Wednesday, October 22, 2008

Debt Rattle, October 22 2008: Shelling

Library of Congress Shelling 1865
View from Circular Church, Charleston, South Carolina, after shelling by the Federal Navy.

Ilargi: Stocks are plummeting once more all around the world, and if you think that trend will stop anytime soon, then you haven’t been paying attention. As long as there is maybe $1 of real money for every $25 dollars (or $100, or $200) of funny virtual money, stocks have a long way left to fall. Especially since what little real money is left tends to stay away from the crap tables.

And that is what the exchanges, make that the entire economy, have become. As Deepak Chopra put it, ".. less than 2 percent of the $3 trillion to $4 trillion that circulates in the world's markets daily is used for goods and services. The rest is trying to make money off money.[..] Our financial structure which, of course, is an American system but is now global, is pure speculation. It's gambling."

Please excuse me, but I don’t think a whole lot of people understand what this means. The funny money will disappear, no matter how hard its creators, the banks and governments operating in our societies, try to prevent that from happening. Nobody with assets that have some real value left will be willing to risk them in trades with what they know to be largely worthless counterparties. The only players staying at the table are the ones who are already broke, and the only money left is the funny sort.

That makes it inevitable that the trendlines for stock markets will keep pointing downward, and do so much longer and much steeper than we are willing to see. This will drag down the value of "real assets" with it, until hardly any of the labor of man will have a monetary value left, till most people will not be able to afford to pay for many of their basic needs, and ultimately till the value of human life itself will be discounted to a hair’s width above absolute zero.

Spending public funds on doomed rescue operations will make this process much uglier and far more devastating. With the Fed on its way to throw an extra $3 trillion in taxpayer pearls at the dying swine of Wall Street in 2009, you can add some $40.000 in losses for every family. Which is only slightly less than the save-a-dead-stinking-whale bail-outs have cost this summer, which now add up to $4 trillion.

And no, that is not all. A recent change in corporate tax law enables Wells Fargo to pay $13 billion for Wachovia, immediately write off $19 billion on its IRS bill, and keep going for years, to a total of $74 billion. There is of course no way that Wells is the only party that discovered this maze; there will be more mergers and acquisitions along these lines, hidden bail-out scams for bankrupt institutions.

An announcement that made me laugh hard was the one from the Fed saying they will start paying higher interest on banks’ reserves in Fed vaults. Last thing I saw, there were no non-borrowed reserves left there; just about every penny banks "possess" has been borrowed. From the Fed. Which will now pay interest over money borrowed from it? Nah, they wouldn't try that, would they? Maybe it's just me.

Somehow I feel confident that it will not stop here, that there are more trick rabbits to come out of the hats of the balding duo from the town of Corleone. After all, a rally is in the cards: there still is some real money left in the country -and I have said this before- in pension funds. You might want to use Argentina’s confiscation of its own pensions as an early warning sign, and not just in the US.

Why Wells Fargo Really Wanted Wachovia
For Wachovia shareholders, it may have seemed too good to be true. But it wasn't. Just days after it essentially collapsed and Citigroup made an offer to buy its banking assets for $1 per share, Wells Fargo came out of nowhere, offering to buy the entire company for $7 per share with no help from the government. No backstop from the FDIC. No taxpayer intervention. Nothing. Just a good ol' fashioned buyout.

But why? Why was Wells Fargo so eager to ante up a deal that was leaps and bounds sweeter than Citi was willing to pay? After all, Wells Fargo has a stellar reputation of keeping underwriting standards in check, so why would it want anything to do with a shoddy bank drowning in subprime mortgages? Taxes. It was all about the taxes.

The day after Citigroup made its bid, the Treasury changed a tax rule that lets banks accelerate the losses and writedowns on banks they acquire against their own net income, offsetting the charges as tax write-offs. Wells plans on writing off some $74 billion of Wachovia's $498 billion loan portfolio -- an insanely large amount that reflects just how poisoned Wachovia's books really were. With the new tax rules, it gets to use all of that $74 billion as a charge against its own net income, which means one thing: Wells Fargo's going to be a tax-write-off machine for years to come.

Just how much will it save? The Wall Street Journal, citing an independent tax analyst, estimates Wells Fargo could reap a tax savings of about $19.4 billion. To put that in perspective, the 0.1991 shares of its own stock Wells Fargo is offering Wachovia comes out to around $6.24 per share, or roughly $13.8 billion. Yes, Wells Fargo gets a $19.4 billion tax break for a company it'll pay just under $14 billion for (if the deal closed today). In other words, Wells Fargo didn't pay anything for Wachovia: The IRS paid it more than $5 billion to take it. Who ever said you have to fear the taxman?

A couple implications of this: One, it's a good thing that at least some benefits are granted to companies willing to buy failed banks. After all, had Wells Fargo not stepped up to the plate, the existing deal with Citigroup could have stuck taxpayers with tens of billions of dollars in losses. Nonetheless, let's keep in mind what these tax advantages are: yet another page in the bailout book. You might as well add these tax breaks as a stealth entry to the nearly $3.9 trillion or so already laid out to right the banking industry. When will it ever end?

Wachovia Loses $23.9 Billion on Real-Estate Charges
Wachovia Corp., the bank being acquired by Wells Fargo & Co., reported its third straight quarterly loss, hurt by crumbling mortgage markets and writedowns on securities backed by real estate. The third-quarter loss was $23.9 billion, or $11.18 a share, compared with net income of $1.6 billion, or 85 cents, in the same period a year earlier, the Charlotte, North Carolina-based company said today in a statement.

The loss was $2.23 a share excluding one-time items, versus the average loss estimate of 2 cents from 16 analysts surveyed by Bloomberg. Wells Fargo outbid New York-based Citigroup Inc. for Wachovia, agreeing to spend $14 billion to create the largest U.S. branch network. San Francisco-based Wells Fargo was aided by a change in tax rules that makes it easier to absorb losses on Wachovia's mortgages. The bank also agreed to sell assets to comply with U.S. regulations if the combined company controls more than 10 percent of deposits nationwide.

"Wells Fargo will get substantial tax benefits from losses incurred by Wachovia, so the more losses the better off they are," Chris Marinac, managing director of FIG Partners LLC in Atlanta, said before earnings were released. "It's kind of a free pass." Wachovia boosted reserves by $4.8 billion in the quarter, which included an impairment charge of $18.7 billion. That charge reflected lower market values and terms of the Wells Fargo transaction, Wachovia said.

"We're on track to complete the merger as planned in the fourth quarter," Wells Fargo Chief Financial Officer Howard Atkins said in a statement. Wachovia rose 2 cents to $6.09 yesterday and has tumbled 84 percent this year on the New York Stock Exchange. Wells Fargo gained 41 cents, or 1.3 percent, to $32.64. It has advanced 8.1 percent this year, the biggest increase in the 24-company KBW Bank Index.

Wells Fargo said it expects $74 billion in losses and writedowns from Wachovia's $498 billion portfolio, including $32 billion in option-adjustable-rate mortgages and $24 billion in commercial loans. It plans to offset the markdowns by raising $20 billion in capital through the sale of shares and by cutting $5 billion in annual expense. Wells Fargo viewed Wachovia "as its best chance to become a coast-to-coast franchise to compete effectively against Bank of America and JPMorgan Chase & Co.," analyst David Hendler of CreditSights Inc. said in an Oct. 15 report. The bank will have more than 6,675 branches, compared with 6,139 at Bank of America Corp., and assets of about $1.4 trillion.

Wachovia agreed to the takeover less than three months after new Chief Executive Officer Robert Steel pledged to rebuild investor confidence in the bank, which in 2006 paid $24 billion for California lender Golden West Financial Corp. Golden West was a leader in option-adjustable-rate mortgages, which helped contribute to housing-related losses. The bank wrote off $810 million in option adjustable-rate mortgages, up from $508 million in the previous quarter. Borrowers are not paying interest on about $9 billion of the loans, or 7.6 percent of the total outstanding.

Wells Fargo expects a cumulative loss of $26 billion from option ARMs, with more than 90 percent of those credit costs to be incurred by the end of next year. Steel in September estimated such losses would reach about $14 billion. Option-ARMs, which Wachovia no longer offers, allow borrowers to defer part of their interest payments, boosting the principal. Loans in California and Florida, two of the states hardest hit by the decline in housing prices, account for about 70 percent of Wachovia's $119 billion of option-ARMs.

Profit at the division that includes retail, small business and commercial customers fell 43 percent to $857 million from $1.5 billion last year. Wachovia said "low-cost core" deposits declined 8 percent to $370 billion during the quarter as business customers withdrew almost a fourth of their funds. The bank cited "significant market turmoil at quarter-end," when Citigroup and Wells Fargo were vying for Wachovia.

The trend for deposits from commercial customers has reversed since Oct. 1 because of the proposed merger and new regulations boosting deposit insurance, the bank said. The corporate and investment bank lost $703 million, compared with a $212 million profit a year earlier. Wells Fargo is studying which investment-banking businesses to retain given its limited experience in the market, CEO John Stumpf has said.

The capital-management subsidiary lost $499 million, compared with a $294 million profit last year. The unit includes the A.G. Edwards Inc. brokerage, which was acquired last October, and the Evergreen asset-management company. Assets under management declined 24 percent from Dec. 31 to $209 billion because of $40.6 billion in net outflows and $25 billion in declining market valuation.

Today's earnings announcement may be the last by Wachovia, started by German immigrants in central North Carolina in 1879. Its sale, which Treasury Secretary Henry Paulson praised yesterday as good for the U.S. banking system, is set to be completed by the end of the year.

Fed Raises Rate It Pays on Banks' Reserve Balances
The Federal Reserve will raise the interest rate it pays banks for the excess cash they keep on deposit so it can keep pumping funds into the financial system without affecting the central bank's monetary policy.

