. It really is a mug's game; you absolutely need to clear as much as possible.'

On a brighter note, the average minimum repayment as a percentage is beginning to creep up, according to financial analyst Moneyfacts. This year, so far it stands at 2.66 per cent - £7.63 a month - while standing at 2.58 per cent in 2007 and 2.47 per cent in 2006.

'While some lenders have reduced their minimum payments, there have been significant increases such as that by MBNA. It is a good sign that they are increasing, but the minimum percentage has only increased slightly, which is unlikely to outweigh the increase in purchase rates and cash APRs,' says Samantha Owens of Moneyfacts.

Only two card lenders - Capital One and Coutts, the private bank - insist on a 5 per cent minimum repayment, and the Capital One 'Classic' Visa card carries a monster 34.9 per cent APR. 'It's aimed at people trying to rebuild their credit history,' says Mr Hagger. 'With a rate this high the customer would never repay their balance if the minimum was 2.25 per cent.'

As a rule, Ms Walker recommends paying off the most expensive credit card debt first if you have more than one, and - if possible - trying to shift your existing debt to a new card that offers a cheap balance-transfer deal. Alternatively, you could set up a direct debit to make sure that you never miss a credit card repayment - an omission that picks up a £12 fine - and then make overpayments by telephone or direct from your current account each month.

Danish Central Bank to Lead Lender Roskilde Takeover as No Buyer Found
The Danish Central Bank will lead a buyout of Roskilde Bank A/S after a slumping property market drove the lender into insolvency and a private purchaser couldn't be found.

Roskilde will receive 4.5 billion kroner ($890 million) in cash from the central bank and Danish lenders. The purchasers will also assume 37.3 billion kroner of debt, Roskilde said in a statement yesterday. The shares were suspended in Copenhagen trading today, after falling 75 percent this year.

Writedowns on real estate loans led to a pretax loss of at least 1 billion kroner in the first half, double an estimate the bank published on July 14, Roskilde said yesterday. Denmark became the first European economy to enter a recession since the global credit crisis began, as declining property values prompted consumers to spend less. The bailout is the first by the Danish central bank in 15 years.

"The central bank views this matter with great seriousness," Nationalbanken, as the central bank is known, said in the statement. "This acquisition will contribute to limiting the negative effect on Denmark's financial system" of Roskilde's failure.

Roskilde, based in the Danish city of the same name, received "unlimited liquidity" from the central bank on July 10 and the Danish Bankers Association agreed to cover as much as 750 million kroner of losses. The central bank said at the time the backing was conditional on Roskilde finding a buyer within six months.

"Potential buyers have expressed severe uncertainty as to the general credit culture of the bank," and therefore didn't submit bids for the bank in whole or in part, Roskilde said in the statement. The central bank is acting with more than 100 of the country's private lenders, which last year pledged to cooperate in case of a bank failure.

Statements from Roskilde and the central bank didn't specify the proportion of funding being supplied by Nationalbanken and the private financial institutions. Roskilde Chief Executive Officer Soeren Kaare-Andersen said last month the bank hadn't been able to reduce the size of its real-estate loan portfolio fast enough. He will remain as CEO of the new bank, the company said yesterday.

"The government backs the solution found for Roskilde Bank," Economy Minister Bendt Bendtsen said in a statement on the ministry's Web site. "We had preferred that a private buyer had been found, but in the current serious situation, this solution is necessary."

Roskilde said on July 14 it would write down as much as 900 million kroner for the first six months of the year. Since the July announcement, "a large number of clients" have pulled their assets out of the bank, it said yesterday. Danish housing prices will drop as much as 10 percent this year and next year following a boom and rising interest rates, Svenska Handelsbanken estimates. Homeowner foreclosures rose in July to the highest since 2003, Statistics Denmark said.

Roskilde asked the Copenhagen OMX Stock Exchange to suspend the trading of its shares and the Oslo ABM and Irish Stock Exchange to suspend the trading of its issued bonds. The central bank last bailed out a commercial lender in 1993, when, together with Sydbank A/S, it was forced to dismantle the assets of Varde Bank.

