Tuesday, September 30, 2008

Debt Rattle, September 30 2008: Bad Drama

Timothy O'Sullivan Evacuation May 30, 1864
Port Royal, Virginia. The Rappahannock River front during the evacuation.

Ilargi: Posturing and drama are the key words these days in politics, even more than before. There are still politicians in the world who use lines like "the fundamentals of our country’s economy are strong". Wherever you live in the world, when you hear someone say that, you don’t want nothing to do with the speaker, trust me on that. That’s either a dumb-ass or a liar posturing, that’s how you recognize bad acting.

At least that line is gone from Washington playbooks. It went from sounding good to sounding just too ridiculous. Just as it will do in every single other country. But don’t worry, the US is still the land of creative innovation: America’s elected happy few have found a new posture. It’s called standing up for the people and the free market.

It’s all just drama, a made-for-TV cheap B-movie remake of some Greek tragedy or another. A bunch of ill-fitting empty additions and changes will be thrust into Paulson’s woozy doggle, the Dick Morris clones are doing overtime surveys to see what would secure the vote, and then it will all be passed, with the cream of the nation spitfully proclaiming in any microphone they can find that it was so terribly necessary, and they worked so terribly hard, and their insistence on moving a comma two spaces to the left has saved the nation from meltdown and preserved the rights of the people. And the oldest mummy ever to orgasm over power will pose as a white knight. Yeah, that’s right, on the Letterman show.

The real world drama, the one not made for TV, certainly carries a lot more tragedy. We are living in the days of falling records, which will in time lead to the days of falling people.

As Wall Street fell more than it ever has in history, US home prices kept on plunging at an uncharted pace. But that’s all just a side show compared to what happens in money markets. Lending rates are surging to new highs so fast it’s time to get dizzy. It makes no difference anymore that central banks unleashed another $620 billion into the black hole, credit is utterly frozen.

For comparison, stock markets lost $1.2 trillion yesterday. Do you need a better proof that what goes in the House over $700 billion is posturing, and bad drama posing as reality TV? Money and credit is leaking out of the world economy so fast you'd need a Paulson plan every single day to keep it cranking along.

Every penny available is hoarded by banks trying to save their butts. You will next see central banks cutting interest rates as if the pit is indeed bottomless. That is an attempt at creating another carry trade. And no, that will not have any effect either. They can not make banks lend to each other who have far more debts than whatever portion of that $620 billion, or the next and the next after that, it is that they can get their hands on. They are gone, drowning in a sea of losing bets, and all the lifeboats left are leaking. Bad.

Here’s where the B-movie remake of the great Greeks meets the theatre of the absurd:

”House Republican conservatives are likely to keep pressing for a mandatory insurance program they initially proposed for mortgage-backed securities. They may also try to force the Securities and Exchange Commission to suspend mark-to-market accounting and require bank regulators to assess the real value of the troubled assets...”

If you still need a translation of that: the real value of the troubled assets is zero. And the real market has already marked it there.

PS Allow me to add something to that: The Real Markets have marked the "troubled assets" down to zero. They're just waiting for the assets to come out of their hiding places. And what we see happening now, is that the real markets are losing patience. They will increasingly start forcing the troubled assets out of their dark holes. And while I am not the only voice talking about this, I think it's still poorly understood: this poses a very serious concern that the economic system, as it exists today, will collapse in its entirety. $700 billion is just one tenth of one percent of the estimated $700 trillion in outstanding derivatives. It's like owing $100, and offering a dime as full and final payment.

Credit markets frozen as banks hoard cash
The cost of borrowing dollars in the overnight interbank market soared the most on record, despite renewed confidence that the bailout plan would be resurrected in a second vote later this week.

Speaking ahead of the open of US markets, President George Bush called for the Congress to act to avoid "lasting" damage to the US economy. "We're in an urgent situation and the consequences will grow worse every day if we do not act," Mr Bush said. Stock markets climbed despite soaring borrowing costs as hopes rose that the bailout would be forced through as early as Thursday.

The Dow Jones rose more than 250 points to 10615.7 within 10 minutes of opening, driven as much by investors closing out short positions as they were by any improvement in sentiment. President Bush pointed to yesterday's stock market declines, where the Dow Jones index dropped a record 777 points, to warn Americans of the consequences of inaction within Congress.

"The drop in the stock markets represented more than a trillion dollars," Mr Bush said, but traders warned that the stock market declines were inconsequential compared to conditions in the interbank lending market. "Stock markets are the side show," said one trader in New York. "The centre ring is what is happening in the credit markets." Banks borrowing dollars overnight were faced with a Libor rate of 6.88pc, up from 2.57pc yesterday.

Bankers said that rate suggested the interbank market was frozen. "The money markets have completely broken down, with no trading taking place at all," said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. "There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending."

Borrowing rates soared across currencies worldwide. Overnight sterling rates surged from 5.26pc to 6.78pc. A lack of lending in the bank market has led to governments in the US and Europe rescuing five financial institutions in the past two days. Yesterday the US Federal Reserve sought to avoid further banking failures by doubling the amount of dollars available to foreign central banks through swap lines to $620bn.

The crisis in the interbank lending market prompted speculation that the US Federal Reserve would be forced to cut interest rates in October. Futures on the Chicago Board of Trade showed a 66pc chance that the Fed would cut its funds target rate by 0.5 to 1.5pc.

U.S. fed funds rate soars with other lending rates
The key lending rate between U.S. banks skyrocketed on Tuesday with other market interest rates after a surprise defeat of a $700 billion bank bailout plan caused a further drop in global credit availability.

The interest rate on federal funds, or supply of surplus reserves that banks lend to each other overnight, opened at 7 percent, well above the current 2 percent target rate set by the Federal Reserve. The effective or average rate on fed funds was 1.56 percent on Monday after trading between 0.01 percent and 3.00 percent, according to the New York Fed.

In other bank lending, the London interbank offered rate (Libor) on overnight dollar funds jumped by a record 430 basis points to 6.87 percent, the highest in at least 7-1/2 years, according to Reuters data.

Libor Rises Most on Record After U.S. Congress Rejects Bailout
The cost of borrowing in dollars overnight rose the most on record after the U.S. Congress rejected a $700 billion bank-rescue plan, putting an unprecedented squeeze on the global financial system.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers' Association said. The euro interbank offered rate, or Euribor, for one-month loans jumped to a record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, also increased to an all-time high.

"This is unheard of, the money markets should be the engine driving the financial system but they have broken down," said Kornelius Purps, a fixed-income strategist in Munich for UniCredit Markets and Investment Banking, a unit of Italy's largest lender. "Any institution that hasn't completed its 2008 funding needs by now is going to be in very serious trouble. More banks are going to need to be bailed out."

The seizure in the credit markets is tipping lenders toward insolvency, forcing U.S. and European governments to rescue five banks in the past two days, including Dexia SA, the world's biggest provider of loans to local governments, and Wachovia Corp. Money-market rates climbed even after the Federal Reserve yesterday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. In Europe, banks borrowed dollars from the ECB at almost six times the Fed's benchmark interest rate today.

Libor, set by 16 banks including Citigroup Inc. and UBS AG in a daily survey by the BBA, is used to calculate rates on $360 trillion of financial products worldwide, from credit derivatives to home loans and company bonds. As money-market rates rise, banks charge higher interest on loans to companies and consumers. U.S. securities firms and lenders alone have a record $871 billion of bonds maturing through 2009, according to JPMorgan Chase & Co.

Yields on overnight U.S. commercial paper jumped 171 basis points today to an eight-month high of 3.95 percent, according to data compiled by Bloomberg. Average rates on paper backed by assets such as credit cards and auto loans rose 229 basis points to 6.5 percent, the highest since 2001. Companies sell commercial paper to help pay for day-to-day expenses such as salaries and rent.

Funding constraints are being exacerbated as financial companies try to settle trades and buttress balance sheets over the quarter-end, balking at lending for more than a day.

The Frankfurt-based ECB said it lent banks $30 billion for one day at a marginal rate of 11 percent, 900 basis points above the Fed's key rate of 2 percent. The ECB said it received bids for $77.3 billion. The Bank of Japan injected more than 19 trillion yen ($182 billion) into the country's system over the past two weeks, the most in at least six years. The Reserve Bank of Australia pumped in A$1.95 billion ($1.6 billion) today.

In the year before the turmoil in money markets began in July 2007, the Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, never exceeded 15 basis points. It was a record 250 basis points today. "The money markets have completely broken down, with no trading taking place at all," said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. "There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending."

Borrowing rates rose in Asia earlier today. The three-month interbank offered dollar rate in Singapore jumped to an eight- month high of 3.90 percent. The three-month rate in Hong Kong rose by the most in almost a week to 3.664 percent. The difference between the rate Australian banks charge each other for three-month loans and the overnight indexed swap rate reached 98 points, close to a six-month high.

Financial institutions have posted almost $590 billion of writedowns and losses tied to U.S. subprime mortgages since the start of last year, according to data compiled by Bloomberg. Dexia got a 6.4 billion-euro ($9.2 billion) state-backed rescue, Belgian Prime Minister Yves Leterme said today. Yesterday, the U.K. Treasury seized Bradford & Bingley Plc, Britain's biggest lender to landlords, while governments in Belgium, the Netherlands and Luxembourg extended a lifeline to Fortis, Belgium's largest financial-services firm. Elsewhere, Hypo Real Estate Holding AG received a loan guarantee from Germany, and Iceland agreed to rescue Glitnir Bank hf.

"Counterparty fear in the banking sector is at a new extreme," said Greg Gibbs, director of currency strategy at ABN Amro Holding Bank NV in Sydney. "Credit conditions are as tight as a drum. Unless this settles down, central banks would need to cut rates globally to bring funding costs down."

Congress's rejection of the U.S. government's bank-rescue plan yesterday prompted traders to fully price in a cut in the Fed's target rate of at least a quarter point next month, futures on the Chicago Board of Trade showed. The odds were zero percent a month ago.

The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, was at 352 basis points today after breaching 350 basis points for the first time yesterday. The spread was at 110 basis points a month ago.

"We can be sure that funding pressures are not going to ease while there is so much uncertainty," said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world's largest inter-bank broker. "Cash is going to be at a premium. There's really no end in sight."

U.S. Stocks Have Further to Fall, Dow Theory Says
Transportation stocks are signaling the market is poised for more losses after the Dow Jones Industrial Average posted its biggest-ever point decline.

Dow Theory, created by Wall Street Journal co-founder Charles Dow in 1884, holds that the 30-stock industrial average takes cues from the Dow Jones Transportation Average. The gauge of companies such as FedEx Corp. and Ryder Systems Inc. slid yesterday to the lowest since March 17, suggesting the industrials' biggest point decline ever won't mark its bottom, some investors say.

"When the Dow transports are making new lows, that generally signals more trouble for the markets," said Frederic Dickson, who manages $17 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. "The transports are really a signal of what Wall Street thinks of overall economic prospects."

According to Dow Theory, weakness or strength in manufacturing will last only if matched in the shipping of products. Until yesterday, when the transports joined the industrials in giving up gains since mid-July, that trend was bullish. U.S. stocks tumbled yesterday after Congress rejected the Bush administration's plan to buy toxic mortgages from banks.

The Dow industrials plunged 7 percent to 10,365.45, while the transportation index tumbled 5.2 percent to 4,503.89. Shares rose today after lawmakers said they intend to salvage the $700 billion bank-rescue package. The Dow average rose 2.6 percent to 10,637.92 as of 10:16 a.m. in New York.

"Both indicators moving in sync to the downside is indicative of an economic issue that would translate into lower corporate earnings," said Chuck Carlson, a money manager at Horizon Investment Services LLC in Hammond, Indiana. Horizon oversees $170 million and uses Dow Theory to determine how much cash to hold as insurance against declines in stock prices.