Fed officials acted after the initial rate they set Oct. 6 failed to keep the benchmark U.S. overnight interest rate close to the target set by policy makers. The central bank will pay interest on excess reserves at the lowest target rate for a one- or two-week period less 0.35 percentage point, effective tomorrow, the Fed said in a statement.

The previous rate was 0.75 percentage point below the target. Chairman Ben S. Bernanke wants to ensure that his efforts to flood the financial system with cash don't interfere with the policy rate. The Fed started paying interest on reserves this month after gaining authorization under the financial-rescue bill passed by Congress.

"We're not quite sure what we have to pay in order to get the market rate, which includes some credit risk, up to the target," Bernanke told economists Oct. 7. "We're going to experiment with this and try to find what the right spread is."
The federal funds rate on overnight loans between banks traded as low as 0.25 percent this week and 0.13 percent last week. Fed officials cut their target for the benchmark rate by a half point to 1.5 percent on Oct. 8.

Fed governors "judged that a narrower spread between the target funds rate and the rate on excess balances at this time would help foster trading in the funds market at rates closer to the target rate," the Fed said today in Washington.

Mass layoffs highest since 9/11
The number of layoff announcements involving at least 50 workers rose in September to the highest level since the Sept. 11 terrorist attacks seven years ago, the government said Wednesday. There were 2,269 mass layoff actions, up 497 from August, according to statistics released by the Labor Department. That was the most mass layoffs since the 2,407 in September 2001.

"At large firms, basically what I see is an across-the-board, shotgun approach," said Paul Sarvadi, Chairman and CEO of human resources outsourcing firm Administaff in Houston. "If they anticipate revenues going down, then they see how much they need to cut to reach operating targets, and equate that cost to a number of people."

Overall, the number of initial claims for unemployment benefits related to mass layoffs rose by 61,726 to 235,681. That was the highest level since September 2005, after Hurricane Katrina devastated the Gulf Coast, resulting in 297,544 claims. The manufacturing industry pulled the most devastating numbers, accounting for 28% of all mass layoffs and 36% of unemployment insurance claims in September. More specifically, 19,278 of the 46,391 claims in that industry came from the transportation equipment sector.

"Most manufacturers are pretty secure," said Chris Kuehl, economic analyst for the Fabricators and Manufacturers Association. "But there's been a lot of action in the auto and aerospace sectors, such as the Boeing strikes and the the low demand for cars due to the credit crunch." Kuehl believes that layoffs at auto and aerospace companies, a large segment of the manufacturing industry, don't tell the whole story. "After all, the medical manufacturing and energy segments are gangbusters," he said. But the overall situation is grim, and the worst may not be over, according to some experts.

Sue Murphy, manager for National Human Resources Association in Nashua, N.H., believes that there will be an increase in layoffs as the practice of scrutinizing employee count continues. She said companies will accelerate the trend of cutting hours, replacing jobs with technology and outsourcing labor during tough times like these, when their priorities are protecting costs and market share. "The companies look at the nice-to-haves and the must-haves, and the employees that are not essential will be up for review," Murphy said. "A lot of quality people will be out of work." 

I Hate To Disagree With a Billionaire, But...
We've heard and read a lot about what the political leaders of the major industrial nations are doing to stop the bleeding in stocks, unfreeze the credit markets, calm down investors, prop up the banking system, and ward off an economic depression.

How a bunch of guys in suits will get all those metaphors done at once I don't know. But they're trying. What's more, "trying" now includes op-ed appearances in major newspapers. The past week has seen pieces in The New York Times, The Wall Street Journal and The Washington Post by the likes of Fed Chairman Ben Bernanke, SEC Chairman Christopher Cox, investor extraordinaire Warren Buffett, and British Prime Minister Gordon Brown.

If you read any of those pieces then you already know how mostly bland they were. If you're trying to calm down, prop up, and ward off, then reassurance to the point of boredom is the whole idea -- which is probably why none of the articles was among the most read or e-mailed. That is, except for Buffett's piece, "Buy American. I am." He was talking about stocks, of course; he can also afford to make his point more directly because he's not a politician (i.e. he got rich the honest way). Here's the crux of his argument:
"Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value."

I'm not even going to say much by way of disagreement -- I'm simply going to post a chart that shows the facts about the performance of one especially safe cash equivalent vs. other investments during the past (almost) eight years.

This chart appeared in a very recent Short Term Update, with the reminder that we've been saying "Cash is King" for years. Given the way the facts speak for themselves, a prudent investor would at least want to consider the case for whether Cash will continue to be King in the near term.

S&P 500 Dividends to Fall Most Since '58 This Quarter
Dividend payments by companies in the Standard & Poor's 500 Index may plunge 10 percent this quarter, the biggest decline since 1958, as bank failures and slowing economic growth stifle payouts, S&P said.

The firm also cut its estimated 2008 dividend from all S&P 500 companies to $28.05 from $28.85, representing the slowest annual growth since 2001, according to a statement. Financial companies in the index reduced their payouts 35 times in 2008, almost triple the past five years combined, said Howard Silverblatt, the senior index analyst at S&P.

"We're seeing an enormous amount of cuts," New York-based Silverblatt said. "There is a lot of pressure on dividends, and a lot of people are concerned about their cash flow." The S&P 500 tumbled 35 percent this year as global mortgage- related losses topped $660 billion and central banks were forced to pump more than $2 trillion into rescuing financial markets from collapse. Bank of America Corp., Lennar Corp. and Principal Financial Group Inc. cut their dividends by 50 percent or more this month.

Fannie and Freddie's Regulator Suggests U.S. Backs Their Debt
The regulator of Fannie Mae and Freddie Mac is taking on a new role: trying to help them sell debt on better terms. As turmoil in the debt markets pushes up the mortgage giants' cost of borrowing, James Lockhart, director of the Federal Housing Finance Agency, said at a mortgage bankers' convention here that the government has effectively guaranteed Fannie and Freddie's debt. Later, in an interview, he added, "The U.S. government will be behind them short, medium and long term."

Investors' confidence in Fannie and Freddie affects their borrowing costs and determines how aggressively they can purchase mortgages and related securities from lenders. That has a big effect on the rates that banks charge consumers on home mortgages. Both Fannie and Freddie have pledged to increase their mortgage purchases sharply over the next year. Despite huge efforts by the Treasury and Federal Reserve to encourage lending, home-mortgage rates have trended up in recent weeks after briefly slipping below 6% last month.

The average rate on 30-year fixed-rate home loans that conform with the standards of government-backed investors Fannie and Freddie was 6.61% last week, up from 6.14% the week before, according to HSH Associates, a financial-data publisher. On Monday, rates were coming down. Lou Barnes, a mortgage banker in Boulder, Colo., said they were between 6.125% and 6.25%. Investors in recent days have been demanding higher yields on debt issued by Fannie, Freddie and the 12 regional Federal Home Loan Banks, which also play a big role in providing funds for home mortgages.

For instance, says Jim Vogel, an analyst at FTN Capital Markets, five-year bonds issued by Fannie and Freddie were yielding about 1.4 percentage points above comparable U.S. Treasury bonds Monday, compared with less than 1.1 points early last week. That partly reflects unintended consequences of the government's efforts to prop up banks. The Federal Deposit Insurance Corp. recently said it would provide guarantees on bank debt for three years. That means investors who ordinarily buy Fannie or Freddie debt may switch to higher-yielding debt issued by banks and also backed by the government.

Mr. Lockhart said investors needn't worry about Fannie and Freddie's ability to repay their debt, because the Treasury has agreed to provide as much as $100 billion of equity capital to each company, if needed. Even so, foreign investors have become wary of debt issued by such government-backed entities as Fannie and Freddie. The Treasury's recent agreement to buy preferred stock in Fannie and Freddie, if needed, says the agreement "shall not be deemed to constitute a guarantee" of the companies' debts.

On Monday, Fannie canceled its monthly sale of benchmark notes, without explanation. The company occasionally cancels such sales, but in the current market, Mr. Vogel said, it might have had trouble finding enough buyers. In early September, the regulator took management control of Fannie and Freddie under a conservatorship, citing the risk that losses related to mortgage defaults might exhaust their capital and leave them unable to support the mortgage market.

Mortgage Bankers Ask to Lift Fannie and Freddie Home-Loan Limits
The U.S. Mortgage Bankers Association plans to ask the Federal Housing Finance Agency to increase the limit for Fannie Mae and Freddie Mac purchases or guarantees of single-family mortgages to $625,500 to bolster the housing market.

The mortgage bankers' residential board of governors is scheduled to vote today on the recommendation, which would call for an increase of 50 percent above the current limit of $417,000 in most areas, at the trade group's annual conference in San Francisco. "It will be stimulative," Garry Cipponeri, senior vice president of Chase Home Finance LLC in Iselin, New Jersey, and head of the mortgage bankers' capital markets committee, said in an interview. "This market needs liquidity."

A higher limit guaranteed by the government agencies is needed to spur lending in the most expensive housing markets, such as California and New York, Cipponeri said. The availability of mortgages above $417,000, known as non-conforming loans, "has gotten worse" amid a tightening of credit standards, he said.

Congress approved raising the limit temporarily to $729,500. That increase expires at the end of the year and lawmakers would decide whether to raise the limit permanently, with the Federal Housing Finance Agency having oversight of Fannie Mae and Freddie Mac. The government last month took control of Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac partly to encourage lending.

Under the Housing and Economic Recovery Act passed in July, the government agencies keep the $417,000 limit for most areas and increase it in high-cost areas based on median home prices, said Corinne Russell, spokeswoman for FHFA Director James Lockhart. Any change will be up to Congress, she said.

Mortgages are harder to obtain amid surging foreclosures and falling prices in the worst U.S. housing slump since the 1930s. Home-loan originations may drop almost 20 percent this year to $1.9 trillion, about half the 2003 record, according to the Washington-based mortgage bankers group. Cipponeri spoke on a panel at the MBA meeting yesterday with Joseph Murin, president of Ginnie Mae, and Dean Schultz, chief executive officer of the Federal Home Loan Bank of San Francisco.