Scandinavia's last financial crisis occurred in the early 1990s following the real-estate boom of the 1980s. Nordbanken and Gota Bank went bankrupt and were merged in 1993 in a state- engineered restructuring. Nordbanken, Finland's Merita Bank, Denmark's Unidanmark and Norway's K-Bank were then merged from 1998 to 2000 to create Nordea Bank.

German bank buy-out imminent
Commerzbank is in the final stages of agreeing a complex €9 billion (£7 billion) takeover offer for its German rival Dresdner Bank. A meeting of Commerzbank’s 21-strong supervisory board is scheduled for this week, with expectations mounting that the deal could be announced soon after.

Talks between Commerzbank and Dresdner’s parent company, the insurer Allianz, have been going on for weeks. The combined group would pose a credible challenge to Deutsche Bank’s dominance of German retail banking. The final terms of the deal are still being discussed, according to German banking sources. Allianz has offered to indemnify Commerzbank against up to €1 billion of Dresdner credit losses to allow the deal to go through.

On that basis, Commerzbank would pay €9 billion to buy Dresdner, according to sources close to the talks. It is understood both numbers are still being discussed but a proposal is close to being agreed. It is unclear what will happen to Dresdner Kleinwort, the investment-banking division of Dresdner that is based largely in London.

Commerzbank’s investment-banking division is heavily focused on derivatives trading, while Dresdner has a large corporate-finance and broking operation. Some industry sources have claimed that Dresdner Kleinwort bosses may attempt a management buy-out, although it is unclear how such a deal would be financed in today’s market environment.

Allianz has been attempting to dispose of Dresdner for some time. Lloyds TSB and Santander are among the other interested bidders, although a German solution was always considered the most likely outcome. The pride of the German financial sector has been badly damaged by the global credit crisis. IKB, one of several small German lenders to get into trouble, was sold last week to Lone Star, the American private-equity group.

When Allianz and Dresdner merged in 2001 it was seen as the start of a spell of consolidation for Germany’s financial sector. The disposal of Dresdner is now being spoken of in the same terms

Bad Begets Worse
Fannie Mae and Freddie Mac are giants of the mortgage finance industry. But to investors, they're rapidly shrinking.

And as they struggle, they're taking the housing market with them, reinforcing a downward spiral in which their troubles translate into pricier home loans and increasing foreclosures, in turn further undermining the companies.
"Right now you have a giant negative feedback loop," said Paul Miller, an industry analyst at Friedman, Billings, Ramsey Group. "How you break it, I don't know."

About 70 percent of newly issued mortgages are owned or guaranteed by Fannie Mae and Freddie Mac. Without this financial backing, the banks and other lenders who typically make home loans would no longer be able to do so. The housing market could collapse.

The two companies have tried to keep providing financing to the industry but their mounting losses, rooted in the subprime mortgage crisis, are making this harder and harder. Many prospective home buyers are stuck.

"Fewer people are willing to buy property, which contributes to a decline in housing prices and that leads to more foreclosures and higher losses, which hurts Fannie Mae and Freddie Mac, which pull back by tightening their mortgage terms, thus continuing the cycle," said Robert E. Litan, an economist at the Brookings Institution.

Moody's estimates that interest rates on 30-year fixed mortgages are already higher by at least a half percentage point -- and maybe a full percentage point -- because Fannie Mae and Freddie Mac have been forced to pay a premium interest rate on the money they borrow from investors worried about the firms' health.

The yield on bonds guaranteed by the companies has increased to almost the highest in 22 years relative to Treasurys, according to Bloomberg News. And when Fannie Mae and Freddie Mac pay more to borrow that money so they can acquire or guarantee mortgages, the companies pass the cost on mortgage lenders, who in turn charge borrowers more for home loans.

Despite the Federal Reserve's effort to lower interest rates, including repeated cuts over the last year in the interest rate the Fed controls, 30-year, fixed-rate mortgages this week averaged 6.37 percent, the highest level in six years. At the same time, the companies are tightening credit in an effort to ensure the loans they make will be repaid.

Freddie Mac, for instance, no longer finances no-money-down mortgages, nor does it continue to buy or guarantee mortgages given to people who have failed to document their finances. Fannie Mae has withdrawn from the market for all-day loans, which are considered risky because they require less documentation than traditional prime loans.