Companies in the S&P 500 are forecast to report a 3 percent drop in profits this quarter, the fourth consecutive decline, according to estimates compiled by Bloomberg. The benchmark index for U.S. equities lost 8.8 percent yesterday, the most since the crash of 1987.

Another indicator may show stocks are poised to rally. The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose 34 percent to a record 46.72. The gauge, calculated from prices paid for options on the S&P 500, is considered the market's "fear gauge" because it tends to rise as stocks fall.

Stocks usually advance after the VIX peaks, according to a note to clients by Bespoke Investment Group LLC, a research and money-management company based in Harrison, New York. After the 10 biggest percentage increases for the 18-year-old VIX, the S&P 500 added an average of 0.36 percent the next day and 0.5 percent during the next week, Bespoke analysts wrote.

Every company in the industrial average dropped yesterday as the measure slid to the lowest since October 2005. Nine companies fell to 52-week lows, including 3M Co., Caterpillar Inc. and United Technologies Corp. Dow Theory's last signal, on April 18, was bullish, as the industrial and transportation averages rebounded from declines in March. That changed yesterday as the transport gauge retreated for the fifth time in six days.

"People are anticipating that if the economy is slowing down people are going to be shipping less," said Blake Howells, who helps oversee $2 billion at Portland, Oregon-based Becker Capital Management. "That would indicate that the market anticipates that the economy is going to slow."

Bill's Backers Scrambling to Come Up With Plan B
The House's shocking rejection of legislation designed to steady financial markets left policymakers bewildered and the fate of the bailout in doubt. House and Senate leaders had been confident they could cut a deal and get the measure approved this week. Instead, rank-and-file members of both parties voted no, leading to a 228 to 205 defeat.

Policymakers had no Plan B, but observers outlined possible scenarios: Lawmakers could bring the same bill back this week, hoping that the Dow Jones industrial average's 777-point plunge would persuade skeptics to change their vote; they could also make tweaks to the bill in the hope of winning more support. But lawmakers may have to head back to the drawing board or concede that no plan can pass.

"I don't know that we know the path of the way forward at this point," House Minority Leader John Boehner, R-Ohio, said in a press conference. House Financial Services Committee Chairman Barney Frank, who helped craft the deal, told reporters he would be in touch with Treasury Secretary Henry Paulson to see how best to move forward. The House has adjourned for Rosh Hashanah and will regroup Thursday, he said. "We'll have to see" what to do next, the Massachusetts Democrat said.

Acknowledging the House conservatives who opposed using taxpayer dollars to buy up troubled assets, Rep. Frank said the Bush administration would have to see how far that opposition goes. "I think the administration has to do a check ... as to what extent there is a fundamental, philosophical, ideological opposition to any intervention, and until we know that, it's hard to shape the new plan," he said. Rep. Frank said he would be watching market reaction.

"Short-term thing is one thing. But I think the reaction will not be just in the stock market," he said. "The reaction will also be in the credit markets. ... If Paulson is right, if [Federal Reserve Board Chairman Ben] Bernanke is right, then I think there will be some reaction."

Mr. Paulson may have boxed himself in. For the past week he has vigorously argued that the bill is necessary to stave off catastrophe in the financial markets. After the bill failed, he tried to reassure Wall Street that he would do everything in his power to prevent further deterioration, but he acknowledged his power was limited. "I am committed to continue to work with my fellow regulators to use all the tools available to protect our financial system and our economy," he said. "Our toolkit is substantial but insufficient."

Sounding just this side of desperate, Mr. Paulson said: "We need to get something done, and I'm going to continue to consult with congressional leaders to find a way forward to get something done as soon as possible. We need to get something done. ... We need to put something back together that works." The House loss followed dozens of hours of tense negotiations over the last week between Mr. Paulson and congressional leaders that concluded with a bipartisan compromise.

The Senate had been expected to take up the measure Wednesday. It was unclear if that would still happen. Observers said the bill's language would likely be changed to placate more members. "We have to deconstruct this bill and put it back together in a manner that appeals to more members of Congress and still solves the liquidity crisis," said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable.

Some analysts said resurrecting the bill would be difficult after members return to their districts and hear from angry constituents. "They are going to have to bring it up again," said Andrew Parmentier, an analyst at Friedman, Billings, Ramsey Group Inc.'s FBR Capital Markets Corp. "They are going to have to find some way to do it. I just think the odds of this passing after members return home, that's tough. They are going to hear from a lot of constituents when they return home." Others agreed with that assessment.

"It was a much better strategy to have them vote on this before they return home. ... I don't think we can stress enough the importance of passing something this week," said Ron Glancz, a lawyer at Venable LLP.

But it remained possible that the fallout on Wall Street could sway members. The Dow average's drop followed the news that the House had rejected the bill. Since some lawmakers openly doubted the market would worsen if no bill were passed, the drop may change their minds, some observers said.

James Chessen, the chief economist for the American Bankers Association, said the stock market lost more in market capitalization Monday than the bill would have authorized the Treasury Department to spend. At one point after the failed vote, the market had lost $945 billion of capitalization, according to some indexes.

"In other words, the stock market lost more than $900 billion in market value today because Congress failed to pass authority for Treasury to buy assets worth $700 billion," Mr. Chessen said. "That's not necessarily $700 billion in losses, but we lost $900 billion today."

With the way forward unclear, lawmakers turned to blaming each other for the House loss. Some analysts said policymakers did not do a good job selling the plan, leading the public to oppose it en masse. "Everybody's called it a bailout, and once it got labeled a bailout, it was going to have an uphill battle," said Brian Gardner, an analyst with KBW Inc.

"It definitely had an impact on the debate and how people viewed it. It was never sold as stabilizing the macroeconmoy. It was never sold about what it meant to business and consumer access to credit. So it became a bailout for Wall Street." It was also a bad time to try to pass a plan that was unpopular, analysts said. "It doesn't look very good when you go home," said Gil Schwartz, a partner at Schwartz & Ballen LLP.

U.S. Stocks Rally on Speculation Bank Rescue Plan Will Pass
U.S. stocks rose as growing expectations that lawmakers will salvage a $700 billion bank- rescue package helped the Standard & Poor's 500 Index recover almost a third of yesterday's 8.8 percent drop.

JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc. advanced more than 5 percent as Democrat and Republican congressional leaders said a bailout deal would eventually pass after its rejection spurred the S&P 500's biggest plunge in two decades. Hess Corp. and Occidental Petroleum Corp. rose almost 7 percent as speculation the legislation may be revived boosted oil prices following a $10-a-barrel drop yesterday.

"The market appears hopeful something will happen," said John Carey, a Boston-based money manager at Pioneer Investment Management, which oversees about $300 billion. "There's the thought Congress will come back to this bailout proposal. That's the expectation. The market debacle yesterday seems to have gotten people's attention in Washington."

The S&P 500 rose 30.22 points, or 2.7 percent, to 1,136.61 at 10:11 a.m. in New York. The Dow Jones Industrial Average gained 244.76, or 2.4 percent, to 10,610.21 after falling a record 777.68 points yesterday. The Nasdaq Composite Index added 2.3 percent to 2,028.45. European stocks rose, while Asian shares declined. Government bonds in the U.S. and Europe fell. The dollar climbed against the euro.

The gains helped the S&P 500 pare losses in its worst September since 1937. More than $1 trillion in market value was erased from U.S. equities yesterday after the House of Representatives voted down the plan designed to rid financial institutions of bad loans.

The S&P 500 has declined 11 percent in September and the Dow average has lost 8.2 percent. The Nasdaq is down 14 percent. The S&P 500 has retreated 11 percent since the end of June for its fourth-straight quarterly decline, the longest stretch since 2001. The Dow has slipped 6.6 percent and the Nasdaq is down 12 percent.

The MSCI World Index of 23 developed nations has dropped 13 percent this month as almost $600 billion of credit losses and writedowns at financial institutions worldwide prompted banks to hoard cash, forced Lehman Brothers Holdings Inc. into bankruptcy and spurred government seizures of American International Group Inc. and the U.K.'s Bradford & Bingley Plc.

Financial companies in the S&P 500 this month traded at 1.1 times their book value, the lowest valuation since Bloomberg began tracking the data in 1995. Commercial banks in the gauge trade at 0.8 times book value, also a 13-year low. JPMorgan, the biggest U.S. bank by deposits, climbed 9.8 percent to $45. Citigroup rose 8.1 percent to $19.19. Goldman Sachs increased 5.4 percent to $127.24 and Morgan Stanley gained 5.2 percent to $22.09.

Christopher Dodd, chairman of the Senate Banking Committee, said senators may deal with the bill as early as tomorrow.
"We don't intend to leave here without the job being done," said Dodd, a Connecticut Democrat. Democratic presidential candidate Barack Obama called for calm after the House vote, saying the plan "will get done." Republican nominee John McCain urged lawmakers to "go back to the drawing board" and come up with legislation that will pass.

Home Prices in 20 U.S. Cities Declined Record 16.3% in July
House prices in 20 U.S. cities declined in July at the fastest pace on record, signaling the worst housing recession in a generation had yet to trough even before this month's credit crisis. The S&P/Case-Shiller home-price index dropped 16.3 percent from a year earlier, more than forecast, after a 15.9 percent decline in June. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

The housing slump is at the center of the meltdown in financial markets as declining demand pushes down property values and causes foreclosures to mount. Banks will probably stiffen lending rules even more in coming months to limit losses, indicating residential real estate will keep contracting and consumer spending will continue to falter.

"The fact that house prices quickened their slide before the worst point in credit markets hit this month does not bode well," said Derek Holt, an economist at Scotia Capital Inc. in Toronto. Home prices decreased 0.9 percent in July from the prior month after declining 0.5 percent in June, the report showed. The figures aren't adjusted for seasonal effects so economists prefer to focus on year-over-year changes instead of month-to-month.

Prices dropped in 13 cities month-over-month, compared with 11 in June. Las Vegas saw values fall 2.8 percent in July, the largest decline. Economists forecast the 20-city index would fall 16 percent from a year earlier, according to the median of 23 estimates in a Bloomberg News survey. Projections ranged from declines of 14.5 percent to 16.5 percent. Compared with a year earlier, all 20 areas showed a decrease in prices in July, led by a 30 percent drop in Las Vegas and a 29 percent decline in Phoenix.

"While some cities did show some marginal improvement over last month's data, there is still very little evidence of any particular region experiencing an absolute turnaround," David Blitzer, chairman of the index committee at S&P, said in a statement. Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.

Other reports show price declines continue. The National Association of Realtors said Sept. 24 that the median price of an existing home fell 9.5 percent in August from a year earlier, compared with an 8 percent drop in July. The following day, the Commerce Department said the median price of new homes fell 6.2 percent in August from a year earlier, following a 4.6 percent drop the prior month.

Sales of previously owned homes fell 2.2 percent in August from the prior month and were 32 percent below their historic high reached in September 2005. Declining home construction has subtracted from growth since the first quarter of 2006, pushing the economy to the brink of a downturn.

U.S. homebuilders, buffeted by at least $19 billion in losses since 2006, will ask lawmakers to pass a $15,000 tax credit for all homebuyers, replacing a $7,500 incentive enacted earlier this year that they contend failed to stimulate demand.
"Our members are really hurting," Jerry Howard, the chief executive officer of the National Association of Home Builders, said in an interview yesterday. "The tax credit passed in July seems to have failed to have sparked interest."