If You Give a Cow a CDO
A House Budget Committee hearing today into the role of the credit ratings agencies in the financial crisis is making much of a 2007 email from a Standard & Poor's analyst to a colleague: "We rate every deal. It could be structured by cows and we would rate it." There have been hundreds of billions of dollars of losses on collateralized debt obligations and other forms of structured finance that were created by Wall Street firms and rated by S&P and Moody's. More losses are coming. So how badly could the cows do in comparison?

After all, as producers of an important commodity, cows have a better understanding of how to value an underlying asset. And their grazing is infinitely cheaper and less wasteful than that of Wall Street bankers. Milk, as cows know, can go bad. Indeed, this summer, someone describing UBS' structured financial instruments to HedgeWorld News, compared the bank's troubled portfolio to "having an inventory of old milk."

A speech by Annette Nazareth, a former Securities and Exchange commissioner, suggested that deals structured by cows would not be that far off the mark. Speaking before the Los Angeles bar association a year ago, she cited the children's book If You Give a Mouse a Cookie, by Laura Numeroff, in describing the turmoil in the credit markets at that time:

"You might want to keep the plot of this delightful tale in mind if my descriptions of collateralized loan obligations and quant funds become too much to bear. In the book, a very demanding little mouse asks for a cookie. Of course, if you give a mouse a cookie, he's going to ask for a glass of milk. And when you give him the milk, he'll probably ask you for a straw. I think you probably are beginning to get the drift of the plot.

"While some have asserted that the book is an extended allegory for industrial capitalism and others for the dangers of giving in to terrorism, my take is more straightforward. I see the story as an introduction into the lessons of cause and effect."

CDO Cuts Show $1 Trillion Corporate-Debt Bets Toxic
Investors are taking losses of up to 90 percent in the $1.2 trillion market for collateralized debt obligations tied to corporate credit as the failures of Lehman Brothers Holdings Inc. and Icelandic banks send shockwaves through the global financial system.

The losses among banks, insurers and money managers may spark the next round of writedowns on CDOs after $660 billion in subprime-related losses. They may force lenders to post more reserves against losses after governments worldwide announced $3 trillion in financial-industry rescue packages since last month, according to Barclays Capital. "We'll see the same problems we've seen in subprime," said Alistair Milne, a professor in banking and finance at Cass Business School in London and a former U.K. Treasury economist. "Banks will take substantial markdowns."

The collapse of Lehman Brothers, Washington Mutual Inc. and the three banks in Iceland prompted Susquehanna Bancshares Inc., a Lititz, Pennsylvania-based lender, to lower the value of $20 million in so-called synthetic CDOs by almost 88 percent last week. KBC Groep NV, Belgium's biggest financial-services firm, which had 377.4 billion in assets as of June 30, wrote down 1.6 billion euros ($2.1 billion) after downgrades on company- and asset-backed debt. Brussels-based KBC had 9 billion euros in CDOs as of Oct. 15, primarily linked to corporate debt, according to an investor presentation.

Some synthetic CDOs, tied to credit-default swaps on corporate bonds, are trading at less than 10 cents on the dollar, according to Sivan Mahadevan, a derivatives strategist at Morgan Stanley in New York. CDOs parcel fixed-income assets such as bonds or loans and slice them into new securities of varying risk, providing higher returns than other investments of the same rating.

The synthetic variety pools credit-default swaps, which are derivatives based on bonds and loans and used to protect against or speculate on defaults. Should a borrower fail to meet debt agreements, the contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent. An increase in the agreement's cost indicates a deteriorating perception of credit quality.

About $254 billion of CDOs tied to mortgages for borrowers with poor credit histories have defaulted, according to Wachovia Corp. Tracking defaults on those linked to corporate bonds will be difficult because the market is largely private, said Mahadevan. Derivatives are contracts whose value is derived from assets including stocks, bonds, currencies and commodities, or from events such as the weather or changes in interest rates.

Downgrades of corporate CDOs will force investors to boost capital, according to an Oct. 17 report from Barclays Capital analysts led by Puneet Sharma in London. Buyers of deals graded AA by Standard & Poor's and Aa2 by Moody's Investors Service, the third-highest rankings, may have to increase cushions against losses to cover the full amount of the investment, up from 1.2 percent now, Sharma said. His estimate is based on the world economy entering a "severe" recession.

Demand for synthetic CDOs pushed the cost of default protection to record lows in 2007, driving down company borrowing expenses. Sales surged to $503 billion in 2006, from $84 billion five years earlier, according to Morgan Stanley. Bankers loaded the securities with bonds and swaps offering the highest return for a given credit ranking, indicating additional risk. An AA rated European issue offered an average yield of 50 basis points over money-market rates when sold in 2006, according to UniCredit SpA analysts in Munich. Similarly rated corporate bonds paid 9 basis points. A basis point is 0.01 of a percentage point.

"The maths ended up driving the way CDO portfolios were put together," said Nigel Sillis, a fixed-income and currency analyst at Baring Asset Management Ltd. in London. The banks that structured the securities and investors both failed to do "fundamental credit analysis," said Janet Tavakoli, president of Tavakoli Structured Finance in Chicago. "They were using correlation models, they were using spread models, but they weren't doing analysis on the underlying corporations."

Fitch downgraded 422 classes of CDOs on Oct. 13 after seven financial companies defaulted or were bailed out since September. The company didn't disclose the total number of classes it rated. The downgrades force payment of the credit-default swaps packaged in the debt, causing losses for investors or eroding capital. "The same kind of shudders that went through the asset- backed CDO market will probably go through the corporate CDO market," said Sillis. "We'll see a pickup in default rates."

Barclays Capital estimates that 70 percent of synthetic CDOs sold swaps on Lehman. Swaps on Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Banki hf were included in 376 CDOs rated by S&P. The company ranks almost 3,000. About 1,500 also sold protection on Washington Mutual, the bankrupt holding company of the biggest U.S. bank to fail, according to S&P. More than 1,200 made bets on both Fannie Mae and Freddie Mac, the New York-based rating company said.

The collapse of Lehman, WaMu and the Icelandic banks, as well as the U.S. government's seizure of the mortgage agencies, will have a "substantial" impact on corporate CDO ratings, S&P said in a report Oct. 16. The government in Reykjavik seized Kaupthing Bank, the country's largest lender, earlier this month. Assets and liabilities from Landsbanki Islands and Glitnir Banki were transferred to state-owned entities, triggering default swaps.

Nonpayment on speculative-grade corporate bonds may rise to 7.9 percent worldwide in a year, from 2.8 percent at the end of the third quarter, as the credit crisis deepens, Moody's said Oct. 8. Those in the U.S. may rise to 7.6 percent, said S&P. "As there are credit events, you'll have losses in portfolios and marking down of other assets," said Claude Brown, a partner at law firm Clifford Chance LLP in London.

Investors may sell the CDOs back to banks, which will unwind protection they wrote to hedge swap transactions, Barclays said. The chain of events will push up the price of default protection and company borrowing, according to Barclays. Banks unwinding hedges helped double the cost since April of default insurance on the lowest-ranking equity portion of the benchmark Markit CDX North America Investment Grade Index, to 75 percent upfront and 5 percent a year. That equates to $7.5 million in advance plus $500,000 annually on $10 million of debt for five years.

For European investment-grade company debt, as shown by the Markit iTraxx Europe index of credit-default swaps, the price for protecting against nonpayment may climb 55 basis points to a record 200 next year, Barclays forecasts. Some investors are choosing to buy protection and determine their losses now, according to Edmund Parker, head of derivatives at law firm Mayer Brown LLP in London. National Australia Bank, the country's biggest lender by assets, paid A$100 million ($67 million) this year to hedge the risk of loss on six company-linked CDOs totaling A$1.6 billion. It will pay a further A$60 million annually for the next five years, according to company filings.

"The upside is that you've now drawn a line on those assets and you know you're not going to lose more than your hedging costs," Parker said. "Unless, of course, your counterparty goes under." Companies most frequently referenced in synthetic CDOs include Philadelphia-based Radian Group Inc., the third-largest U.S. mortgage insurer, whose stock fell 68 percent in New York trading this year. Another is CIT Group Inc., an unprofitable commercial lender in New York that dropped 83 percent. The company faces about $2.4 billion in debt repayments by the end of 2008, according to data compiled by Bloomberg.

"We feel very strongly that we have adequate claims-paying capabilities for both our financial-guarantee business and our mortgage-insurer business," said Radian spokesman Richard Gillespie. CIT spokesman Curtis Ritter declined to comment, pointing to the company's statement last week that it will meet funding needs for the next 12 months. Forecasts for ratings downgrades are "going to force a lot of activity" in unwinding CDOs, said Rohan Douglas, former director of global credit derivatives research at Citigroup Inc. He now heads Quantifi Inc., a provider of valuation models for the debt. "Buy-and-hold investors suddenly find themselves in a situation where they will have to sell these assets."

With CDOs slashed 90% will toxic waste's toll top $2 trillion?
Collateralized Debt Obligations (CDOs) -- those fiendishly complex securities that slice bonds into different groups based on risk -- are a $1.3 trillion pile of toxic waste likely to be written down 90% from financial institutions' (FIs) books. That's a shame because so far FIs have written off $660 billion worth of subprime mortgages and mortgage-backed securities (MBS) and that total is expected to top $2 trillion before it's all over. That is way more than the $340 billion in capital that resides on FIs books.

Since there is very little information about CDOs available, it is difficult to both put a value on them and to know how bad the damage is. One firm estimates that $254 billion of CDOs tied to subprime mortgages have defaulted. But corporate CDOs are privately traded, so the damage from writing down this toxic waste is difficult to quantify. These corporate CDOs were called synthetic -- they consisted of bundles of Credit Default Swaps (CDSs) on corporate bonds.