As Fannie Mae and Freddie Mac tighten credit and the cost of borrowing increases, the housing market contracts. For the week that ended Aug. 15, the Mortgage Bankers Association reported that applications for new mortgages declined 34 percent from the year earlier to the lowest level since 2000. projects that this tighter credit alone will account for a 5 percent decrease in housing prices. Overall, projects a 30 percent drop in prices. To sell homes in such a sluggish market, realtors have had to lower prices.

When prices fall, homeowners with high mortgage payments tend to walk away from those payments in larger numbers and housing speculators fail at higher rates. Both factors lead to more frequent and more expensive defaults, which hurt Fannie Mae's and Freddie Mac's bottom lines by forcing them to put more money into their capital reserves.

This rise in defaults is a major cause of the companies' net losses, which have been a combined $14.9 billion over the past year. Those losses reduce investor confidence and compel the firms to be even more conservative about the loans they fund. The vicious cycle starts all over again.

And the red ink is likely to continue. Earlier this month, Freddie Mac reported that its losses from foreclosures and other failed home loans nearly doubled in the second quarter from the previous three months to $2.8 billion, and that the company more than doubled its reserves for anticipated losses because of delinquencies. One reason: It predicted that national home prices would decline by an average 18 to 20 percent, more than the 15 percent the company had forecast previously.

At Fannie Mae, losses from foreclosures and other problem loans rose to $5.3 billion in the second quarter, from $3.2 billion in the first quarter. And in July, the challenge grew even steeper, said Daniel H. Mudd, Fannie Mae's chief executive. A market that "many of us had already described as the worst in a generation took a turn for the worse after the quarter ended," he said, citing even higher defaults and sharper declines in home prices.

Yesterday, shares of Freddie Mac continued to fall, declining 2.8 percent to close at $3.16. But Fannie Mae stock reversed its sharp decline of earlier in the week, gaining 10.2 percent to $4.85. Still, industry analysts see a heightened possibility that the federal government will be forced soon to bail out Fannie Mae and Freddie Mac -- an action that might halt or slow this downward spiral.

In a rare display of bipartisanship this summer, the Bush administration and Congress quickly came together on a rescue plan that would prop the companies up if they faced imminent collapse. Treasury was given the authority to lend Fannie Mae and Freddie Mac money or buy stakes in the firms.

Deborah J. Lucas, a finance professor at Northwestern University, said the government's rescue plan was designed to restore confidence in the companies and the financial markets, of which the mortgage market is a significant part. "The motivation for the bailout was to prevent that type of spiral," she said.

So far it has not worked out that way. "Their ability to lend is constrained by their insufficient capital, higher spreads and investor doubts about whether they will be allowed to continue to operate in a business-as-usual mode," Lucas said.

Fed's Barn Doors Are No Obstacle for Its Horses
Once a year at the end of August, the notable and quotable from the worlds of business, finance, academia and government trek to, if not up, Wyoming's Teton mountain range to attend the Federal Reserve Bank of Kansas City's Jackson Hole Conference.

Whether it's the elevation that goes to their heads or an elevated sense of importance they get from rubbing shoulders with central bankers in shorts, the attendees treat the event like the annual pilgrimage to Mecca. The Kansas City Fed adds to the cachet by shrouding the event in secrecy. The agenda isn't posted on the Web site; registered guests and media covering the event have access to a password-protected site.

The papers presented at last week's conference won't be accessible until sometime this week, according to the Kansas City Fed's public affairs office. (Academics could perish by the time the Kansas City Fed publishes.) All this secrecy in the age of transparency left me to ponder conferences past. Perhaps there was something to be gleaned from the topic selected for this once-a-year Fed symposium? Was it a leading, lagging or coincident indicator of the economic times?

After all, the Fed is in the business of setting monetary policy. Because adjustments in interest rates and the money supply operate with a long and variable lag, the Fed is, by definition, in the forecasting business. It has to anticipate tomorrow in determining where to put the overnight benchmark interest rate today.

So how good is the Fed in anticipating the economic issues facing the U.S. and global economy? A quick glance at the topics since 1978 suggests, not very.

The 2007 symposium, "Housing, Housing Finance and Monetary Policy" was definitely timely. Still -- and even allowing for the lag between the selection of the topic and the event -- it's probably more accurate to say an examination of the interaction among housing, housing finance and monetary policy came well after the horse was out the barn door. In fact, the barn went down in flames.