Senate May Try to Revive Bank-Rescue Bill by Tomorrow
The U.S. Senate will try to salvage a $700 billion financial-rescue package after the measure was defeated in the House of Representatives. The lawmakers won't have a lot of room to negotiate. While they need to tweak the legislation enough to win over reluctant Republicans, they'll risk losing votes from Democrats if they veer too far from the delicate compromise that congressional leaders hammered out with the U.S. Treasury.

"They're not going to totally revamp the bill," said Pete Davis, president of Davis Capital Investment Ideas in Washington, who spoke to House and Senate leaders yesterday. "They'll make some minor changes and pass it. This is all about political cover."

The House rejected the legislation yesterday in a 228 to 205 vote, sending the Dow Jones Industrial Average tumbling 778 points for its biggest point drop ever and erasing more than $1 trillion in market value. The Standard & Poor's 500 Index fell 8.4 percent, the most since Oct. 26, 1987. S&P 500 futures rebounded today, rising 3.1 percent at 11:03 a.m. in London.

Senators say they have no choice but to revive the measure, which is designed to restore confidence in the nation's banking system. "We don't intend to leave here without the job being done," said Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, who said the senators may deal with the bill as early as tomorrow.

Senator Judd Gregg of New Hampshire, the Banking Committee's ranking Republican, said the plunge in stocks underlined the urgency of the rescue package. "The economy is in distress," said Gregg. Money-market rates jumped in Europe today, with lenders hoarding cash as the third quarter ends. Rates on three-month loans in dollars were as high as 10 percent as of 10:50 a.m. in London, said Ronald Tharun, a money-market trader at Landesbank Baden-Wuerttemberg in Stuttgart.

To pick up the 12 votes needed to pass the bill in the House, the bill will need some cosmetic changes, lawmakers and political analysts say. Ninety-five Democrats joined the 133 Republicans who voted against the bill. Both sides are looking for changes.

House Republican conservatives are likely to keep pressing for a mandatory insurance program they initially proposed for mortgage-backed securities. They may also try to force the Securities and Exchange Commission to suspend mark-to-market accounting and require bank regulators to assess the real value of the troubled assets, lawmakers say. Either measure could drive away Democratic votes.

House Republicans are also lobbying the White House to get the Federal Deposit Insurance Corp. to play a greater role in shoring up the financial system, said a House Republican aide. Under the plan, the FDIC would issue lenders certificates they could use as capital, which the banks would have to pay back with interest. The proposal would give the FDIC more say in how the institutions are run. Democrats may balk at that.

Democrats say they may seek stronger oversight over the plan, tougher limits on executive compensation and more relief for homeowners facing foreclosure. Some Democrats want a provision that would allow bankruptcy judges to alter the terms of a home mortgage for individuals in bankruptcy, even reducing the principal balance. That would be a deal-killer for many Republicans, a danger that presidential nominee Barack Obama recognized: He opposed including that in the original bill, angering fellow Democrats.

The Senate won't hold any roll-call votes today because several lawmakers will be celebrating Rosh Hashanah, the Jewish New Year. Gregg and Dodd urged investors not to view that pause as inaction. "We can certainly work," said Dodd. Senators, he said, will "hopefully come back Wednesday and get a different result." The measure is expected to get far more support in the Senate than it did in the House.

House Majority Leader Steny Hoyer said he expects his chamber to be ready to take up the plan again after a Senate vote. "We're not out of business until this is addressed," Hoyer said. Hoyer said he has spoken with Republican Whip Roy Blunt and both are committed to working together on a compromise. Some lawmakers are proving tough to sell on the plan.

"We can craft a much better bill," said Representative Brad Sherman, a California Democrat who voted against the bill. He objected to the "tens of billions of dollars" that could go to foreign companies and said the oversight board the plan would create would be powerless.

Sherman wants more relief for homeowners and stronger restrictions on executive compensation, among other measures.
"It's not just a matter of we pass this bill or we do nothing," Sherman said. "The other suggestion from 400 eminent economists is that we take some time and we pass a good bill." Representative Jeb Hensarling, a Texas Republican, said most Republican conservatives oppose the idea of Treasury purchasing troubled assets, because it puts too much of the expense on taxpayers.

"That is a model that House conservatives feel is fundamentally flawed," said Hensarling, the chairman of a group of more than 100 House Republican conservatives called the Republican Study Committee. Still, the markets may dictate that Congress act now.

"It's just not acceptable for Congress to essentially tell Main Street or Wall Street to drop dead," said Chris Lehane, a Democratic consultant who was former Vice President Al Gore's communications director. "The Dow dropping 777 points is a pretty powerful force to find another 12 votes."

Western world will become significantly less wealthy
In one fell swoop, the House of Representatives has applied a sledgehammer to the American economy. The staggering plunge in the value of publicly quoted stocks in the US last night - a $1.2 trillion fall - shows more clearly than anything else just how much it had been holding out for a financial bail-out.

Even so, the longer you stare at a screen of the Dow Jones or FTSE 100, the more abstract it seems. So this is what it means:
It means millions more Americans, and hundreds of thousands more Britons, will lose their jobs; it means the recession will be deeper and more protracted than previously feared; it means borrowing costs will increase on both sides of the Atlantic. Companies will cut back on investment. Pension funds will be depleted.

The Western world, in short, will become significantly less wealthy. There is still time for US policymakers to rescue the deal, but not much. Financial markets are no longer just chaotic, but are close to complete collapse. A number of banks, already on the edge, will be pushed that bit closer to the precipice as a result.

As the past few weeks have shown, companies can go bust very, very quickly. When they collapse they are very difficult, if not impossible, to put back together again. The free market can be very creative but it can also be immensely destructive. This is one of those points where the scale of destruction is potentially so great that it could set the economy back years.

This is why so many people – and not just the politicians putting the deal together – are warning that if the deal fails entirely we could be facing a second Great Depression. The big mistake policymakers made in the 1930s was to allow too many banks to fail. This caused such a financial earthquake that it led to a decade of hardship.

The Troubled Asset Relief Program was not a perfect template for dealing with struggling banks. However, to dangle it in front of markets and then snatch it back again was an improbably unwise move. Aside from the certain fact that shares will plunge, few can guess what today will bring.

There is a growing chance of some co-ordinated interest rate cuts from central banks. This may not solve everything, but in these circumstances, policymakers will be using every tool at their disposal to ensure that markets do not collapse entirely.

Fitch may downgrade Citigroup; cuts Wachovia
Fitch Ratings late Monday placed the investment-grade ratings on Citigroup Inc. on watch for possible downgrade following its acquisition of Wachovia Corp.'s banking operations for $2.16 billion. Fitch has an "AA-" long-term issuer default rating on Citigroup. Separately, Fitch downgraded Wachovia's long-term IDR to junk status, or to "BB-" from "A+."

While Fitch views the acquisition as a positive for Citigroup, in terms of it substantially increasing its retail banking franchise, the ratings service remains concerned by the bank's asset quality problems. Fitch expects Citigroup to post a loss in the third quarter. If losses and asset quality problems continue in future quarters, Fitch may downgrade the bank's ratings, though likely not below the "A+" level, Fitch said.

"The strategic benefits of Citigroup Inc.'s acquisition of Wachovia Corp.'s retail, corporate/investment and private banking operations are tempered by Citi's own escalating asset quality challenges," Fitch said. The deal, arranged by federal regulators on Monday, greatly expands Citigroup's retail franchise _ giving it a total of more than 4,300 U.S. branches and $600 billion in deposits _ and secures its place among the U.S. banking industry's Big Three, along with Bank of America Corp. and JPMorgan Chase & Co.

However, Citigroup slashed its quarterly dividend in half to 16 cents and announced plans to sell $10 billion in common stock to shore up its capital position. In addition to assuming $53 billion worth of debt, Citigroup will absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio, with the Federal Deposit Insurance Corp. agreeing to cover remaining losses, if any. Citigroup also will issue $12 billion in preferred stock and warrants to the FDIC.

The remaining Wachovia Corp. will consist of its asset management, retail brokerage and certain select parts of its wealth management businesses, including the Evergreen and Wachovia Securities franchises. It will continue to be a public company under the Wachovia name.

On Monday, Standard & Poor's Ratings Services placed its investment-grade ratings on Citigroup on watch for possible downgrade, noting continued pressures on the bank's own performance from writedowns on its loan portfolio. Citigroup shares gained $1.33, or 7.6 percent, to $19.09 in morning trading. Shares lost 12 percent on Monday. Wachovia shares soared 90 cents, or 49.5 percent, to $2.75

UBS May Post Fifth Quarterly Writedown, Fail to Stem Outflows
UBS AG, the European bank with the biggest losses from the credit crisis, may report a fifth straight quarterly writedown and more withdrawals by wealthy clients as the credit crisis hits Europe in full force.

Markdowns at Zurich-based UBS will probably amount to 3 billion Swiss francs ($2.7 billion), according to the median of five analysts surveyed by Bloomberg. Writedowns have already cost the bank more than $44 billion and forced it to raise almost $28 billion in capital.

Chief Executive Officer Marcel Rohner and Chairman Peter Kurer, trying to stem client redemptions and record share price declines, will brief shareholders on Oct. 2 on efforts to scale back the investment bank and overhaul the board. European rivals Fortis, Dexia SA, Hypo Real Estate Holding AG, Glitnir Banki HF, and Bradford & Bingley Plc were all forced into government rescues this week. U.S. lawmakers yesterday failed to agree on a $700 billion rescue package for the finance industry.

"People have lost their faith in UBS and so we're expecting worse outflows from wealth management than we had in the second quarter," Florian Esterer, who helps oversee about $63 billion at Swisscanto Asset Management in Zurich, said of the third quarter. "It'll be a couple of years before we see flows back to a normal pace."

UBS fell as much as 6.3 percent and was down 17 centimes, or 0.9 percent, at 17.98 francs by 11:36 a.m. in Swiss trading, extending yesterday's 14 percent drop. It has lost 61 percent this year, compared with a 42 percent drop in the 69-member Bloomberg European Banks index.

UBS may announce the writedowns as early as tomorrow, said Peter Thorne, an analyst at Helvea in London with an "accumulate" recommendation on the shares. The bank warned of losses every quarter for the past year. UBS is scheduled to report detailed third-quarter earnings Nov. 4.

"As long as the writedown's below 5 billion francs, everyone will be happy," said Javier Lodeiro, a Bank Sal. Oppenheim analyst in Zurich. "North of that and the Tier 1 threshold approaches quite fast, and people would get very nervous." Rohner, in a debate broadcast on Switzerland's SF1 television Sept. 20, said he expects the U.S. rescue plan to stabilize the market for subprime-infected assets, making it easier for banks to reduce risk. Stock markets slumped after the rejection of the proposal by lawmakers yesterday deepened concern more economies will fall into recession.

The Swiss National Bank today cut 10 basis points from its one-week repurchase rate and offered additional francs for three months in an effort to ease tensions in money markets. UBS and Zurich rival Credit Suisse Group AG are well-capitalized and meet all legal requirements, the country's banking regulator said.

Kurer, who has vowed to increase the number of financial experts on UBS's board of directors, will ask shareholders at this week's meeting to elect Sally Bott, BP Plc's group human resources director, Rainer-Marc Frey, founder and chairman of Horizon21, Bruno Gehrig, chairman of Swiss Life Holding AG and William G. Parrett, former CEO of Deloitte Touche Tohmatsu.

The bank is also scaling down its investment banking unit and last month announced plans to separate the unit from wealth and asset management after mounting writedowns prompted rich clients to withdraw funds for the first time in almost eight years.

Clients of UBS's wealth management units, described by the company as the "core" franchise with 1.86 trillion francs in assets under managment at the end of June, removed 17.3 billion francs more than they invested in the second quarter, their first net outflows since the final quarter of 2000.