The $54 trillion CDS market -- famously deregulated by John McCain's chief economic advisor Phil "Americans are Whiners" Gramm -- is now causing shudders for owners of synthetic CDOs since they are tied to the bankruptcy of Lehman Brothers along with Iceland's biggest banks. Fitch downgraded 422 classes of CDOs on October 13 after seven financial companies defaulted or were bailed out since September. And Barclays estimates that 70% of synthetic CDOs were tied to Lehman Brothers.

Why was anyone willing to buy these hunks of toxic waste in the first place? FIs bought CDOs because they offered a 41 basis point (100 basis points equals 1%) yield over similarly rate corporate bonds. This incredibly complex disaster will cost at least $1 trillion. Was the collapse of the global financial system worth the extra 41 basis points?

Hungary Raises Benchmark Rate to 11.5% to Defend Its Currency
Hungary's central bank raised the benchmark interest rate by 3 percentage points today, after a series of earlier measures to prop up the forint failed to halt the flight of investors from local assets.

The Magyar Nemzeti Bank lifted the two-week deposit rate today to 11.5 percent, the highest since July 2004, the Budapest- based bank said in an e-mailed statement. The first emergency increase in five years came after policy makers left rates unchanged at their scheduled meeting two days ago.

Stocks, bonds and the forint plunged in the past two weeks on concern that the country will face Iceland-like difficulties in financing its current account and budget deficits with global credit drying up. Lining up help from the European Central Bank and the International Monetary fund, along with moves to increase liquidity, failed to stem the slide.

"This is a desperate, brutal decision," said Daniel Bebesy, an economist at Budapest Investment Management. "The size is fine, but what we got here is the evaporation of global liquidity, so it's uncertain if the rate increase will rev up demand for the forint." The forint, which fell to 283.35 per euro earlier today, close to its record low, traded at 278.47 12 p.m. in Budapest, erasing gains after the rate decision. It has lost 14 percent of its value this month. The benchmark BUX stock index was down 2.9 percent extending its October plunge to 37 percent.

Hungary is scrambling to shield its markets from being engulfed by the global financial crisis that erased more than $25 billion from equities in 2008. Central banks from London and Frankfurt to Washington and Hong Kong last week were forced to cut interest rates after yearlong credit-market seizure stoked concern banks will run short of money.

In Hungary, where foreign currency loans made up 62 percent of all household debt at the end of the second quarter, up from 33 percent three years earlier, consumers were threatened by the currency's slide. "Local people have also started to worry about the currency's level," analysts at KBC Groep NV wrote in a note to clients today. "The major risk in any currency crisis is to have local players convert their deposits into foreign currencies."

Europe's emerging markets were also afflicted by the crisis, forcing Ukraine to borrow $15 billion from the IMF, while Iceland's government took control of the country's financial industry and Moscow's benchmark Micex Index lost 63 percent this year. "Hungary's central bank took an extreme decision," said Bartosz Pawlowski, an economist at Toronto Dominion Bank in London. "Today every emerging market currency except the Romanian leu was losing ground. If the forint stays weak or continues to weaken and credit dries up, we could be looking at a horrible situation in the real economy."

In Hungary, the government cut bond sales by 200 billion forint ($937 million) this year, pledged to cut the budget deficit faster than previously planned, while the central bank is buying back state debt and is offering new loan facilites to provide liquidity to a stalled bond market. Hungary today scrapped an auction of bonds due in 2012 and the central bank allocated 44 million euros in a foreign exchange swap tender.

The ECB agreed to lend Hungary as much as 5 billion euros ($6.7 billion) to help unfreeze the credit market, while the IMF said it was "ready" to discuss financial assistance. The funds were a "last resort," Andras Simor, the president of the central bank, said after the rate decision on Oct. 20. "When the forint reached dangerous territory, they tried with all their might to put a halt to the speculation," said Gyorgy Barcza, an economist at KBC Groep NV in Budapest.

"It's always difficult to defend against a speculative attack. The fundamental question is if we can now buy the solution to the short-term financing problem with high interest rates." Hungary raised rates at a time when inflation is slowing. Consumer prices in September were 5.7 percent higher than a year earlier. That's the slowest rate of increase in two years after food and oil prices declined.

Price pressure is set to ease further as Hungary last week lowered its economic growth forecast for next year to 1.2 percent from an earlier 3 percent, citing the slowdown in the country's key export markets in west Europe. The government expects inflation to slow to 3.9 percent next year, reaching about 5 percent by December and about 3 percent by the end of next year.

Argentina seizes pension funds to pay debts. Who's next?
Here is a warning to us all. The Argentine state is taking control of the country's privately-managed pension funds in a drastic move to raise cash. It is a foretaste of what may happen across the world as governments discover that tax revenue, and discover that the bond markets are unwilling to plug the gap. The G7 states are already acquiring an unhealthy taste for the arbitrary seizure of private property, I notice.

So, over $29bn of Argentine civic savings are to be used as a funding kitty for the populist antics of President Cristina Kirchner. This has been dressed up as an anti-corruption and efficiency move. Aren't they always? Argentine sovereign debt was trading at 29 cents on the dollar today, pushing the yield to 25pc. Tempted? Credit Default Swaps on Argentine bonds reached 2,900. Do we have a Latin Iceland on our hands, but with 100 times the population? Or several, Pakistan, Ukraine, Hungary? ...... Switzerland? Australia? Britain?

The funds being targeted are known as AFJPs or retirement accounts, but how long will it now be before Mrs Kirchner cracks down on the entire $97bn pool of private pensions? There are a lot of much-needed hard currency assets in those portfolios. "A state takeover of pensions creates all kinds of doubts and throws into relief the extreme financing needs of the government next year," said Jorge Alberti, from

Needless to say, the Kirchner government (part II) is unable to raise any money on the global markets at a tolerable price.
Investors have already been burned by her stealth default on Argentina's index linked bonds. This was achieved by sacking the head of the statistics office and rigging the inflation data (by 20pc annually, or so.) Frankly, I am a little surprised that Argentina's 2001 default - the biggest in history - was not a severe enough burning in itself for investors. But political risk seems to be a blind spot for some asset managers. And then there was the great agro-boom of 2005-2007 so all was forgiven, until commodities went into free-fall in May.

President Kirchner has been eyeing the pension pool for some time. Last year she pushed through new rules forcing them to invest more money inside the country - always a warning signal. My fear is that governments in the US, Britain, and Europe will display similar reflexes. Indeed, they have already done so.

The forced-feeding of banks with fresh capital - whether they want it or not - and the seizure of the Fannie/Freddie mortgage giants before they were in fact in trouble (in order to prevent a Chinese buying strike of US bonds and prevent a spike in US mortgage rates), shows that private property can be co-opted - or eliminated - with little due process if that is required to serve the collective welfare.

This is a slippery slope. I hope Paulson, Darling, and Lagarde tread with great care. I do not expect Steinbruck to tread with any care. The Merval index of stocks in Buenos Aires is down 12.6pc as I write. Telecom Argentina took it badly (-25pc), so did Grupo Financiero Galicia (-13pc) and Banco Frances (-20pc).
Foreign sellers?

Argentina Default Looms, Pension Seizure Roils Market
Argentina's planned seizure of $29 billion of private pension funds stoked concern the nation is headed for its second default in a decade.

President Cristina Fernandez de Kirchner's decision hurt markets already reeling from slumping commodity prices and slower growth. The retirement system, set up in 1994 to help bolster capital markets, owns about 5 percent of companies listed on the Buenos Aires stock exchange and 27 percent of shares available for public trading, data compiled by pension funds show.

Argentine bond yields soared above 24 percent before the announcement late yesterday, and the benchmark Merval stock index tumbled 11 percent. The last time the government sought to tap workers' savings to help finance debt payments was in 2001, just before it stopped servicing $95 billion of obligations. "It's the final of many nails in the coffin from an institutional investor perspective," Bill Rudman, who helps manage $3 billion of emerging-market equity at WestLB Mellon Asset Management in London. Argentina is "disappearing into irrelevance," he said.

The government's proposal to take control of 10 funds, including units of London-based HSBC Holdings Plc and Bilbao, Spain-based Banco Bilbao Vizcaya Argentaria SA, still needs congressional approval. BBVA fell 6.5 percent in Madrid. Repsol YPF SA, Spain's biggest oil producer, slid 13 percent in Madrid, the steepest intraday decline since 1997. Repsol owns YPF SA, the largest oil company in Argentina, and said last month it would announce in November a date for the delayed sale of a 20 percent stake in YPF on the local stock market.

Fernandez said yesterday her decision is "in a context where the biggest countries" are taking steps to protect their banks because of the global financial crisis. "Instead, we're taking them for our retirees and workers," she said during a rally in Buenos Aires. Argentina's borrowing needs will swell to as much as $14 billion next year from $7 billion in 2008, RBC Capital Markets, a Toronto-based unit of Canada's largest bank, said yesterday.

South America's second-largest economy has been shut out of international capital markets since its 2001 default. Holders of about $20 billion of defaulted bonds rejected the government's 2005 payout of 30 cents on the dollar, and Fernandez has said she's considering proposals to offer a new deal. The cost of protecting Argentina's bonds against default soared yesterday, as five-year credit-default swaps based on Argentina's debt jumped 2.38 percentage points to 32 percent, according to Bloomberg data.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality. The proposed takeover "makes the chance of default in the short-term less likely by inflicting immense damage to the long- term credibility of the government and the financial system with its own people," said Paul McNamara, who helps manage $1.2 billion of emerging-market assets at Augustus Asset Managers Ltd. in London.