In 1995, the symposium was devoted to "Budget Deficits and Debt: Issues and Options." The discussions focused on the problems associated with chronic deficits and potential solutions. In short order, the U.S. government produced a surplus for the first time in 30 years. The surpluses lasted from 1998 through 2001. Deficits are now back. Put the 1995 symposium in either the fighting-the-last war category or long-leading- indicator category.

The first four years (1978-1981) of the Kansas City Fed's conference were devoted to agricultural issues. Droughts in the Midwest may have inspired 1979's symposium on "Western Water Resources: Coming Problems and the Policy Alternatives." The papers looked at subjects such as "water policy" and how to augment supply. Sound familiar?

"Access to fresh water was a big deal," says Michael Aronstein, president of Marketfield Asset Management in New York. "At the top of a bull market, everything is always `limited."' Of course, back in the 1970s global cooling was the rage. The April 28, 1975, edition of Newsweek magazine reported "ominous signs" that the earth's weather patterns had begun to change dramatically, portending everything from a "little ice age" to food shortages and famine.

Among the more spectacular solutions proposed for global cooling was melting the polar ice cap. Talk about an inconvenient truth ahead of its time.

In 1999, the Jackson Hole conference was devoted to "New Challenges for Monetary Policy." Specifically, the program was focused on the conduct of policy in a low-inflation environment and the proper response to movements in asset prices.
Bingo! For once the Fed was prescient. In August 1999, the technology and Internet stock bubble was about to embark on its last, monetary-fuel-injected run.

The Nasdaq Composite Index almost doubled in value between the Jackson Hole conference and early March. While the Fed gets a good mark for its timing, it receives an offsetting demerit for its failure to grasp the "new challenges" for policy, the most important of which was mitigating the effects of a burst stock-market bubble without inflating a new one in housing. A for conception, F for execution.

"Income Inequality Issues and Policy Options" in 1998 foreshadowed what was to become a big political issue in the 2008 presidential election. In terms of the policy options for the central bank, the achievement of price stability and maximum sustainable growth, along with stabilizing the financial system, are enough for one institution whose main policy tool is a short- term interest rate. The redistribution of income isn't the role of monetary policy. (It's not the role of fiscal policy, either.)

Which brings us to the 2005 symposium, "The Greenspan Era: Lessons for the Future." Alan Greenspan's 18-year tenure as Fed chief was drawing to a close. He was feted as "the greatest central banker who ever lived" in a paper presented by Princeton University's Alan Blinder. Blinder is a discussant this year, not a presenter.

And as for the lessons of the Greenspan era, this year's Jackson Hole symposium, "Maintaining Stability in a Changing Financial System," says it all.

Analysts' Accuracy on U.S. Profits Worst in 16 Years
Analysts' accuracy in predicting U.S. profits dropped to the lowest level in at least 16 years last quarter, adding to a worsening track record since regulators forced companies to stop leaking information to Wall Street.

Earnings estimates from analysts matched results for 6.7 percent of companies in the Standard & Poor's 500 Index that reported second-quarter profit, the fewest since Bloomberg began compiling the data in 1992. Accuracy peaked at 30 percent in the fourth quarter of 2000, the year Regulation Fair Disclosure, known as Reg FD, was adopted, and has fallen for six of the seven years since.

"They're winging it," said John Kornitzer, who oversees $5 billion as chief investment officer of Kornitzer Capital Management in Shawnee Mission, Kansas. "They can't find out the stuff they want to find out, and they've got so much to do because there have been so many cuts."

The Securities and Exchange Commission's law stripped analysts of their edge in forecasting earnings by making companies release information that affects profits to the public. More than $500 billion of bank losses from the collapse of the subprime mortgage market has made predicting company results even harder.

Second-quarter earnings declined 22 percent for the 459 companies in the S&P 500 that released results so far, according to data compiled by Bloomberg. That's twice the drop analysts projected in the first week of July, before the reports began.
Missing the Mark

Analysts are increasingly likely to miss the mark because companies are more cautious with information following the SEC's rule, said John Wilson, co-director of equity strategy and chief market technician for Morgan Keegan, which manages $120 billion in Memphis, Tennessee.