Bernstein cuts earnings estimates for Morgan Stanley
Sanford C. Bernstein lowered its earnings estimates for Morgan Stanley, after the investment bank agreed to sell a 21 percent stake to Japan's Mitsubishi UFJ Financial Group Inc for $9 billion to shore up its finances.

"While the deal is certainly dilutive to current shareholders, this should help Morgan Stanley regain some confidence from the markets," analyst Brad Hintz wrote in a note to clients. The analyst said the net earnings impact of the capital raise will be a 17 percent to 19 percent hit to his 2009 and 2010 full-year earnings-per-share expectations for Morgan Stanley.

"Right now, confidence in one's name is significantly more important than high-teens earnings dilution," said Hintz, who maintained an "outperform" rating on the stock. The analyst cut his earnings estimates for the investment bank to $4.84 from $5.02 per share for 2008 and to $4.42 from $5.46 a share for 2009. He also lowered his price target on the stock by $10 to $50.

A full credit market recovery is not expected until at least early 2009, while the U.S. economy will start recovering in mid 2009, he said. Shares of the New York-based company rose 6 percent to $22.32 in morning trade on the New York Stock Exchange.

Why You Should Ignore the Bailout Vote
Ignore the vote that just took place in Washington on the proposed $700 billion TARP program. It is a political tactic, and nothing else.

Events of the past seven days are all starting to make sense now. Senator McCain puts his Presidential campaign on hold one day last week, and rushed to Washington to get into the mix on the proposed $700 billion TARP program. Soon thereafter, a well-organized group of House Republicans starts to kick sand in the face of anyone in favor of Treasury Secretary Paulson’s proposal.

The all-hands-on-deck meeting at the White House serves to accomplish nothing, with Mr. McCain and Mr. Obama each coming out with a different spin about who is to blame for the state of affairs. Over the weekend, a deal is struck that was thought to be passable by all sides. If politicians needed any reminder about how tough the world is right now, Wachovia sells itself to CitiGroup Monday morning for what appears to shareholders to be 10% of the Friday closing share price.

And yet, to the surprise of most senior elected U.S. officials, the plan is voted down.. Market sells off 500 points. House Republicans huddle to devise next steps, having just yesterday appeared to have been in favor of a proposal to solve the overhang currently clouding the credit and equity markets.

With an eye to November 4th elections, and losses predicted in both the House and Senate, Congressional Republicans seem to see this crisis as providing the opportunity for a Hail Mary pass. By voting down the proposal, newspapers tomorrow will report that “The Deal Is Off”.

Local television stations would be running double-enders during the supper hour. Those that opposed the bill will be pounding their chests, with the theme: “this Bill did nothing for the average family”. The folks in Congress who opposed the bill at noon knew that they were going to vote it down, recognizing that the market would throw a fit.

Tomorrow, or the next day, or the day after that, I predict that the Bill will be amended just enough to show some victory for enough lawmakers to get a package through the Congress. In the meantime, the market gyrations served to ensure that most voters would be watching television Monday night, or reading their paper Tuesday morning.

With a few weeks to go, few politicians want to appear to take the side of Wall Street over Main Street. That’s why the Bill went down. If Mr. McCain can play his cards right over the next 48 hours, he’ll be able to claim some victory from the jousting that is to come. But, as the Terminator would say: “I’ll be back.”

The Rich Are Staging a Coup This Morning
Let me cut to the chase. The biggest robbery in the history of this country is taking place as you read this. Though no guns are being used, 300 million hostages are being taken.

Make no mistake about it: After stealing a half trillion dollars to line the pockets of their war-profiteering backers for the past five years, after lining the pockets of their fellow oilmen to the tune of over a hundred billion dollars in just the last two years, Bush and his cronies -- who must soon vacate the White House -- are looting the U.S. Treasury of every dollar they can grab. They are swiping as much of the silverware as they can on their way out the door.

No matter what they say, no matter how many scare words they use, they are up to their old tricks of creating fear and confusion in order to make and keep themselves and the upper one percent filthy rich. Just read the first four paragraphs of the lead story in last Monday's New York Times and you can see what the real deal is:
"Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it. "Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages.

"At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees. "Nobody wants to be left out of Treasury's proposal to buy up bad assets of financial institutions."

Unbelievable. Wall Street and its backers created this mess and now they are going to clean up like bandits. Even Rudy Giuliani is lobbying for his firm to be hired (and paid) to "consult" in the bailout. The problem is, nobody truly knows what this "collapse" is all about. Even Treasury Secretary Paulson admitted he doesn't know the exact amount that is needed (he just picked the $700 billion number out of his head!). The head of the congressional budget office said he can't figure it out nor can he explain it to anyone.

And yet, they are screeching about how the end is near! Panic! Recession! The Great Depression! Y2K! Bird flu! Killer bees! We must pass the bailout bill today!! The sky is falling! The sky is falling! Falling for whom? NOTHING in this "bailout" package will lower the price of the gas you have to put in your car to get to work. NOTHING in this bill will protect you from losing your home. NOTHING in this bill will give you health insurance.

Health insurance? Mike, why are you bringing this up? What's this got to do with the Wall Street collapse? It has everything to do with it. This so-called "collapse" was triggered by the massive defaulting and foreclosures going on with people's home mortgages. Do you know why so many Americans are losing their homes?

To hear the Republicans describe it, it's because too many working class idiots were given mortgages that they really couldn't afford. Here's the truth: The number one cause of people declaring bankruptcy is because of medical bills. Let me state this simply: If we had had universal health coverage, this mortgage "crisis" may never have happened.
This bailout's mission is to protect the obscene amount of wealth that has been accumulated in the last eight years. It's to protect the top shareholders who own and control corporate America.

It's to make sure their yachts and mansions and "way of life" go uninterrupted while the rest of America suffers and struggles to pay the bills. Let the rich suffer for once. Let them pay for the bailout. We are spending 400 million dollars a day on the war in Iraq. Let them end the war immediately and save us all another half-trillion dollars!

I have to stop writing this and you have to stop reading it. They are staging a financial coup this morning in our country. They are hoping Congress will act fast before they stop to think, before we have a chance to stop them ourselves. So stop reading this and do something -- NOW!

Obama proposes increasing bank deposit insurance
Democratic presidential candidate Barack Obama said Tuesday the government should extend the federal deposit insurance limit from $100,000 to $250,000 to help small businesses as part of a revamped economic rescue plan he called essential to averting a catastrophe.

Obama said in a statement that Congress should not start over as lawmakers consider their next move in the wake of the House's rejection of a bipartisan plan backed by congressional leaders and the Bush administration. "Given the progress we have made, I believe we are unlikely to succeed if we start from scratch or reopen negotiations about the core elements of the agreement. But in order to pass this plan, we must do more," he said.

Obama said the current federal guarantee of up to $100,000 in bank deposit insurance, a limit set nearly 30 years ago, is adequate for most families but insufficient for many small businesses. Raising the limit to $250,000 "would boost small businesses, make our banking system more secure and help restore public confidence in our financial system," he said.

Obama said jobs, retirement savings and economic security for all Americans hang in the balance as Congress considers what to do next. "While I, like others, am outraged that the reign of irresponsibility on Wall Street and in Washington has created the current crisis, I also know that continued inaction in the face of the gathering storm in our financial markets would be catastrophic for our economy and our families," he said.

HBOS shares hit new low on fears over Lloyds rescue deal
Shares in HBOS fell to a new low today after losing nearly 12 per cent as speculation gathered pace that Lloyds TSB may be forced to change the terms of its £12.2 billion rescue deal for the owner of Halifax and Bank of Scotland.

The fall in the bank’s shares to a record low of 125p follows an 18 per cent decline yesterday, and one major investor in HBOS and Lloyds TSB told Times Online: "The market is telling you the deal will just not go ahead in its current form." Edinburgh-based HBOS was on the brink of collapse two weeks ago until Gordon Brown, the Prime Minister, personally intervened to broker a takeover by Lloyds TSB.

While people close to Lloyds said political pressure makes it extremely unlikely that the deal will fail, some shareholders in Lloyds TSB have privately expressed their concerns about the takeover, suggesting it is not a done deal. One investor said: "There is something about this deal that has never quite hung together. It started to look potentially over-ambitious when analysts began to circulate very large numbers for the amount of additional capital that Lloyds TSB might need."

Other sources close to the bank said Lloyds' management could use the ongoing financial crisis as an excuse to renegotiate the terms of the merger, a move that could in itself destabilise the bailout. HBOS and Lloyds face a demanding shareholder ballot in which 75 per cent of those who vote must approve the merger, although the banks will be helped by the fact that 50 per cent of shareholders own shares in both companies and so have a vested interest in approving the deal.

Shareholders in both banks are set to vote on the merger in late October or early November. Sources close to the situation insisted the banks will not be hurried into bringing the vote forward by the financial markets' turmoil. Sources close to both banks said the Government's involvement will ensure the takeover goes ahead.

One City source said: "There are three parties to this marriage — HBOS, Lloyds and the Treasury. With the Treasury in there, there's just no way it can fail." The Financial Services Authority is also understood to be relatively unconcerned about the deal. "Its pretty far down our list of priorities," said one source. The regulator did not call either bank yesterday or over the weekend. City analysts said Lloyds' management could grab the chance to cut the price it will pay for HBOS.

Simon Pilkington, analyst at Cazenove, said: "There is a risk that the terms are amended. We expect that the overriding principle in deciding the terms is that Lloyds will not pay a premium to book value." Other analysts argued the deal does not make financial sense for Lloyds. Alex Potter, a banking analyst with Collins Stewart, said: "If I was a Lloyds shareholder, I would say no."

HBOS has much greater exposure to the wholesale money markets for its funding than Lloyds, which has been the most financially cautious of the big banks. Shareholders could be worried a merged Lloyds-HBOS will be heavily exposed to further market turmoil. Some institutional shareholders in HBOS, including Schroders Asset Management, are also understood to dislike the deal because they believe Lloyds is getting HBOS on the cheap.

Roger Lawson, a director of the UK Shareholders Association, which lobbies on behalf of retail investors, said: "Certainly HBOS shareholders are not happy about what's being offered. They'll be even angrier if Lloyds reduces its offer. It's only half the net asset value; the directors should not sell at that price."

Bailout's failure leaves community banks facing Fannie-Freddie losses
The rejection by the House of the government’s $700 billion rescue plan for troubled financial institutions leaves community and regional banks still facing large losses from their holdings of preferred shares of Fannie Mae and Freddie Mac.

Fannie and Freddie preferred and common stockholders were virtually wiped out in the government takeover of the two troubled mortgage finance companies earlier this month, with the Treasury department eliminating preferred dividends.

But bank lobbyists were successful in inserting a provision in the bailout bill that would have given special tax treatment to banks that had exposure to the Fannie and Freddie shares, lessening the blow. Under current tax rules the preferred share losses should be treated as capital losses. The provision included in the rescue package would have allowed the banks to write off the preferred share losses against ordinary income.

There were roughly 800 banks with preferred share holdings that totaled $16 billion, according to Paul Merski, chief economist with the trade group Independent Community Bankers of America. Earlier today the House voted 228 to 205 to reject a bailout package that would have allowed the U.S. Treasury to buy troubled assets such as mortgage backed securities and other collateralized debt obligations that have soured, crippling financial institutions that hold them.

While no one can predict what will happen with the rescue bill in the next 48 hours, Merski said the bill had strong bipartisan support. “If the bill is brought up again in similar fashion I have confidence (the tax relief provision) would be included,” he said.

The banking sector was among the biggest losers on Wall Street on a day that saw the largest one-day drop in history for the Dow Jones Industrial Average and the biggest drop in 21 years for the Standard & Poor’s 500 Stock Index.