Amado Boudou, the head of Argentina's social security administration, said yesterday the government will keep the same investment mix for the funds, with 60 percent in bonds and 10 percent in stocks. He called the privately run system an "enormous error." Currently, about 55 percent of the 94.4 billion pesos ($29.3 billion) held by the private pension funds is invested in government debt, according to the pension regulator's Web site. A takeover would allow the Fernandez administration to write off the sovereign bonds held by the funds, said Javier Salvucci, an analyst with Buenos Aires-based Silver Cloud Advisors.

"It's a short-term fix that may cause more fiscal and macro pain in the long haul, which has been typical of the last two administrations," said Will Landers, who manages $5 billion in Latin American equities at BlackRock Inc. Since the pension system began in 1994, trading volume on the Buenos Aires stock exchange has quadrupled. The funds were net buyers of domestic equities for a third straight month in September, investing about $144 million, according to Deutsche Bank AG. They have about $4.1 billion in domestic stocks, strategist Guilherme Paiva wrote in an Oct. 15 note.

The government's plan is "one additional factor to count against Argentine assets," said Vinicius Silva, an emerging market strategist at New York-based Morgan Stanley, which recommends that emerging-market equity investors have a "zero' weighting in the country. Nestor Kirchner, Fernandez's husband and predecessor as president, began tightening restrictions on private pension funds last year, requiring them to keep more investments in the country to sustain economic growth. The rules forced the funds to "repatriate" about $3 billion in mostly Brazilian assets, Sebastian Palla, chairman of the country's pension fund association, said in February.

Foreign emerging-market funds sold about $250 million in Argentine stocks through August this year in the biggest outflow since 2000, according to fund flow tracker EPFR Global in Cambridge, Massachusetts. The Merval is down 51 percent this year compared with 39 percent for the Bovespa in neighboring Brazil. Bond markets also have tumbled. Yields on the government's 8.28 percent bonds due in 2033 have almost tripled to 24.69 percent from 8.83 percent a year ago.

The declines reflect concern that a 40 percent drop in commodity prices since July will slow growth in South America's biggest economy after Brazil. Argentina gets more than half its export revenue from wheat, soybeans, corn and other commodities. Argentina's growth will slow to 5 percent this year and 2.5 percent in 2009, RBC Capital Markets said. The economy expanded 8.8 percent on average over the past five years as Kirchner and Fernandez used surging tax receipts to boost government spending on everything from civil servant pay rises to energy subsidies.

Seven years ago, as the government tried in vain to stave off a debt default, it pressured the pension funds to participate in bond swaps that pushed forward repayment dates. That December, strapped for cash to pay salaries, it ordered the funds to transfer $3.2 billion in bank deposits to state-owned Banco de la Nacion. The latest move is "much, much worse," said McNamara at Augustus. "It's not just shoving a little bit of debt in at the edge, it's taking over the whole system," he said. "It does even more damage to the concept of encouraging people to invest in the domestic financial industry."

Argentina Nationalizes $30 Billion in Private Pensions
Argentine stocks plunged 13 percent Tuesday after the government announced plans to nationalize nearly $30 billion in private pension funds. The government of President Cristina Fernandez said that it had to protect retirees as stocks and bonds fall amid the global financial crisis. But her political opponents called it a naked scramble for cash to prop up falling tax revenue.

The main Argentine stock index, the Merval, dropped more than 13 percent after word leaked that President Fernandez wanted government control over the private money. The nationalization would allow the government to pay off millions of dollars in debt and finance stalled infrastructure projects starved for credit, a former finance minister Miguel Kiguel told Buenos Aires-based television station TodoNoticias.

But analysts said the nationalization plan puts property rights at risk, and investors fled from Argentine stocks. “It tells the market that the government thinks it can change the rule of the game whenever its wants, which has caused Merval to fall, while the rest of the world remains steady,” said Camilo Tiscornia, an economist with the economic consulting firm, Castiglioni, Tiscornia y Asociados.

The president’s office declined to comment. Ms. Fernandez planned to detail her plan in the afternoon before sending it to Congress, where her Peronist party has a majority. Argentina is one of the world’s top five exporters of soybeans, corn, wheat and beef, and falling prices for these commodities prices worldwide have reduced an important source of government revenue.

At the same time, the country has struggled to access international credit — even before the world financial crisis hit — with $12 billion in debt payments due in 2009. Argentina effectively has been banished from the international debt market since defaulting on $95 billion of bonds in 2001, the largest sovereign default in history. Ms. Fernandez’s pension plans ran into stiff criticism Tuesday before the official announcement.

The bill, which “basically expropriates funds from individual contributors,” will likely be approved by Congress in the next few weeks, Daniel Kerner, an analyst with the Eurasia Group in New York, wrote Tuesday. Argentina’s powerful labor unions have expressed support for the measure. Argentina’s private accounts were created in 1994 under President Carlos Menem, who embarked on a wave of privatization in Argentina during his 1989-1999 terms.

The pension funds are controlled by the BBVA Banco Frances, a unit of BBVA of Spain; HSBC Holdings; the insurance company MetLife Inc.; and ING Groep along with other local funds. Argentines contribute $4.6 million to the funds every year. About one-fourth of Argentina’s 40 million citizens are affiliated with the private funds.

Pakistan seeks IMF help to avoid debt default
Pakistan sought help from the International Monetary Fund on Wednesday to avoid defaulting on billions of dollars in loans and skirt a financial crisis brought on by high fuel prices, dwindling foreign investment and soaring militant violence. Pakistani officials had previously said turning to the IMF would be a last resort.

Aid from the agency often comes with conditions such as cutting public spending that can affect programs for the poor, making it a politically tough choice for governments. Dominique Strauss-Kahn, managing director of the fund, said in a statement that an IMF mission will begin discussions with Pakistani authorities in the next few days "on a program aimed at strengthening economic stability and enhancing confidence in the financial system. The amount of (IMF) financing under a stand-by arrangement has yet to be determined." He said Pakistan has requested discussions with the IMF "to meet the balance of payments difficulties the country is experiencing as a result of high food and fuel prices and the global financial crisis."

Iceland, Hungary, Serbia and Ukraine have also turned to the IMF for financing to ease the current crisis. Created in 1944 to rebuild the world financial system after World War II, the IMF initially helped developed nations lend to one another. By the 1990s, it had evolved into a rescue fund for troubled emerging economies — but gave them little say on the terms of their loans. Pakistani economists say up to $5 billion is needed to avoid defaulting on sovereign debt due for repayment next year, but that $8 billion more may be needed overall. The country has also asked for loans from wealthy nations and multilateral agencies such as the World Bank. Analysts say the country will probably get that help also because of its front-line status in the war on terror.

Any default would further shatter local and international confidence in the government and the economy at a time of intense fighting against al-Qaida and Taliban militants near the Afghan border. High oil prices and dwindling investment from overseas have triggered a balance of payments crisis that is undermining the Pakistani rupee. The country is also battered by high inflation and chronic power shortages. The total amount of foreign currency in Pakistani banks has fallen by more than half since last year and currently stands at $7.75 billion.

Leading Pakistani economist Qaiser Bengali said the government had no choice but to ask the IMF for help. He said the agency should condition any assistance on spending cuts in defense and the civil service — two areas he said were currently over funded — and spare programs that boost the economy. "We are like a factory that spends more than its revenues on the head office and on security guards and there is no money left for spare parts and raw materials," he said of Pakistan. "That kind of factory is certain to shut down."

Ukraine seals IMF bailout with Russian backing
Ukraine was poised to complete an International Monetary Fund rescue package for its banks but at the cost of securing Russian backing for the £8 billion infusion. The breakthrough came after the country's feuding political leaders postponed a December election to ensure passage of financial reforms demanded by the institution.

Ukraine has boomed in recent years on the back of higher commodity prices and a liberalisation of its property and financial sector. But the country's current account deficit has ballooned in recent months, exposing its currency and financial institutions to a loss of investor confidence. The National Bank of Ukraine has poured hundreds of millions of dollars into struggling banks but without extra cash from the IMF its reserves are dangerously depleted. The country's currency, the hryvnia, dropped to an all-time low against the dollar before progress was reported.

Prime Minister Julia Timoshenko said an agreement on a $15 billion IMF loan was 90 per cent complete. Parliament will meet next week to approve the package. "The talks are almost finished with the IMF and we've almost agreed on what necessary changes to laws we have to make to get the loan," she said. But the populist leader, who is locked in a bitter power struggle with former ally, President Victor Yushchenko, warned that the country would have to make painful adjustments. "Ukraine will have to tame its social appetites," she said. "We will have to cut spending that Ukraine cannot now afford."

The announcement of progress in the IMF talks came hours after Russian Finance Minister Alexei Kudrin signalled its support for a bail out. The Kremlin's efforts to restore its influence in Ukraine has become the dividing line of domestic politics in the former Soviet state. Despite the gravity of the crisis the country's parliament saw scenes of disarray as supporters of Miss Timoshenko used chairs to jam shut the door of the chamber.

Global Financial Summit Scheduled for Nov. 15
President Bush will host a summit meeting on the global financial crisis on Nov. 15 in Washington, bringing together world leaders for the first in a series of conferences aimed at reforming the international financial system, the White House announced today. The summit, to be held 11 days after the U.S. presidential election, will include leaders of the Group of 20, a forum established in 1999 to promote dialogue among industrialized and developing countries on economic issues. G-20 meetings normally bring together the finance ministers and central bank governors of 19 nations plus the European Union.

In announcing the summit, White House spokeswoman Dana Perino said the two presidential candidates have been informed of Bush's intention to invite world leaders to Washington and support the idea. She said a specific venue has not yet been finalized. The summit will be preceded by a White House dinner on Nov. 14, she said. "The leaders will review progress being made to address the current financial crisis, advance a common understanding of its causes and, in order to avoid a repetition, agree on a common set of principles for reform of the regulatory and institutional regimes for the world's financial sectors," Perino told reporters. "These principles can be further developed by working groups for consideration in subsequent summits."