"You no longer have that favored guy who gets the wink and the nod before everyone else," Wilson said. "Unless you've got an analyst with a really good handle on an industry, it just gets tougher and tougher in an environment like this."
Gap Inc., the largest U.S. clothes retailer, climbed 4.6 percent to $19.88 in New York trading today after reporting second-quarter profit of 32 cents a share, topping the 30-cent average forecast of analysts surveyed by Bloomberg.

Not all research has gotten worse, said Jerome Dodson, a fund manager who oversees $1.7 billion at San Francisco-based Parnassus Investments. "Often an individual analyst knows the company better than we do because they follow it on a daily basis," said Dodson. "Good analysts will bring a company to our attention that's not getting a lot of attention on Wall Street."

Meredith Whitney, the bank analyst at Oppenheimer & Co., predicted Citigroup Inc. would cut its dividend two months before it did. Wachovia Corp.'s Douglas Sipkin lowered his recommendation on Bear Stearns Cos. in May 2007, when it was trading at $150. JPMorgan Chase & Co. later bought the company $9.43 a share, the deal's value when it closed in May.

Job cuts and a decline in analysts' pay after government efforts to prevent research operations from mingling with investment banking may have exacerbated the drop in the quality of research, according to Morgan Asset Management's Walter "Bucky" Hellwig. The SEC requires banks to separate research and investment banking divisions to prevent the leaking of nonpublic information about corporate transactions.

Bank of America Corp., the second-biggest U.S. bank, fired about a quarter of the stock analysts in its New York-based securities unit in January. Newark, New Jersey-based Prudential Financial Inc., the second-largest U.S. life insurer, shut its 420-person stock research and trading unit last year because it wasn't making money.

"It's not the high-profit, high-dollar profession that it used to be," said Hellwig, who helps oversee $30 billion in Birmingham, Alabama. "In the wake of all the regulation to separate investment banking from analysis, the job of the analyst became just that, often just watching the stocks and checking the estimates." Accuracy in the second quarter worsened as complex, illiquid securities caused unexpected losses, said Sean Ryan, a New York- based analyst with Sterne, Agee & Leach Inc.

American International Group Inc.'s report was among the biggest misses of all companies in the S&P 500 after the world's largest insurer wrote down more than $11 billion of holdings. The adjusted loss was 51 cents a share, compared with analysts' estimate for a 77-cent profit. New York-based AIG's shares plunged 18 percent Aug. 7, the day after the report, for the steepest drop since the company went public in 1969.

National City Corp., the Cleveland-based bank whose market fell by 70 percent this year, reported a loss that was more than twice what analysts estimated, as did Seattle-based Washington Mutual, the biggest U.S. savings and loan, and New York-based Merrill Lynch & Co., the largest U.S. stock brokerage.

Morgan Keegan's Wilson, who uses technical and quantitative analysis to make investment decisions, says investors can't rely only on analyst reports because "nobody knows right now how bad it could be" as the U.S. economy slows and banks' credit losses continue to climb.

"You've got to do lots of other things beside read an analyst report and take an earnings estimate at face value," he said. "Schmoozing the company doesn't help anymore."

Global warming time bomb trapped in Arctic soil much larger than presumed
Climate change could release unexpectedly huge stores of carbon dioxide from Arctic soils, which would in turn fuel a vicious circle of global warming, a new study warned Sunday.

And according to one commentary on the research, current models of climate change have not taken this extra source of greenhouse gas into account.

Scientists have long known that organic carbon trapped inside a blanket of frozen permafrost covering one fifth of the world's land mass would, if thawed, release greenhouse gases into the atmosphere. But until now they simply did not have a good idea of how much carbon is actually locked inside this Arctic freezer.

To find out, a team of American researchers led by Chien-Lu Ping of the University of Alaska Fairbanks examined a wide range of landscapes across North America. They took soil samples from 117 sites, each to a depth of at least one metre, in order to provide a full assessment of the region's so-called "carbon pool."

Previous estimates of the Arctic carbon pool relied heavily on a relative handful of measurements conducted outside of the Arctic, and only to a depth of 40 centimetres (15.5 inches). The study, published in the British journal Nature Geoscience, found that the stock of organic carbon "is considerably higher than previously thought" -- 60 percent more than the previously estimated.