With Bailout, Fortis Is Back Where it Started
With the forced sale of its Netherlands activities of ABN Amro, Dutch-Belgian banking and insurance company Fortis will be back were it started. In a little over a year, Fortis has changed from a prestigious financial institution to a pariah in the banking world.

Over-confidence, bluff and arrogance have proved an almost fatal cocktail for Fortis which was saved from collapse by a financial injection of almost €11.2 billion on Sunday. The intervention by the Dutch, Belgian and Luxembourg governments enabled Fortis to narrowly avoid the nightmare scenario of a run on the bank. The finance ministers have forced Fortis to put its stake in ABN Amro up for sale.

No definite buyer has yet come forward. If it does, it will have a bargain on its hands: The sales price is estimated to be less than half of what Fortis originally paid for it last year. But less than 12 hours after Dutch Finance Minister Wouter Bos, his Belgian counterpart Didier Reynders and Belgian Prime Minister Yves Leterme thought they had weathered the storm, the deal came under pressure again.

Investors initially reacted favorably to the rescue deal and shares rose by 15 percent. But shortly after 10 a.m. on Monday morning, with new CEO Filip Dierckx only minutes into a press conference, shares nose-dived to nearly €4, a 16-year low.

The contrast with last year, when banking staff had also worked long and hard on negotiations, could not have been greater. One year ago, Fortis became the proud co-owner of ABN Amro, the Netherlands' largest financial institution. Together with the Royal Bank of Scotland and the Spanish bank Santander, the relatively small Fortis forced its biggest rival to its knees and became the largest bank in the Benelux.

But the euphoria was not to last. The credit crisis that had already reared its head in October last year created losses that Fortis could only manage with a great deal of difficulty, especially on top of the €24 billion it had shelled out for its part of ABN Amro. Solvency became a problem and when last week there were also rumors about a liquidity crisis at the bank, intervention by the national regulators became inevitable.

The result was a mix-and-match version of the US rescue package. Fortis' banking arm was to be semi-nationalized and ABN Amro would have to be sold. The weekend's lengthy negotiations included French commercial bank BNP Paribas and Dutch bank ING but bids from both banks for part or all of Fortis were deemed unacceptably low.

The present solution is inevitably a temporary one. Dutch Finance Minister Bos has said that the government's 49 percent stake in Fortis is meant to boost confidence and will be sold off again as soon as Fortis is back on its feet, possibly leaving the taxpayer with a little extra.

In the meantime, rumors continue to circulate that ING and BNP Paribas still have their eye on ABN Amro. A significantly lower selling price, however, would impact severely on Fortis' strategy to become one of the top players on the pan-European financial stage. Dierckx, the company’s third CEO in four months, said the company has taken the decision to sell ABN Amro independently but it is widely believed that the pressure came from the new major shareholders.

Fortis is back where it began in other ways, too. Maurice Lippens, chairman of the supervisory board, has stepped down. The 65-year-old nobleman not only masterminded the takeover of ABN Amro, but was also one of the Fortis' founders in the early 1990s.

The insurance arm of Fortis is safe, Dierckx said on Monday morning. Fortis is still an important player in Belgium for retail clients and medium-sized companies, and it will remain a strong private bank for wealthy clients. Fortis is taking time out to come up with a new strategy in the coming weeks. It will have to find a solution for those parts of the bank that were put up for sale in order to buy ABN Amro.

And is Fortis going to remain active in countries such as Poland and Turkey? At Monday's press conference Dierckx replied with the same answer he gave to most of the questions he could not answer: all will be revealed on Nov. 3, the date Fortis publishes its quarterly

Fears more UK banks could fall
The UK government was bracing itself last night for further casualties after a day of panic on the world's financial markets prompted fears that the nationalisation of Bradford & Bingley would have a domino effect on the banking sector in Britain.

With Germany, France, Iceland, Belgium, the Netherlands and Luxembourg joining the list of casualties of the year-long credit crunch, a plunge in bank shares in the City prompted a drop of 5% in London's FTSE 100 Index.
The authorities had hoped that the bail-out of B&B would help to draw a line under the financial crisis.

But Lord Turner, the new chairman of the Financial Services Authority, indicated that this was not the end of the crisis. "We are not necessarily right at the end of this process," he told BBC Radio 4's The World At One. "At the moment we believe our other high street banks are well capitalised and in a reasonable condition, but we will have to keep this situation under review."

Last night Gordon Brown made it clear that he was ready to intervene to protect Britain's financial system after the extraordinary events in the US. He said: "The governor of the Bank of England, the chancellor and I will take whatever action necessary to ensure continued stability." The FTSE closed more than 250 points lower, adding to the problems of Britain's pension funds, and was on course for its biggest one-month drop since the stockmarket crash of October 1987.

Gold and government bonds soared as investors sought safe havens, while oil, share prices and sterling all suffered. The pound had its biggest one-day fall for 15 years after the B&B rescue and the release of figures showing that mortgage lending had fallen to 5% of its level before the crisis began last summer.

The chancellor, Alistair Darling, has been lobbied to adopt a UK version of the US bail-out plan for toxic mortgages, as well as to introduce a more permanent standing facility from the Bank of England that would allow billions of pounds to be poured into the financial system.

The FTSE 100 endured its eighth largest percentage point fall in history, with only one stock in the FTSE 100 of blue chip shares ending the day higher - the supermarket chain Morrisons. Royal Bank of Scotland at one point lost 20% of its value, while Lloyds TSB, in the throes of an emergency takeover of HBOS, hit fresh lows. HBOS shares were off 18%.

The share price movements came after a series of dramatic events in the financial markets:
• Bradford & Bingley was nationalised just before the stock market opened in London and its 200 branches and £20bn of deposits were sold to Santander of Spain.
• Fortis became the biggest continental European casualty of the crisis and was bailed out by the governments of Luxembourg, Belgium and the Netherlands.
• Citigroup announced the takeover of the US commercial bank Wachovia.
• Iceland took a 75% stake in the country's third biggest bank, amid fears that the move could bankrupt the country.
• Germany arranged a credit lifeline for the commercial real estate lender Hypo Real Estate.

The turbulence came despite the world's central banks injecting fresh liquidity into the markets in an attempt to persuade banks to start lending to each other. The mood of extreme caution, however, left the rates at which banks borrow from each other at their highest since the credit crunch began in August last year.

It is understood that some of the major banks have floated the idea of putting toxic mortgage assets in the government's coffers in exchange for more liquid bonds. It is thought that not all the banks are in agreement about the proposal and the Treasury is unconvinced about the plan. A Treasury source said the chancellor was keeping all options open, but that a US-style plan was not in the offing.

Richard Lambert, director general of the CBI, said: "What's happening to bank shares makes no economic sense. We have to have confidence that they will survive." Analysts were mesmerised yesterday by the share price movement in Lloyds TSB and HBOS, following the £12bn takeover agreed two weeks ago, saying it showed the level of fear in the market.

"I'm trying to be open-minded about other surprises there might be," said James Eden of Exane BNP Paribas. "Can you imagine Lloyds walking away from HBOS? The share price is telling you there is a chance of that happening."
Darling insisted that nationalisation of B&B was necessary after sustained falls in its share price raised concerns that savers would pull their savings.

"We had to stabilise the situation in order to protect the banking system as a whole," he said. The Treasury was determined that it was "business as usual" for the bank's 2.6 million savers - whose deposits have been sold to the Spanish bank Santander - and the mortgage customers who now owe money to the government.

Darling made it clear that the government was standing behind the banking sector and used £4bn of taxpayer funds to protect deposits in B&B that fell outside the Financial Services Compensation Scheme, which protects the first £35,000 of savings. The government is also lending the scheme £14bn to fund the guarantees. The bill will ultimately be picked up by the banks which fund the scheme.

French President Meets Financials To Assess Liquidity Needs
French President Nicolas Sarkozy met with heads of the country's largest financial institutions Tuesday in order to assess their liquidity needs in the wake of government-led intervention to prop up Franco- Belgian lender Dexia.

The meeting, which took place hours after three European governments pledged to add EUR6.4 billion to Dexia's capital, was also attended by Bank of France Governor and European Central Bank board member Christian Noyer. French Finance Minister Christine Lagarde said it was important that a senior ECB official heard the most pressing needs of the country's financial industry.

"We heard how banks and insurance companies evaluate the current situation and under what constraints they operate,...how to ease up any constraints in terms of liquidity," Lagarde said. "The meeting also allowed the governor of the Bank of France...to hear and understand a certain number of questions and demands from financial operators, particularly in terms of liquidity management and the need to go beyond day-to- day (liquidity management)," Lagarde said.

She repeated that the French financial system is solid, but added that "the object of the meeting wasn't to analyze the robustness of companies." Sarkozy insisted with the heads of the country's largest lenders, including BNP Paribas SA, Credit Agricole SA, Societe Generale SA, and insurers, such as Axa SA and Groupama SA, on the "absolute necessity of maintaining uninterrupted and flexible financing to companies," Lagarde said.

As Dexia adds to the list of European casualties of the liquidity crunch, Lagarde said U.S. party politics played a role in the demise of the rescue plan devised by U.S. Treasury Secretary Henry Paulson in Washington late Monday. Still, she hoped that a new, amended version would make it through Congress.

"It's obviously a bit complicated these days because everyone is positioning themselves in terms of ... the stance their camps adopt in the election campaign," Lagarde said. "We all hope that...the House of Representatives...will reexamine it in a favorable manner. There's a lot of hope in the...financial world that the plan is carried out, even with changes."

Who Will Rescue the Rescuers?
Everything is happening just as it should – alas! Now the Europeans are getting into the act – albeit only in a minor, supporting role. Fortis – a huge Belgian/Dutch financial company – is going bust, says today’s paper. And public officials of at least three countries are trying to rescue it.

According to the Financial Times , the firm is likely to be nationalized by Luxembourg, Belgium and the Netherlands all at once. This will be a first – a company taken over by politicians who speak at least three different languages. We’d call it an “internationalization.”

Meanwhile, over on this foggy island, the government is preparing to nationalize another major bank – Bradford and Bingley. Nervous savers are taking their money out of B&B, leaving the firm dangerously short of cash, says the FT . But it didn’t take a genius to see that there would be Hell to pay. That’s what always happens when you reach the top of a credit bubble. People may spend more than they earn for years; eventually they reach the point where they can’t go on.

And lenders and investors inevitably go overboard too. They’re so eager to earn a fee, they stop worrying about whether the loan will ever be repaid. But the geniuses didn’t see it coming. They were too impressed by their own theories and their own financial models...and their own multi-million dollar bonuses. It fell to us here at The Daily Reckoning – poor, neglected, lonely as we are – to fly the “Crash Alert” flag day after day...and to say the obvious to anyone who would listen: “this too shall pass.”

And now, according to the New York Times , it is passing: “The End of Euphoria,” the Times puts it. “Bill comes due for excesses of past 15 years.” But where’s the surprise? Mr. Market always has a surprise in store. And he always brings it out when you least expect it. So far, the surprise is that the financial sector has been hit harder than expected. Each time an institution goes bust, the feds react with more money and more credit. Each time, stocks rally and word goes out that the crisis is over.

Then, another institution goes belly up. And now Warren Buffett is apparently on the phone – according to our sources at the Financial Times – warning Congress that if they don’t take action on the bailout plan things could get a lot worse. Yes, that is all part of the program too. When people get the bill for their own mistakes they naturally want to pass it off to someone else. Who better than that chump of last resort – the taxpayer? The bill for the Paulson bailout plan could come to $1 trillion.