She said the leaders are also expected to discuss the impact of the financial crisis on emerging economies and developing nations. The summit will give leaders an opportunity "to strengthen the underpinnings of capitalism by discussing how they can enhance their commitment to open, competitive economies, as well as trade and investment liberalization," she said. Bush has spent the past couple of days making phone calls to various leaders to get their thoughts about the meeting, Perino said. She said Bush would also solicit the views of whoever is elected to succeed him on Nov. 4.

"We will seek the input of the president-elect," Perino said. But the administration believes it is important to go ahead with the meeting before the new president is sworn in on Jan. 20, she said. "The time will be just about right" to hold the summit on Nov. 15, she said, "because a lot of the emergency measures that these countries have put forward are, hopefully, starting to have an impact on unthawing the credit markets." In addition to G-20 leaders, Perino said top officials of the International Monetary Fund (IMF) and World Bank, along with U.N. Secretary General Ban Ki-moon and the chairman of the Financial Stability Forum, are being invited to the summit. The Financial Stability Forum is an institution set up in 1999 by the Group of Seven industrialized countries and based at the Bank of International Settlements in Switzerland.

Last weekend, Bush, French President Nicolas Sarkozy and European Commission President Jose Manuel Barroso issued a statement saying that the first summit would focus on progress in addressing the current crisis, as well as reforms needed to avert future ones. Subsequent summits would be aimed at implementing specific reforms. Sen. Barack Obama (Ill.), the Democratic presidential candidate, and Sen. John McCain (Ariz.), the Republican nominee, "have been made aware of the meeting and the president's intention to invite the leaders," Perino said. "And I think they were supportive of the idea."

Asked whether Bush agrees with European allies who are calling for a wholesale rewriting of the rules for financial markets, Perino said many countries would come to the summit with their own recommendations and ideas, including the United States. She said it was "too early to say what will come out of" the summit. The G-20 is an appropriate grouping for the summit because "it includes developed and developing nations, and the president thinks it's very important to include developing nations because they have emerging markets," Perino said.

The G-20 includes Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States. The European Union is represented by the rotating presidency of its council and the European Central Bank. The managing director of the International Monetary Fund, the president of the World Bank and other top officials of the two institutions also normally participate in G-20 meetings.

"The G-20 thus brings together important industrial and emerging-market countries from all regions of the world," the group says on its Web site. "Together, member countries represent around 90 per cent of global gross national product, 80 per cent of world trade . . . as well as two-thirds of the world's population."

U.S. to Ask Analysts if Lehman Misled
Federal prosecutors probing the collapse of Lehman Brothers Holdings Inc. have subpoenaed other Wall Street securities firms, seeking information about whether their analysts were misled by Lehman about its financial health, according to people familiar with the matter.

The subpoenas are broad in nature, requesting information about statements Lehman made earlier this year as its stock was tumbling and questions about its strength were mounting. At least three U.S. attorneys offices are investigating Lehman's demise, including the Southern District of New York. As reported, at least a dozen current and former Lehman executives also have been subpoenaed, including Chairman and Chief Executive Richard Fuld Jr.

Analysts could play a key role in the investigations of what happened at Lehman before it filed for bankruptcy protection last month and its U.S. operations were sold to Barclays PLC. The analysts had frequent contact with Lehman executives, both in conference calls and one-on-one conversations, in the months leading up to the firm's collapse. The subpoenas have been sent to brokerage firms and individual analysts.

In a conference call less than a week before the bankruptcy filing, Lehman assured analysts it needed no new capital. The previous day, however, executives had calculated that the firm needed at least $3 billion, The Wall Street Journal reported earlier this month, citing people familiar with the situation.

According to a transcript of the conference call, Mike Mayo, a Deutsche Bank AG analyst, asked if Lehman would need an additional $4 billion in capital as part of a restructuring plan the firm had announced. Lehman Chief Financial Officer Ian Lowitt responded: "We don't feel that we need to raise that extra amount." At another point in the conference call, Mr. Lowitt said: "Our capital position at the moment is strong." A Lehman executive has said since then that the company's comments were accurate at the time because executives hoped to raise more money by selling assets.

Wall Street analysts have testified at the trials of executives accused of misstating the financial condition or prospects of their companies, including General Re Corp. and Qwest Communications Corp., said Colleen Conry, a white-collar lawyer at Ropes & Gray LLP. Securities analysts "are the eyes and ears of the common investors," she said.

The probes are at an early stage and their scope includes whether Lehman valued its assets at artificially high levels, improperly moved $8 billion from its London operations to New York just ahead of its bankruptcy filing and misled New Jersey's pension fund when it provided information about its financial health in connection with a June stock offering, according to people familiar with the situation. A federal grand-jury subpoena is a legal document directing an individual or entity to produce evidence to a grand jury, which could be asked to bring a criminal indictment.

Disney calls for Lehman inquiry
Walt Disney has become the latest company to call for an investigation into the dealings of investment bank Lehman Brothers before its collapse. Disney says it is owed $92m (£56.5m) and wants to know how money was moved between Lehman Brothers Commercial and its parent company before bankruptcy.

US court papers filed by Disney called for an examiner to be appointed to investigate the transactions. Lehman Brothers Holdings filed for bankruptcy protection on 15 September. It was the largest US bankruptcy filing in history and saw what was the US's fourth-largest investment bank agree to sell many of its assets. "When creditors lose money, they deserve to know why and how," said Martin Bienenstock, Disney's lawyer.

He added that the appointment of an examiner was common practice in big cases. Disney's request for an examiner will be heard on 5 November. Other Lehman creditors have made similar petitions to conduct investigations, including several investment funds under the Harbinger name. The funds claim they are owed more than $250m and have requested to see internal documents about asset transfers a month before Lehman filed for bankruptcy.

Pound slumps and FTSE 100 tumbles as Bank of England Governor admits UK recession
The pound plunged by the most in 16 years against the dollar and the FTSE 100 tumbled after the Governor of the Bank of England warned that Britain is entering in its first recession in almost 20 years.

The currency slumped by as much as 5 cents against the dollar at one point in trading in Asia, to $1.6203, well below the $2 level it reached just a few months ago. It remained down more than 4 cents at $1.6262 in London. Against the euro, sterling was down almost a penny to 79p. The FTSE 100 was down more than 4pc at 4047.11 in early afternoon trading, with mining companies and retailers being the hardest hit.

The dramatic slide came hours after Mervyn King told business leaders in Leeds that the UK was in the midst of the worst financial crisis in living memory, and that the road to recovery would be a long and slow one. In his most downbeat comments since the financial crisis erupted last year, Mr King said: "Taken together, the combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand. Indeed, it now seems likely that the UK economy is entering a recession."

Foreign-exchange traders reacted to the comments by immediately pencilling in more aggressive rate cuts by the Bank's Monetary Policy Committee. The MPC delivered an emergency cut of 50 basis points two weeks ago. "The clear trigger behind the depreciation of the pound seems to be the Bank of England Governor's speech," said Adarsh Sinha, currency strategist at Barclays. "He was a lot more pessimistic on the economic outlook than he's been before so the market is pricing in a 50 basis point cut in November and more cuts further out," he said.

It is highly unusual for central bank chiefs to make even veiled predictions of currency movements, but Mr King said that the UK is likely to face a painful adjustment of the value of its currency and current account deficit in the coming months and years thanks to the financial crisis. "For several years, the UK banking sector has been relying extensively on external capital flows, principally short-term wholesale funding, to finance its lending activities. Those external inflows have fallen sharply – a mild form of the reversal of capital inflows experienced by a number of emerging market economies in the 1990s," he said.

"Unless they are replaced by other forms of external finance, the adjustments in the trade deficit and exchange rate will need to be larger and faster than would otherwise have occurred, implying a larger rise in domestic saving and weaker domestic spending in the short run."

Germany’s 'Dumbest Bank' Raided Over €319 Million Transfer to Lehman
KfW Group, the German government-owned development bank, was searched by prosecutors probing a 319 million-euro ($411 million) payment to Lehman Brothers Holdings Inc. Frankfurt prosecutors are investigating KfW management board members over the automated payment to Lehman on Sept. 15, the same day the New York-based securities firm filed the biggest bankruptcy case in U.S. history.

KfW said it will have a full-year loss and faces increased public scrutiny after politicians complained that the bank's board should have stopped the payment as soon as Lehman's financial situation worsened. The German government on Sept. 29 fired KfW management board members Peter Fleischer and Detlef Leinberger over the payment.

"We are investigating whether responsible people at KfW criminally violated their duty to protect the bank's assets by not stopping the transfer despite the palpable problems at Lehman and the international banking crisis," Doris-Moeller Scheu, the prosecutors' spokeswoman, said in a statement. KfW is cooperating "extensively" with prosecutors, the Frankfurt-based lender said in an e-mailed statement. The payments were made for currency swaps on that day.

Frankfurt-based KfW said on Sept. 22 that documents and protocols show no sign the transfer to Lehman was a "conscious decision." Chief Executive Officer Ulrich Schroeder told KfW's administrative board on Sept. 18 that the department in charge of the transaction miscalculated the risk of insolvency at Lehman and the chance of not getting back the money and therefore the bank couldn't intervene in the automated payment, the bank said.

Bild, the biggest-selling newspaper, ran a headline on its front page on Sept. 18 calling KfW "Germany's dumbest bank." German Economy Minister Michael Glos and Finance Minister Peer Steinbrueck, who head KfW's administrative board, said on Sept. 18 they would overhaul the bank's risk management as soon as possible. KfW has already drawn flak for agreeing on Aug. 21 to sell IKB Deutsche Industriebank AG, the first German casualty of the subprime mortgage market collapse, to Lone Star Funds for less than 20 percent of the price the government initially sought. KfW was formed 60 years ago to finance development projects.

Bavarian Finance Minister Quits Over Bank Losses
The financial crisis has claimed its first political victim in Germany with the resignation on Wednesday of Bavarian Finance Minister Erwin Huber after Bavarian public-sector bank BayernLB reported bigger-than-expected losses. Huber's future had been in doubt because of speculation that he may have known about the losses for some time, possibly even since before the Sept. 28 state elections in Bavaria.