This is roughly equivalent to one sixth of the entire carbon content in the atmosphere. And that is just for North America.

The size and mix of landscapes in the northern reaches of Europe and Russia are about the same, and probably contain a comparable amount of carbon-dioxide producing matter currently held in check only by the cold, the study said. And the danger of a thaw is real, note climate scientists.

The Nobel Prize-winning UN panel of climate change scientists project temperature increases by century's end of up to six degrees Celsius (10.8 degrees Fahrenheit) in the Arctic region, which is more sensitive to global warming than any other part of the planet.

Commenting on the research, Christian Beer of the Max Planck Institute in Jena, Germany, pointed out that the climate change models upon which future projections are based, do not include the potential impact of the gases trapped frozen Arctic soils.

"Releasing even a portion of this carbon into the atmosphere, in the form of methane or carbon dioxide, would have an significant impact on Earth's climate," he noted in his commentary, also published in Nature Geoscience.

Methane, another greenhouse gas, is less abundant than carbon dioxide but several times more potent as a driver of global warming.


John Bayley Matthews said...

Over the last month or so, I have noticed that more articles are using the 'A' word in their titles. This got me thinking and I wrote a poem:-

Music for the Apocalypse

They say
the revolution
will not be televised

we know now
that it will be
on the Net

no trumpet blast
is necessary

we were
by Dylan

and now
the chatter
of the keyboard

is the accompaniment
to Decay...

Anonymous said...

Oh my, the terminal triangle (as coined by Carolyn Baker) of economic/financial collapse, climate change and Peak Oil keeps unraveling. Should I add possibility of nuclear war?


Bigelow said...

Ilargi wrote “What everybody still keeps missing is that the power the Fed and the Treasury have over the US financial system grows by the day, and has now reached historically unprecedented levels.

They alone decide who gets a bail-out and lives, or who gets shrunk and shriveled till death follows.”

Some of us notice. It is a disgusting feat of greed, sabotage, social engineering and Orwellian double-speaking. They break it and take more authority to “fix” it. It is like learning the Red Cross personnel have all been replaced by vampires, have caused a 600 car accident out on the street and are asking for your blood.

As you have showed us, a lot of this stuff is out there. It would be career suicide and possibly really dangerous for journalists to document who, what and where –name names—of the henchmen and how they did this to us; how they defrauded not just Americans but the world too.

What lives, what dies? Bet it will be the usual socialism for themselves and their friends till there is nothing left to steal. As Aleister Crowley said, the Dark Ages never really went away. Yes?

Bigelow said...

I or S,

What is your opinion on community currencies?

Anonymous said...

The banking cartel that pushed the FED, the American central bank, through Congress just before Christmas Eve 1913, the same year the Federal income tax was enacted, was sold with the original premise it would ease the wild business cycle. The banker/brokers caused the 30’s Depression; waited several generations for the survivors to die or forget, then caused an even bigger New Depression; profiting throughout. If humans survive they will rip us off again in another 70-80 years.

Anonymous said...

Hi Bigelow,

Back in the sixties there was this old guy (yes very old even in those far off days when the earth was still green) who had been a US senator and being fed up with the way things were run, threw up his hands forgoing all government pensions and the money economy, went back to the land grew stuff and traded with others of a similar bent.
To set prices for that trading he used the regular market place prices. I suppose it would not be a stretch, once something like that were established, to ease trading with a common currency. One drawback I can see is that I think the government frowns on a community currency unless they can hit it for income tax.

BTW this guy traded his produce from the east coast as far as California.

Anonymous said...


"One drawback I can see is that I think the government frowns on a community currency unless they can hit it for income tax."

Of course. They even try to hit you for barter. I wonder what they do if you pay the IT in community currency :-)

Anonymous said...

el pollo

Of course. They even try to hit you for barter. I wonder what they do if you pay the IT in community currency :-)

Would that be one of those things they cut off body parts for?