At least, that’s the estimate of Ken Rogoff, a Harvard economist. Let’s see, that’s about $12,000 for every family in the country. Yet, who complains? Where are the riots? Who’s got a spare $12,000 to send to the feds so they can pass it along to Wall Street? It doesn’t seem to matter to anyone...people figure it’s all “funny money” anyway. And they worry that if it’s not forthcoming, well...maybe Warren Buffett is right. And maybe Paulson and Larry Summers (opining today in the Financial Times ) are right too – maybe the bureaucrats will do such a good job of managing this program that it will make a profit.

Which gives us an idea: why not take TARP – as the program is called – public? Give public officials an opportunity to make some money for a change...let them put their own money into the rescue plan, along with the taxpayers’ money. Let’s see what the prospectus will say: ‘Firm will buy up Wall Street’s mistakes at above-market prices; later, when all this blows over, these ‘assets’ will be sold back to Wall Street.’ Let’s see how much of his own money Hank Paulson would bet on this business model!

No, they’re not likely to take TARP public. Too bad. We’d love to sell it short. Too bad also because it would nice to give Mr. Market a chance to sort this out himself. He’d probably mark down stocks, derivative financial assets, bonds and houses – fast. But so what? “Liquidate the farmers...liquidate labor...liquidate the railroads...liquidate investors...” – in 1929, that was US Treasury Secretary Andrew Mellon’s idea of how to let Mr. Market handle a financial crisis. Let it be! Let Mr. Market do his savage cleaning work. Then, the economy can begin to grow again – on a healthier base.

But that’s not going to happen. Once again, the fix is in. This one bigger than any before... “We must regulate,” says Dominique Strauss-Kahn, director of the IMF (perhaps forgetting that Fortis was regulated by hundreds of bureaucrats in dozens of different countries....). “The time has come to save capitalism from the capitalists,” writes Luigi Zingales of the University of Chicago. Thank God for the bureaucrats. The economists. The Wall Street pros. Now, they’re going to “rescue” us...

But wait a minute...
...wasn’t it the US government that set up Fannie and Freddie with an implied guarantee?
...wasn’t it the SEC that was set up to regulate Wall Street and prohibit the sale of slimy “investments?”
...weren’t these same economists the ones who thought the U.S. financial system was the best in the world...because it was so “dynamic...inventive...and flexible?”
...isn’t it the Fed itself that has been lending money below the inflation rate since 2002? And wasn’t that the major source of “liquidity” that created such a huge credit bubble?
...and wasn’t Hank Paulson the head man at Wall Street’s most go-go firm when all this stuff was going on? Do you remember hearing him warn investors or lawmakers that the whole Vesuvius of hyper-credit was going to blow up? We don’t...

Yes, dear reader, as predicted in these pages...we are witnessing an epochal shift – from capitalism to socialism...from markets to politics...from subtle swindle to naked larceny...from white collar grifters to stick-up men...from slick fraud to brute force. And then...who will rescue us from the rescuers?

This morning, Americans awoke to President Bush, “urging” Congress to pass the bailout. The bailout will “keep the crisis in our financial industry from spreading,” he said from the White House. “We will make clear that the U.S. is serious about restoring our confidence and stability in our financial system.” Obviously, Congress is going to pass the bailout...but what does it mean long-term?

Our intrepid correspondent, Byron King, offers his insight:
“[The bailout is] $700 billion that the nation does not have and cannot afford. The money will go to bail out banks that were run into the dirt by greedy idiots. It’s bad for the dollar. “And if Congress does not approve the bailout? I guess the economy will just crash and burn. Or maybe not. It’s still bad for the dollar. It’s a good thing we all have gold bars buried out in the backyard, eh?

Here’s a sobering detail: For the last 15 years, the U.S. money supply has grown about twice as fast as GDP. Federal government liabilities, meanwhile, have grown three times as fast. It now has more financial obligations than assets. It is, effectively, broke. And here is another cup of strong coffee: U.S. debts are now compounding negatively like a Neg Am mortgage, that delightfully fatal confection invented at height of the housing bubble. Some house buyers didn’t even pay enough to cover the interest on their mortgage; the missed interest payments were added to the mortgage itself, causing it to grow automatically. Exponentially.

We don’t know what Professor Chris Martenson is a professor of. But he has done the world a favor with his description of what happens when things grow exponentially, rather than arithmetically. Imagine you could make a football stadium watertight, he writes. Then, imagine that you put a magic drop of water in the center...a drop of water that doubles every minute...so that after six minutes or so, you’d have about enough water to fill a thimble. Now how long would it take before the stadium filled, he asks?
We’re not going to leave you in suspense. For the first 45 minutes, you can walk around the stadium and barely get your feet wet. But in the next 4 minutes the stadium fills and you drown.

Clive Crook in the Financial Times : “If one idea caused the subprime meltdown and the subsequent financial emergency, it was the belief that house prices could not fall. Nationally, they had not dropped since the 1930s, it was often pointed out: it simply could not happen. A similar complacency now attends discussion of the fiscal outlook.

“It is assumed that the US can borrow without limit. In fact, the US has a budget constraint – less binding than that of other countries, to be sure, because of the dollar’s reserve currency status and other factors, but there nonetheless. This limit is about to be tested, and if the global capital markets decides enough is enough, the challenges confronting the Treasury and the Federal Reserve will make even last week’s exertions seem mild. “The next administration’s fiscal options are vanishing before our eyes. Somebody should tell the candidates and the country.”

The US and global financial crisis is becoming much more severe in spite of the Treasury rescue plan. The risk of a total systemic meltdown is now as high as ever
It is obvious that the current financial crisis is becoming more severe in spite of the Treasury rescue plan (or maybe because of it as this plan is totally flawed).

The severe strains in financial markets (money markets, credit markets, stock markets, CDS and derivative markets) are becoming more severe rather than less severe in spite of the nuclear option (after the Fannie and Freddie $200 billion bazooka bailout failed to restore confidence) of a $700 billion package: interbank spreads are widening (TED spread, swap spreads, Libo-OIS spread) and are at level never seen before; credit spreads (such as junk bond yield spreads relative to Treasuries are widening to new peaks; short-term Treasury yields are going back to near zero levels as there is flight to safety; CDS spread for financial institutions are rising to extreme levels (Morgan Stanley ones at 1200 last week) as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package (US market are down about 3% this morning at their opening).

Let me explain now in more detail why we are now back to the risk of a total systemic financial meltdown… It is no surprise as financial institutions in the US and around advanced economies are going bust: in the US the latest victims were WaMu (the largest US S&L) and today Wachovia (the sixth largest US bank); in the UK after Northern Rock and the acquisition of HBOS by Lloyds TSB you now have the bust and rescue of B&B; in Belgium you had Fortis going bust and being rescued over the weekend; in German HRE, a major financial institution is also near bust and in need of a government rescue.

So this is not just a US financial crisis; it is a global financial crisis hitting institutions in the US, UK, Eurozone and other advanced economies (Iceland, Australia, New Zealand, Canada etc.).

And the strains in financial markets – especially short term interbank markets - are becoming more severe in spite of the Fed and other central banks having literally injected about $300 billion of liquidity in the financial system last week alone including massive liquidity lending to Morgan and Goldman.

In a solvency crisis and credit crisis that goes well beyond illiquidity no one is lending to counterparties as no one trusts any counterparty (even the safest ones) and everyone is hoarding the liquidity that is injected by central banks. And since this liquidity goes only to banks and major broker dealers the rest of the shadow banking system has not access to this liquidity as the credit transmission mechanisms is blocked.

After the bust of Bear and Lehman and the merger of Merrill with BofA I suggested that Morgan Stanley and Goldman Sachs should also merge with a large financial institution that has a large base of insured deposits so as to avoid a run on their overnite liabilities. Instead Morgan and Goldman went for the cosmetic approach of converting into bank holding companies as a way to get further liquidity support – and regulation as banks – of the Fed and as a way to acquire safe deposits.

But neither institution can create in a short time a franchise of branches and neither one has the time and resources to acquire smaller banks. And the injection of $8 b of Japanese capital into Morgan and $5 b of capital from Buffett into Goldman is a drop in the ocean as both institutions need much more capital.

Thus, the gambit of converting into bank while not being banks yet has not worked and the run against them has accelerated in the last week: Morgan’s CDS spread went through the roof on Friday to over 1200 and the firm has already lost over a third of its hedge funds clients together with their highly profitable prime brokering business (this is really a kiss of death for Morgan); and the coming roll-off of the interbank lines to Morgan would seal its collapse. Even Goldman Sachs is under severe stress losing business, losing money, experiencing a severe widening of its CDS spreads and at risk of losing most of its values most of its lines of business (including trading) are now losing money.

Both institutions are highly recommended to stop dithering and playing for time as delay will be destructive: they should merge now with a large foreign financial institution as no US institution is sound enough and large enough to be a sound merger partner. If Mack and Blankfein don’t want to end up like Fuld they should do today a Thain and merge as fast as they can with another large commercial banks.

Maybe Mitsubishi and a bunch of Japanese life insurers can take over Morgan; in Europe Barclays has its share of capital trouble and has just swallowed part of Lehman; while most other UK banks are too weak to take over Goldman. The only institution sound enough to swallow Goldman may be HSBC.

Or maybe Nomura in Japan should make a bid for Goldman. Either way Mack and Blankfein should sell at a major discount of current price their firm before they end up like Bear and be offered in a few weeks a couple of bucks a share for their faltering operation. And the Fed and Treasury should tell them to hurry up as they are both much bigger than Bear or Lehman and their collapse would have severe systemic effects.

When investors don’t trust any more even venerable institutions such as Morgan Stanley and Goldman Sachs you know that the financial crisis is as severe as ever and the fear of collapse of counterparties does not spare anyone. When a nuclear option of a monster $700 billion rescue plan is not even able to rally stock markets (as they are all in free fall today) you know this is a global crisis of confidence in the financial system.

We were literally close to a total meltdown of the system on Wednesday (and Thursday morning) two weeks ago when the $85 b bailout of AIG led to a 5% fall in US stock markets (instead of a rally). Then the US authorities went for the nuclear option of the $700 billion plan as a way to avoid the meltdown together with bans on short sales, a guarantee of money market funds and an injection of over $300 billion in the financial system.

Now the prospect of this plan passing (but there is some lingering deal risk the votes in the House are not certain) -as well as the other massive policy actions taken to stop short selling “speculation” and support interbank markets and money market funds - is not sufficient to make the markets rally as there is a generalized loss of confidence in financial markets and in financial institutions that no policy action seem to be able to control.

The next step of this panic could become the mother of all bank runs, i.e. a run on the trillion dollar plus of the cross border short-term interbank liabilities of the US banking and financial system as foreign banks as starting to worry about the safety of their liquid exposures to US financial institutions; such a silent cross border bank run has already started as foreign banks are worried about the solvency of US banks and are starting to reduce their exposure.

And if this run accelerates - as it may now - a total meltdown of the US financial system could occur. We are thus now in a generalized panic mode and back to the risk of a systemic meltdown of the entire financial system. And US and foreign policy authorities seem to be clueless about what needs to be done next. Maybe they should today start with a coordinated 100 bps reduction in policy rates in all the major economies in the world to show that they are starting to seriously recognize and address this rapidly worsening financial crisis.


Anonymous said...

Ilargi, your lucidity is inspiring.


Anonymous said...

Re: SEC mark to market accounting reversion idea. The banks can keep these toxic assets on their books until the cows come home as far as I'm concerned. Great idea. Sure beats me paying a high price for them while being told I'll make money on the deal later. As a taxpayer, I'd say its a brilliant idea. It won't keep the chickens from coming home to roost eventually. The lobbyists and Hankenstein won't buy it.

The Lizard said...