A spokesman told SPIEGEL ONLINE that Huber, supervisory board chairman at BayernLB, didn't want to continue in the Bavarian cabinet in view of the losses at the bank. BayernLB announced late on Tuesday it will seek €5.4 billion from the German government's bailout fund plus an additional €1 billion for a capital increase, making it the first lender to draw on Berlin's €500 billion rescue fund after being hit by third-quarter losses.

Michael Kemmer, the chief executive of Germany's second-biggest regional bank, said that BayernLB faced a loss of up to €3 billion by the end of the year. In the third quarter alone its pretax loss amounted to an estimated €1 billion, far exceeding expectations of €100 million. The bank had run into problems in 2007 due to risky investments in the United States. Market turbulence following the collapse of Lehman Brothers last month had led to further write-downs and had disrupted business with institutional clients, BayernLB said.

The news had put Huber, the outgoing chairman of Bavaria's Christian Social Union party, under intense pressure and had fuelled speculation that he would be left out of the new cabinet to be presented by his designated successor as CSU chairman, Horst Seehofer, this coming weekend, reports say. The CSU's vote slumped in the election and it lost its absolute majority for the first time in half a century, which has forced it to share power with the liberal Free Democrat party whose regional leader Martin Zeil accused Huber of "fiscal incompetence" during the campaign.

While the €5.4 billion payment is coming straight from the government's rescue program, the additional €1 billion capital injection is being provided by BayernLB's public sector owners with the state of Bavaria contributing €700 million and the state's savings banks €300 million. Analysts had predicted Germany's state-sector banks would be the first to tap the fund after the German cabinet laid out strict conditions for its use on Monday. These include limits on managers' salaries, bonuses and severance pay

No commercial bank has said it would use the fund yet. Now that BayernLB has broken the ice on using the government fund, other regional state-owned lenders may follow. BayernLB said its board members will receive no bonuses while the financial aid is in effect and also that it would suspend dividend payments.

Meanwhile, German authorities searched the offices of development bank KfW on Wednesday in an investigation into the bank's transfer of €319 million ($410 million) to American investment bank Lehman Brothers on Sept. 15, after Lehman had filed for insolvency. The Frankfurt prosecutor's office said it was investigating whether bank officials broke the law in failing to prevent the transfer of the money. The bank has said it hopes to recoup at least half of the funds.

"The aim of the investigation is to determine whether the responsible parties at KfW violated their legal obligations to safeguard assets by failing to block the transfer of funds on Sept. 15, 2008 despite knowledge of signs of liquidity problems at Lehman Brothers and against the background of an emerging international banking crisis," a statement said. KfW has said it will cooperate with the probe. It said the transfer was an error that resulted from a "misjudgment" of the situation.

Commercial real estate market to hit bottom next year
Real estate investors and professionals say financial and real estate markets in the U.S. will hit bottom in 2009 and continue to slump for much of 2010, according to a report released Tuesday by the Urban Land Institute and PricewaterhouseCoopers LLP.

D.C. is the “ultimate hold market when the economy struggles” and downtown office vacancies should remain below 10 percent, according to the annual report. On the residential side, apartments in D.C. lease “no matter what,” the report said. The annual industry outlook includes responses from more than 600 real estate experts, including investors, developers, property company representatives, lenders, brokers and consultants.

The report projects 15 percent to 20 percent losses in real estate values next year from the mid-2007 peak on a national level.
In general, respondents say financial institutions will continue to be pressured into moving bad loans off balance sheets, using auctions to speed up the process.

“The industry is facing multiple disconnects,” said Stephen Blank, senior resident fellow for real estate finance at Washington, D.C.-based Urban Land Institute. “Many property owners are drowning in debt, lenders are not lending, and for many industry professionals, property income flows are declining. There is an unprecedented avoidance of risk. Only when financing gets restructured will pricing reconcile, giving the industry a point from which to start digging out of this hole.”

According to the report, moderate-income apartments in core urban markets near mass transit offer the best investment opportunities, a consistent trend from the previous year. Distribution/warehouse facilities were the next best investment, according to the experts. Downtown office space is expected to outperform suburban markets, according to the report, and retail development is generally near the bottom but still has farther to fall. The housing industry faces more foreclosures and no rebound in values for 2009, according to the report.

Savvy investors will be able to cash in on the inevitable recovery, according to experts. “Money will be made on riding markets back to recovery and releasing properties, not on financing structures,” according to the report.

Even in Resilient Seattle, Office Vacancy Rate Is Rising
Not long ago, Seattle looked invincible, even as an economic downturn was starting to plague the rest of the country. High-profile Seattle-area companies like Microsoft and Amazon were adding thousands of jobs, trade with Asia was strong and Boeing was selling thousands of commercial jets.

Deemed the best office market in the country in some nationwide reports, the city was attracting real estate investors hungry to buy office buildings and build new projects. It seemed as if nothing could go wrong. “Out here in Seattle, we were living in a bubble, immune from the rest of the country,” said Bruce Blume, founder of a real estate development firm, the Blume Company.

Such enthusiasm started deflating this year. Starbucks, based here, is slashing more than 7 percent of its global work force and closing hundreds of stores. Weyerhaeuser, the former lumber giant, trimmed 1,000 jobs and sold off divisions as it became a real estate investment trust. Boeing workers went on strike, and home builders and mortgage companies shed staff. Starting next month, Alaska Airlines, also based in Seattle, is getting rid of 1,000 positions.

Then Washington Mutual, the country’s biggest savings-and-loan, was seized by federal regulators. JPMorgan Chase is buying the bank’s deposits and assets, and is still formulating its plans for the company. An announcement is expected in December. Job growth in Puget Sound, a four-county region that includes Seattle, is expected to shrink to 1.7 percent, from 2.9 percent, this year, according to Conway Pedersen Economics, an economic forecasting concern. “Our economy has gone flat in 2008,” said Dick Conway, an economist at the firm.

The collapse of WaMu, which employs more than 3,500 in downtown Seattle, rattled the city’s confidence and led many companies to question their projects or expansions. The vacancy rate for office space in the central business district reached 10 percent in the third quarter, according to Cushman & Wakefield, still below the nationwide average, but up from 8.4 percent a year ago. With five new buildings, encompassing about two million square feet, opening next year, the vacancy rate is expected to hit 15 percent. Most of the new space has not been leased.

The vacancy rate could go even higher if WaMu — the city’s largest downtown tenant with 1.6 million square feet — vacates space. Brokers estimate the bank could give up as much as one million square feet. The company built a new 42-story headquarters in downtown Seattle for $300 million and moved in only in 2006. It also rents space in other nearby buildings and has made some of that space available for sublease.

Other companies may shed space or are already trying to do so. Starbucks has 390,000 square feet up for sale or lease after spending an undisclosed amount two years ago to purchase an eight-story office building and adjacent parcels. Safeco, an insurance company that was purchased by the Liberty Mutual Group in April, is expected to sublease half of its space, or 200,000 square feet. Heller Ehrman, a century-old San Francisco law firm, is dissolving and may try to sublease more than 100,000 square feet.

“Nobody thought it would be like this,” said Bob Mooney, a managing director at the commercial real estate firm Jones Lang LaSalle in Seattle. “This has hit everyone.” It’s an abrupt turnaround since last year, when Grubb & Ellis, a commercial real estate brokerage, and the Urban Land Institute both named Seattle as one of the top five office markets in the country for investors. Sales of office buildings reached $11.47 billion in 2007, some seven times what they were in 2004, according to Real Capital Analytics. Deals so far this year have totaled only $375 million.

Although building prices have tumbled in 2008, it hasn’t been enough to keep investors interested. Since last year, the price to acquire office space has shrunk 32 percent, to an average of $227 a square foot, according to Real Capital Analytics. Now, credit has largely dried up and has forced many companies and developers to postpone deals. Early this month, a buyer for Qwest Communication International’s 32-story office tower backed out after losing his financing. The building has been on the market since March.

Alfred Clise knows this all too well. The president of a family real estate development firm, Clise Properties, withdrew a 13-acre parcel in downtown Seattle, mainly parking lots and low-rise office buildings, from the market in April, after nearly a year in which he couldn’t find a buyer willing to offer more than $600 million and to develop the area in a way that he believed it deserved. Mr. Clise says he thinks the parcel would be an ideal site for a grand multibillion-dollar development like Rockefeller Center in New York.

It has also become difficult to fill buildings. Rents have jumped 13 percent from a year earlier, to $35.80 a square foot annually in the third quarter, in part because some big landlords bought at the top of the market and are trying to cover their high costs. As enticement, brokers say landlords are throwing in three to six months of free rent, and as much as $100 a square foot in tenant improvements. Still, these incentives have not been enough.

“Everything is on hold,” said David Gurry, a senior vice president at Colliers International in Seattle. “Tenants are waiting to see what happens with WaMu.” Mr. Blume, a developer with a reputation for timing the market well, is still looking for tenants for a five-story life science and laboratory building that is scheduled to open in a month. Another project with 575,000 square feet of office, retail and biotech space is planned nearby, but it may be suspended unless a tenant can be found.

Schnitzer West, a developer based in Bellevue, Wash., may put its plans for a 750,000-square-foot tower, to be called M5 Commerce Centre, on the back burner next year if leasing doesn’t go well for its other projects, which have a total of 562,000 square feet: an office building opening this month and another to be completed next fall. Dan Ivanoff, Schnitzer West’s founder and managing investment partner, is one of many developers pinning their hopes on the technology, biotech and aerospace industries. Seven years ago, the three industries suffered through the collapse of technology stocks and the travel slowdown after the Sept. 11 attacks.