I believe you mentioned yesterday that the mountains of Peru were your dreams of Shangri-La? I bet you musta read the same Donald Duck Comic book I did as a kid, the one where they go in search of the square chicken eggs in the Andes? Yes I can dig it, If I could convince my wife and if I had enough brain cells left to spend learning the language well, I would join you. The experience I had while travelling in Mexico was that the further south I went the warmer and friendlier the people became, so 'uncivilized'. Maybe comes from being free and having nothing to lose. Maybe eventually we will be that way up here. Apres le deluge or courtesy of babblefish, después del diluvio.

Anonymous said...

Seems like the Fannie/Freddie bailout approacheth... groundwork is being laid, timbers are being put in place, skids are being greased, everyone's just waiting to see what form it will take. Anyone care to speculate on whether the bailout will be at least temporarily positive for gold and silver? Seems like the government taking on a nominal doubling of debt can't help but negative for dollar / positive for gold... or am I missing something?

WV Farmer

Anonymous said...

WV Farmer: I do not doubt that the Fed, working in concert with other central banks, could lay down some withering cover fire to keep gold in check while the taxpayer is force fed the GSEs through a funnel.

Anonymous said...

Danish central bank buys out ailing Roskilde bank
“Bjarne Jensen, an independent bank analyst at BJ Consult, said Roskilde had gambled heavily in the real estate market since 2003, but said other Danish banks were not as focused on property development. "They've had enormous growth since 2003, but the growth was financed by loans and not deposits."

In a separate statement, Roskilde said an uncompleted audit had revealed a further 1 billion crowns in likely writedowns on loan provisions that would hit six-month pretax earnings. This is in addition to the expected loss of 520 million to 540 million it forecast in July, when the bank blamed global financial turmoil and a downturn in the Danish real estate market for its problems.

Bernstein said Roskilde's exposure to real estate together with a "slipshod" credit culture had affected the bank, which was not "fit to survive," although he gave no examples.

Nationalbanken said it would set up a new bank to buy all assets and take over all debt and other liabilities in Roskilde, except hybrid core capital and subordinated loan capital in a government-backed bailout.

The central bank intends to continue Roskilde's banking business with the aim of disposing of the company in an orderly fashion.

Bernstein said shareholders and holders of hybrid core capital and subordinated loan capital had most likely lost their capital.”

Anonymous said...

TAIPEI (Reuters) - Merrill Lynch executives arrived in Taipei to clarify the company's role involving in the possible money laundering by family members of ex-president Chen Shui-bian, a local newspaper said on Tuesday.

Anonymous said...


Well, I wouldn’t call the high mountain country of Peru Shangra La. Thirty years ago it was decimated by battles between blood thirsty Maoists ( Sendero Luminoso) and right wing, government sponsored death squads. My favorite city, Huaraz ( 50,000 people at 10,000 feet), lost half its population in 1970 from an earthquake triggered landslide. Poverty is extreme. OTOH it is 10 degrees south latitude, temp high is about 77 during the day and low 62 at night year round, fruit and veggie market is great, Chechua (Inca) culture is interesting and exotic, not much crime (as opposed to Lima where a month stay is a death sentence), it is dominated by glacier peaked mountains over 20,000 feet, and it is really cheap to live. It’s electricity is hydro. Of course, global warming is destroying the glaciers, so hydro-electric has a time related death sentence. The Pacific coast is naturally arid desert, now irrigated from glacial run off, so there will be famine here also from the global warming. Seafood is wonderful. A trout river, stocked with rainbows, runs through it. The worst thing about it is that the taxis (all Toyota hatchback diesels) drive around constantly, honking their horns to drum up business, so there is a constant noise din in the air. Peak oil should solve that J.

The language barrier is a problem, but I can just get by now in Spanish if I don’t discuss macro-economics or relativity, and Huaraz is the climbing center, so there are always plenty of 20 something norteños with bulging leg muscles to talk to. My closest friends live in Saskatchewan, north of Prince Albert. They come down to stay with me in the Caribbean for a couple of months during the winter, so maybe I’ll visit them in the summer if air flight isn’t totally prohibitive. Get a little Anglo culture.

Anonymous said...

Have you eve heard of the DTCC? Scary stuff they have set up to use against us. Fascism is all ready to go.

The DTCC controls tens of trillions of dollars in assets, but have you ever heard of them? 99% of all securities list their subsidiary CEDE as the owner - you are just the beneficiary!