"The economy is a wholly owned subsidiary of the environment, not the other way around."

—Gaylord Nelson

Anonymous said...

Hello, I have found this part of Revelations quite fitting for what is happening.

see Revelations,
about merchants losing Faith

{18:4} And I heard another voice from heaven,
saying, Come out of her, my people, that ye be not partakersof her sins, and that ye receive not of her plagues.

{18:5}For her sins have reached unto heaven, and God hath
remembered her iniquities.

{18:6} Reward her even as she rewarded you, and double unto her double according to her
works: in the cup which she hath filled fill to her double.

{18:7} How much she hath glorified herself, and lived deliciously,
so much torment and sorrow give her:
for she saith in her heart, I sit a queen, and am no widow,
and shall see no sorrow.

{18:9} And the kings of the earth, who have committed fornication
and lived deliciously with her, shall bewail her, and lament for her, when they shall see the
smoke of her burning,

{18:10} Standing afar off for the fear of her torment, saying, Alas, alas, that great city Babylon,
that mighty city! for in one hour is thy judgment come.

{18:11} And the merchants of the earth shall weep and mourn over her; for no man buyeth their merchandise any more:

{18:15} The merchants of these things, which were made rich
by her, shall stand afar off for the fear of her torment,
weeping and wailing,

{18:16} And saying, Alas,
alas, that great city, that was clothed in fine linen, and
purple, and scarlet, and decked with gold, and precious
stones, and pearls!

{18:17} For in one hour so great riches is come to nought.
And every shipmaster, and all the
company in ships, and sailors, and as many as trade by sea,
stood afar off,

{18:18} And cried when they saw the smoke of her burning, saying,
What [city is] like unto this great

{18:19} And they cast dust on their heads, and cried,
weeping and wailing, saying, Alas, alas, that great city,
wherein were made rich all that had ships in the sea by reason of her costliness! for in one hour is she made desolate.

Anonymous said...

Stoneleigh and Ilargi: try to make the prediction, what next will happen?

If the bill will pass, it still will not be enough to fill all the black holes or will it? In the analysis I have read, only Fredie and Fannie will eat 250bn of it.

What will happen after the last dollar from the plan will be spent?
Do you believe there is still the chance to heal the economy?
I am skeptical in this. It's too late I think. It will lead in USSR - like state bancrot.

There are voices stronger and stronger in Europe, to un-bound from the US economy - reduce the dollar reserves as much as possible and let the collapsing empire die.

Greeting from rainy Czech Republic

scandia said...

Ilargi,Stoneleigh and all...I am trying to use an Arabic key board in Syria! Yikes! thinking of you all as am in another world so far from Wall St and WaSHINGTON.
Forgive the typos. i've also DRained an entireide bottle of Leb0nese wine!A surreal experience being here watching what is going on over there!Wish I could discuss events with Syrians but have language problem!I Am at leAST READING iLARGI'S COMMENTS EVERY Day

Anonymous said...


(a) Authority.--The authority of the Secretary to purchase troubled assets under this Act shall be limited as follows:

(1) Effective upon the date of enactment of this Act, such authority shall be limited to $250,000,000,000 outstanding at any one time.

(2) If at any time, the President submits to the Congress a written certification that the Secretary needs to exercise the authority under this paragraph, effective upon such submission, such authority shall be limited to $350,000,000,000 outstanding at any one time.

(3) If, at any time after the certification in paragraph (2) has been made, the President transmits to the Congress a written report detailing the plan of the Secretary to exercise the authority under this paragraph, unless there is enacted, within 15 calendar days of such transmission, a joint resolution described in subsection (c), effective upon the expiration of such 15-day period, such authority shall be limited to $700,000,000,000 outstanding at any one time.

So, the money-laundering aspects of this bill survive intact - Paulson can cycle as much through the black box as he wants, so long as he keeps the tab under the limits. Sheeee-it.

By the way, it is VERY hard to find this bill on the Thomas locator. Here is the link:

Emergency Economic Stabilization Act of 2008

Unknown said...

Scandia's having the best of all of us, it seems!

Anonymous said...

Hat tip to Daily Kos

....it seems that buried deep in the Bailout Bill was a clause that would have enabled banks to operate without ANY reserves! Starting TOMORROW...

This is how the bank code would have read had the bill passed today:

Each depository institution shall maintain reserves against its transaction accounts as the Board may prescribe by regulation solely for the purpose of implementing monetary policy

(i) in a ratio of not greater than 3 percent (and which may be zero) for that portion of its total transaction accounts of $25,000,000 or less, subject to subparagraph (C);
(ii) in the ratio of 12 per centum, or in such other ratio as the Board may prescribe not greater than 14 per centum and which may be zero, for that portion of its total transaction accounts in excess of $25,000,000, subject to subparagraph (C).

So you plan on restoring confidence in the banks by allowing the banks not to have any reserves to match people's checking and savings accounts? What? Was the FDIC just going to cover that all? Wait, don't answer that, I already know the answer.


or http://tinyurl.com/4q4f8w

Ilargi said...


No-one at Daily Kos can take the honor or blame for that one. It circulated yesterday as well. I left it alone for two seemingly contradictory reasons:

1/ it's terribly joyfully excitingly silly

2/ it's not much different from what we already have: central banks buy casino toilet paper in exchange for Treasuries of some kind, which means it all has already gone one -or more- step(s) beyond zero reserve a while ago.

There's always more behind the curtain.

Anonymous said...

the last article (by Roubini?) points back to itself.

Ilargi said...

the last article (by Roubini?) points back to itself.
fixed. thanks.

Bev said...

Thank you Ilargi and Stoneleigh for the work you're doing. I don't really understand it, and it scares the crap out of me, but thank you.

bluebird said...

ilargi says "$700 billion is just one tenth of one percent of the estimated $700 trillion in outstanding derivatives. It's like owing $100, and offering a dime as full and final payment."

How could anyone have been so greedy and so blinded by power to bring down the world. How can anyone be happy knowing they have destroyed so much. I am speechless.
Anonymous Reader

Anonymous said...

from a commentator on Mish's site:

The Federal Reserve has set up it's own SHADOW BANK. While we sit here thinking we won some kind of victory, cheer about what we have accomplished, and imagine it has really meant something, the Fed had already done an ENRON end run. The bailout bill was nothing but cover for an already done deal. Read it and weap. We are ENRON NATION. This country is cooked:

The Board's H.4.1 statistical release, "Factors Affecting Reserve Balances of Depository Institutions and
Condition Statement of Federal Reserve Banks" has been modified in a number of ways.

On September 17, the
Treasury Department announced the Supplementary Financing Program. Under this program, the Treasury
issues marketable debt and deposits the proceeds in an account at the Federal Reserve that is segregated
from the Treasury General Account. This account is shown as "U.S. Treasury, supplementary financing
account" in table 1, table 4, and table 5.

On September 19, the Federal Reserve announced a new lending facility to extend non-recourse loans to U.S.
depository institutions and bank holding companies to finance their purchases of high-quality asset-backed
commercial paper from money market mutual funds. Extensions of this credit are reported in table 1 as
"Asset-backed commercial paper money market mutual fund liquidity facility" and reflected in "Other
loans" in table 3, table 4, and table 5.

On September 21, the Board of Governors authorized the Federal Reserve Bank of New York to extend credit
to the U.S. broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against all
types of collateral that may be pledged at the Federal Reserve's primary credit facility for depository
institutions or at the existing Primary Dealer Credit Facility. In addition, the Board authorized the
Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of
Goldman Sachs, Morgan Stanley, and Merrill Lynch against the types of collateral that would be eligible
to be pledged at the Primary Dealer Credit Facility. Credit extended under these authorizations will be
included, along with credit extended under the Primary Dealer Credit Facility, in Table 1 under the entry
"Primary dealer and other broker-dealer credit."


Anonymous said...

again, from commentator black swan on Mish's site:

THE LAW HAS BEEN CHANGED where the Fed Board members can expand credit at will.

I now understand that the $700 billion was already promised to the world's banks. It was not going to banks to buy their worthless paper. It was going to backstop bank crashes. The worthless MBS paper was only about giving the bailout operation some legitimacy.

Think of it as a multi-level marketing (MLM) scheme. An MLM is a ponzi scheme, but it is legal because you are selling a product. If there was no procuct, it would be a pure ponzi scheme and illegal. Product or no procuct, the suckers in the downline end up losing their money to those higher up. That's what the bailout bill is all about. Taxpayer money is being given to the banks, and the taxpayer is receiving worthless paper for that money. Without the worthless paper, it would never pass. With the paper, something is being bought, even though it is of little value. Ponzi scheme or not, once the rabbis in Congress have said their prayers over it, it is kosher (legal). The taxpayers are the suckers in the downline.

Trust me on this, if the Fed hadn't created that $620 billion and traded it for foreign currency, there would have been so many margin calls, that the derivative trade would have exploded. The market dropping only 777 points, was a blessing. Without the foreign central bank rescue, our market would have crashed and taken a lot of other world markets with it. If the USD was not the world's reserve currency, we wouldn't have been Argentina, we would have been Mexico during the Peso Crisis.

looks like Hank/Ben have received clear warning signals from some of the major creditor nations not to let another prime dealer to fail. Lehman's fail must have almost triggered a run on the USD and that has to be stopped at any cost at the moment.

Greenpa said...

I think the folks here might appreciate this; came to me via my niece, who got it from the Cornell law school listserve:

Waiting for the Barbarians
By Constantine Cavafy (1864-1933), translated by Edmund Keeley

What are we waiting for, assembled in the forum?

The barbarians are due here today.
Why isn't anything happening in the senate?
Why do the senators sit there without legislating?

Because the barbarians are coming today.
What laws can the senators make now?
Once the barbarians are here, they'll do the legislating.
Why did our emperor get up so early,
and why is he sitting at the city's main gate
on his throne, in state, wearing the crown?

Because the barbarians are coming today
and the emperor is waiting to receive their leader.
He has even prepared a scroll to give him,
replete with titles, with imposing names.
Why have our two consuls and praetors come out today
wearing their embroidered, their scarlet togas?
Why have they put on bracelets with so many amethysts,
and rings sparkling with magnificent emeralds?
Why are they carrying elegant canes
beautifully worked in silver and gold?

Because the barbarians are coming today
and things like that dazzle the barbarians.
Why don't our distinguished orators come forward as usual
to make their speeches, say what they have to say?

Because the barbarians are coming today
and they're bored by rhetoric and public speaking.
Why this sudden restlessness, this confusion?
(How serious people's faces have become.)
Why are the streets and squares emptying so rapidly,
everyone going home so lost in thought?

Because night has fallen and the barbarians have not come.
And some who have just returned from the border say
there are no barbarians any longer.
And now, what's going to happen to us without barbarians?
They were, those people, a kind of solution.

Anonymous said...

I went to my bank (US Bank in Portland, OR) yesterday around 5:00 pm to draw out $1000. They said the could only give me $20 bills, that they ran out of $100's around 3:00 pm. Uh oh.

Anonymous said...

Any thoughts about this proposal from Rep. DeFazio?

Toddman said...


Some fool just bought my Kirkland, WA house for ~500k. Done deal.

We went from shouldering 300K of debt to being debt free with some dough stashed away, mostly thanks to you folks and the good people at Seattle Peak Oil Awareness.

Just hit your tip jar with a Franklin, or whatever the CAN equivalent is.

Thanks again for the excellent site and all the hard work.

Anonymous said...

Ilargi and Stoneleigh -- Your recent posts and comments have been very thought-provoking and very...motivating. Thank you.

IMHO, bank AND money market runs have already started and are gaining speed, but far too quietly for most people to notice. That may change very quickly.

Got currency-in-hand? If not, no more thinking, just do it...quietly.


Ilargi said...


Good on ya mate. I still have to give some thought to the folks who bought it though.

Anonymous said...

Todd motivated me to donate also. I and S have saved me a bundle not to mention providing some little peace of mind that better understanding brings as things unfold. Thanks Ilargi and Stoneleigh.

Anonymous said...

Blogger Ilargi said...

... I still have to give some thought to the folks who bought it though.

It's just the gods throwing dice, the sound of rain on the roof.

Ilargi said...

"... I still have to give some thought to the folks who bought it though.

It's just the gods throwing dice, the sound of rain on the roof."

Well, we all need water.

And I never meant for this place to be a hide-out for a select few. I can be glad for saving someone a ton of money, when they sell their soon-to-be worthless property , but I can also still feel for the poor folks who bought it.

Anonymous said...

I figured out these boyos were thieves awhile back.I dislike watching history made when I know the future will be grim,grim,grim.

Perhaps we will get our funds back.I doubt it.I think it takes something like this to destroy a country.

This is treason

I can think of no other name.


Anonymous said...

anyone saw Karl Denninger's "explosive" video posted around 23:15 today on youtube but has since disappeared?

from what was shown in that video, a congressman on Kudlow's show today states: (somebody made it clear that) "assets now held in China and London can be sold to US entities on Monday and then sold to the Treasury on Tuesday. Paulson has made very clear he would recommend a veto on any bill that contained a clear provision that said American didn't own the assets on September 20th that can't be sold to Treasury. Hundreds of billions of dollars are going to bail out foreign investors. They know it. They demanded it. And bill has been carefully written to make sure that can happen."

so it is clear that to avoid a run on the US$, the US needs the cooperation from the creditor nations. the price to pay is to buy back those toxic "assets" at or close to their issued face value.

Anonymous said...

"And I never meant for this place to be a hide-out for a select few. I can be glad for saving someone a ton of money, when they sell their soon-to-be worthless property , but I can also still feel for the poor folks who bought it."

What about a feeling of sadness for the poor person who sells a property knowing it soon could be worthless, what a bugger to be put into that cleft stick, eh?

BTW, just to be sure I got it right, what, more or less exactly, did you mean this place to be?

Anonymous said...

The more I read and see about this bill, the more scared I become. And, do they really think we're so shallow minded that if they refer to it as a rescue bill instead of a bailout we will all be for it?

Anonymous said...

ok, instead of bible quotes, I give you this:

“Gentlemen, I have had men watching you for a long time, and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.”

Andrew Jackson, the seventh president of the United States, to a delegation of bankers in 1832

Anonymous said...

Anon 1:00 am - "...do they really think we're so shallow minded...?"


EntropyBrain - Revelation and Andrew Jackson somehow go together quite well.


Anonymous said...

For contemplation at 2:00 a.m.:


We always build beside a rising tide.
At the first surge we scramble on our knees,
Buttressing every turret of our pride.
No work of man stands long against the seas.

At the first surge we scramble on our knees:
So legions shored the crumbling walls of Rome.
No work of man stands long against the seas,
Barbaric horses plumed with streams of foam.

So legions shored the crumbling walls of Rome,
And China raised her ramparts taller still.
Barbaric horses plumed with streams of foam
Tumbled across the dark horizon's still,

And China raised her ramparts taller still.
Today the ruins look impregnable
Tumbled across the dark horizon's sill.
The Mongols found them no great obstacle.

Today the ruins look impregnable,
Buttressing every turret of our pride.
The Mongols found them no great obstacle.
We always build beside a rising tide.

[Alan Sullivan]


Anonymous said...

There is a video from Karl Denninger that everyone should see.

**FLASH** The REAL REASON For The Bailout


Anonymous said...


I would very much like to commiserate with the person that will buy my house.

I will even supply the champagne.

Good going Todd, wish I could say as much.


Anonymous said...

it is a few days old, but for people who have not listened to a recent interview with Doug Noland of the prudentbear fame, it is definitely worthwhile to check it out:

Anonymous said...

folks, IMO, the bailout/rescue bill is to rescue the USD and the sole purpose is to buy back the mortgage papers sold to the foreign investors who are also major creditors to the US. the $700B certainly will not solve the on going economic crisis or relatively slow collapse but will avoid a sudden death - a run on the USD. the truth can not be told since it is too humiliating and can be used by some party to stir up even bigger trouble and that's the only logical explanation why they put in the "no review" condition in the first place.


Anonymous said...

So now we have a reduction in taxes in the bill which will be the biggest tax liability anyone could have ever fathomed. Is there no sanity in any of this?
Ilargi, please tell us what you would see as the outcome of this bill passing, now, a year from now, and in the future?
I just heard someone on CNBC say we just have to get through the present. We'll worry about the future later.

EBrown said...

So I've noticed a number of stories about the TED spread and LIBOR blowing out recently. Also businesses are complaining about "tight credit", which is directly related to TED and LIBOR. Is a spread in these two benchmarks at current record levels enough to cause the big cascades I & S predict, or will it need to drive even higher before the big descents ensue?

I don't have an empirical basis for my opinion, but I think the spreads are wide enough to cause big problems. Some borrowing and lending is still going to happen, but many traders lines of credit will not be renewed and some corporations will not be able to move on expansion plans (or meet payroll in more dire circumstances).

Marketwatch has an "Oct. Market Summary, Where to Invest Special" right now. It has a big creepy jack-o-lantern on it and within the section there's a poll on where readers think the DOW will end the month. 59% thought below 10,500. It's a self-selecting sample - but interesting all the same.

Anonymous said...

Crystalradio @12:59 a.m.

Who is the primary victim of the $500,000 sale? Who might end up in debtor's prison because of this transaction? Who should be the primary recipient of our empathy, eh?

I know it is a tragic situation. Ultimately, most of us are victims of, as well as complicitous with, our predatory capitalist system. It's very difficult to transcend one's culture.

Nevertheless, as Mohandas K. Gandhi said, "We must be the change we want to see in the world."


Tyr said...

Wow Denninger is WAY off on this one. When people start blaming the "damn forennurs" warning lights should start blinking.

Some people here in Europe were concerned the bill didn't pass because they assume (incorrectly in my opinion) it would have unfrozen credit markets in the US which then supposedly would have a similar effect on the rest of the world. Also not passing the bill had a negative impact on all of us, which was really what they were complaining about ("Not even passed by Bush's own party? Get it together USA")

If I understand correctly bad assets would effectively have to be "laundered" through US entities anyway. A way for these middlemen to make a buck off of passing the buck to the US taxpayer maybe ?

Anonymous said...

Look paying off the bad gambling debts of stupid greedy American banks that gave up on all sane risk protection with taxpayer money is galling enough. But being the toilet bowl for the whole world's toxic assets, paying too much for them and letting the difference come out of the taxpayers is even worse.

But go a step further. If the back room threats were enough to get both party's leadership and both pres. candidates to bend over for this indignity. Then what will the next back room threat/demand be?

If this isn't a buy up our toxic assets or we'll start a run on the dollar threat, then why not just add a clause that says the treasury can only buy MBSs based on property in the US (or heck North America), or only MBSs owned by Americans on Sept 20th?

I don't like "damn forennur" rhetoric either, but if that's not what's going on here, do you have a counter-explanation for Hank's veto threat for those clauses? Help me see this in some way other than Denningers ...

-Brian M, AKA JediDaddy

DJ said...

I love

bicycle mechanic said...


You claimed it now prove it. WHERE is Denniger off. EXPLAIN how the bill does not allow for this. I can READ can YOU, perhaps your ability in English is limited.

There is more than what Denniger said to back this up. Appears they have found the smoking gun. He is saving that.

Come here and claim something you best be able to back it up.

Lets hear how Denninger is wrong. That the language does not allow this.

DJ said...

I love Denninger, but I agree that this xenophobic crap does far more harm than good. Why not focus the blame on the American institutions that are about to serve as a giant money-laundering operation. How can you be mad at any entity that takes advantage of an opportunity given to them? Blame those who give the opportunity at the public's expense.

Anonymous said...

Foreign investors knew that much of the toxic mortgage crap was NOT backed by the US government in any way, but they wants the Big Returns and so took the risk of buying stuff that was 'too good to be true'

Most savvy foreign investors can smell day old fish at the market.

Denniger's xenophobia is unfortunate but does not negate his analysis.

Blue Monday

Tyr said...

If you assume a bailout would work (which I don't but a lot of economists seemingly do) I think you need at least the option to provide partial assistance to some foreign banks to some degree. What happens if a large bank in The City fails ? In a global economy fall-out of such an event could undo positive impact of domestic US interventions. And realistically I do think mainly institutions with strong US ties would be targeted, to say billions would flow to China is nothing but hyperboly.

Also personally I think Paulson's loyalties lie with a transnational club of high finance movers and shakers rather than with the US taxpayer, which doesn't help.

Anonymous said...

My gut reaction as to why Paulson et al are lying through their teeth on why he needs 700bn has to do with the 'bailout emergency' being precipitated by demands from foreign Creditors that the US buy back all the crapola or they stop buying US crapola Treasury securities.

It's HUMILIATING for a Great Power like the US to have to pay up or else.

Bush and Paulson Do Not want the US public to know we Had to cave in to threats.

It's like the US is a 'street person or something.

This seems to especially offend Denninger's sense of nationalism.

Blue Monday

Anonymous said...

Ahimsa,you say:

Who is the primary victim of the $500,000 sale? Who might end up in debtor's prison because of this transaction? Who should be the primary recipient of our empathy, eh?

How can we judge these things? For instance you talk of debtors prison, but that person likely may just be trading across the board, no loss no gain in real terms. But for the seller there is the knowledge in his mind that it is likely a bad deal for the buyer. He is caught in the cleft stick of obligations to his own and obligations to the other. No joy there that I can see.

You also mention :

"... Mohandas K. Gandhi said, "We must be the change we want to see in the world."

Okay, no angel me, but for many years now I haven't sold a used car of mine, to other than the junker, because of that thought. But then I haven't been terribly desperate either. That is called luck, or, the gods shooting crap.

The Lizard said...

"This seems to especially offend Denninger's sense of nationalism."

You're talking like it's extortion or something.
We smelly little foreigners have been funding America's public relations - its name and its armies - for some 3 decades.
The invoices are coming due.

The American state is simply doing what so many of its homeowners are doing: borrowing money to make a minimum payment to another creditor.

Where will the feds send their Jingle Mail?

Anonymous said...

Denninger's xenophobic rubbish is insulting to any rational person. He must not have a historical understanding of the bullying US empire.


bluebird said...

ebrown from 9/29/08 "I only just noticed that the header on the top of the blog has darkened several notches..."

It seems darker today.
Anonymous Reader

The Lizard said...

ahimsa: "Denninger's xenophobic rubbish is insulting to any rational person. He must not have a historical understanding of the bullying US empire."

In fairness: I was reading a Brit xenophobe's blog the other day, decrying the fact that British schoolchildren were asked to write an essay on "What provoked the Spanish to form the Armada?"

BritBlogger had no clue, and the answer is as near as Wikipedia.

"Patriotism is your conviction that this country is superior to all other countries because you were born in it."
- George Bernard Shaw

Anonymous said...

I utterly agree that the US has been living beyond it's means for decades.

It does need to suck it up and pay it's debts.

What is so sleazy is the fact that US leaders are afraid to tell their own people that the cook is jar is empty.

Pay as you go from here on out time..

The cowardly clinging to "Wishery" (how we wish reality would be) as someone put it, as opposed to facing Reality.

Money Talks,
Bullshit Walks

Time for the US to put up and shut up instead of childish whining and hand wringing.

Blue Monday