Lately, a number of concerns with connections to these industries have been active. In July, the Bill and Melinda Gates Foundation broke ground on a new 12-acre headquarters just north of downtown. Amazon is more than doubling its 1.6 million square feet of leased space. Construction of the first of 11 office buildings started in January, and a few months ago the bookseller said it had options to occupy another 500,000 square feet.

Microsoft, which has hired people every year since it opened in the region in 1979, continues to hire and lease new space. The technology giant, which has leased nearly two million square feet outside town over the last 18 months, is rumored to be close to a lease for 350,000 square feet in South Lake Union, a neighborhood a little more than a mile from downtown.

“Seattle is still in a much better position than the rest of the country,” said Greg Inglin, an associate at Pacific Real Estate Partners in Seattle, “and we have Microsoft and Amazon to thank.”

Funds investing in the BRIC economies have plummeted by 60%
If you thought decoupling was something that happened to train carriages then you probably have a lot to be thankful for this month. For investors, the word denoted an investment theory that saw them pour billions of pounds into risky emerging markets.

Economists said that these markets had ‘decoupled’ from the stagnating and debt-ridden Western economies, so that even when everyone else was suffering, the likes of China and Russia would shrug off financial problems. When the crunch came, however, the decoupling theory vanished in a puff of smoke. The BRIC countries (Brazil, Russia, India and China) were among the hardest hit by a perfect storm of falling commodity prices and global financial collapse.

Investors with funds specialising in these areas have suffered a great deal. If you had put £1000 in Allianz’s RCM BRIC Stars Fund this time last year, you would now have £433. If your focus had been on China, you might have done even worse with the Jupiter China Fund, which would have turned your £1000 into £391. Is this the end of our excitement over the BRIC economies, or an indicator of value to be had? Some experts believe that now is the time to up your exposure - as long as you are investing for the long term. Gary Dugan, Chief Investment Officer at Merrill Lynch Global Wealth Management, said that, if you take a long view, BRIC countries have investment opportunities beyond those available in the West.

“In the medium and long term the major emerging economies of Brazil, China, India and Russia will remain the engines of global economic growth. Even today we are seeing the Chinese government acting to maintain momentum with reducing interest rates, tax cuts and infrastructure spending,” he said. “Russia has the potential to rebound strongly when equity markets there settle, and India and Brazil have huge emerging middle classes.”

In the short-term, however, Mr Dugan said that battered UK equities may offer good value, and investors could gain whilst still investing in what they know best. “Investors can buy UK, US or European equities - all of which have fallen heavily - and expect a return nicely above 10 per cent when markets recover,” he said. “ And they can get this without going further afield to emerging markets they understand less well.”

Perhaps the biggest blow to emerging market fans this week was news that China’s economic growth slowed in the third quarter of the year, slipping into single digits for the first time in four years. After the excitement caused by the Olympic Games in Beijing, the admission from China’s National Bureau of Statistics that “uncertain and volatile factors in the international climate” are “starting to release their negative impact on China’s economy”, fuels fears that Chinese growth is beginning to stutter.

Mining group Rio Tinto added to the negative sentiment by warning of a major slowdown in China. Tom Albanese, the Rio Tinto chief executive, said China was “pausing for breath”, while BHP Billiton, Rio’s rival, also talked of slowing Chinese growth. Robin Geffen, fund manager at Neptune, who presides over funds in both Russia and China, said that despite this news, China still had potential for economic growth in the next two years “that would be difficult to find in any of the OECD countries”.

He points out that although investors who put their money in a year ago are out of pocket, those who have invested on a longer term basis are not suffering. “It is about responsibility in marketing as well,” he said. “We have not advertised these funds for over two years. All too often people buy in at a time of maximum performance and maximum highs.” Over five years, most BRIC funds are still showing a profit. If you had invested 1000 in JP Morgan’s India fund five years ago, you would now have £2436. Gartmore’s China Opportunities Fund would have given you £1676.

Mr Geffen believes there is value to be had in BRIC countries, particularly in China and Russia. “You would be buying into these markets at very cheap historical levels,” he said. “The problems with emerging markets in the past have been that they had very high levels of foreign debt in dollars and now they have high levels of foreign currency. They will also have much higher growth in their economies than the OECD countries.”

Hedge Funds Worldwide Post Record Losses in September
Hedge funds worldwide posted record monthly losses in September, according to Eurekahedge Pte., as short sale bans and client redemptions amid the credit crisis hurt funds including Citadel Investment Group Inc. The Eurekahedge Hedge Fund Index, which tracks 2,431 funds that invest globally, declined 4.7 percent, preliminary figures from the data provider show. The drop is the biggest one-month loss since it began collecting data in 2000 and the index, down 7.9 percent through September, is set for its worst year on record.

"The volatility has been difficult even for seasoned veterans to manage; one day the markets plunge on apocalyptic fundamentals, and the next day they surge," said Robert Howe, founder of Hong Kong-based hedge fund manager Geomatrix (HK) Ltd., which oversees $32 million. "As many managers just liquidate to wait out the storm, or clients do it for them, money drains out of all investment strategies."

Hedge funds have suffered in a financial market contagion triggered by the collapse of the U.S. subprime mortgage market last year, losing about $88 billion of assets on investment declines and investor withdrawals in September. That's reduced the industry's total size to about $1.8 trillion, according to Singapore-based Eurekahedge. Money overseen by hedge funds has grown to about $1.9 trillion from $490 billion at the start of the decade, according to Hedge Fund Research Inc. of Chicago.

Managers investing in European markets were among the worst performers, sliding 6.9 percent, followed by those investing in emerging markets, which fell 6.8 percent, according to Eurekahedge. The Eurekahedge North American Hedge Fund Index dropped 5.3 percent, while the Eurekahedge Asian Hedge Fund Index declined 4.8 percent. The index tracking Japan investments and Latin America were least affected, losing 4.4 percent and 4.1 percent respectively.

By strategy, September marked the worst month on record for so-called arbitrage and relative value funds, which attempt to profit from price discrepancies between markets, and macro funds -- those seeking to profit from economic trends by trading stocks, bonds, currencies and commodities, Eurekahedge said. Managers who trade futures, known as commodity trading advisers or CTAs, was the sole strategy that posted gains in September, as bets on oil futures and volatility helped stem losses on market-wide declines in asset prices, Eurekahedge said.

Lehman Brothers Holdings Inc., once the fourth-largest securities firm, filed for bankruptcy protection in September while American International Group Inc., Fannie Mae and Freddie Mac were bailed out by the U.S. government, sending the MSCI World Index into its biggest monthly slide since August 1998. The decline in markets also came as the U.S. Securities and Exchange Commission temporarily banned short selling of more than 900 stocks. In a short sale, an investor sells a borrowed security, aiming to profit by repurchasing it later at a lower price and returning it to the holder, pocketing the difference.

Citadel Investment's biggest hedge fund fell as much as 30 percent this year because of losses on convertible bonds, stocks and corporate debt, two people familiar with the Chicago-based firm said earlier this month. While hedge fund managers have struggled, they have still outperformed the key benchmarks. An index tracking managers of so- called long-short funds, who bet on rising and falling stock prices, declined 6.6 percent, compared with the MSCI World Index's 12 percent slide in September, the report showed.

Among those that employ those strategies in Asia, the Tantallon Fund, a long-short fund managed by Singapore-based Tantallon Capital, declined 4.2 percent in September, according to data compiled by Bloomberg. Assets shrank to $544 million at the end of the month, from $1.5 billion at the start of the year. The QAM Asian Equities Fund managed by Quant Asset Management, a Singapore-based hedge fund, which uses computer models to pick trades, fell 4.8 percent in September, according to the firm.

The Japan Macro Fund, run by Singapore-based Asia Genesis Asset Management Pte, fell 1.8 percent last month, the worst month this year, according to Chua Soon Hock, managing director of the firm and the manager of the fund. The $745 million hedge fund trimmed its year-to-date advance to 9.3 percent, he said. The Akamai Pan Asia fund, run by Geomatrix, ended September down 0.8 percent as it closed some of its short positions after countries including the U.S. and Australia introduced temporary bans for short selling. The fund said it bought long-term holdings in Japan, Hong Kong, South Korea, Australia and India.

Spend, Baby, Spend: US Budget Deficit to Soar Again
Signs of hard times getting harder in the U.S. are appearing every day. Home construction has dropped to its lowest level in roughly 60 years. Industrial production has fallen by rates unseen since the early 1970s. Consumer spending continues to decline month after month, even as the holiday season approaches.

But there is little evidence of belt-tightening in Washington. While the rest of the country switches into austerity mode, there's almost a boomtown feel in the capital, where a federal spending spree is rapidly driving the federal deficit to record heights. For the fiscal year ending Sept. 30, the gap between revenue collected by the government vs. what it spent was already lofty at $455 billion — an amount equal to nearly 7% of GDP, making it the largest deficit since the end of World War II.

And the red ink will continue to rise, thanks to panicky raids of federal coffers by policymakers trying to stem the financial crisis. President George W. Bush started the current bonanza in February by approving a $152 billion economic stimulus package. When other bailouts, including the recently passed $700 billion financial rescue plan, are counted, Washington is set to shell out some $1.5 trillion in the near term.

Projections for the next fiscal year's deficit start at roughly $550 billion and go as high as $1 trillion, depending on the government's current obligations, expected further spending measures and falling tax revenues related to the slowing economy. Rather than causing alarm, though, the rising deficit is viewed by policymakers and economists as a necessary evil to keep the economy afloat.

"There is a real threat of a serious recession," says Robert Bixby, head of the Concord Coalition, an organization dedicated to eliminating deficits and shoring up the federal budget. "So it's appropriate in those circumstances to loosen fiscal policy, so long as it is done on a targeted and temporary basis."

At some point, most economists argue, the U.S. will have to balance its budget and repay what it has borrowed to fund the spending spree. That will most likely mean reducing outlays and raising taxes in the future. But neither presidential candidate can convincingly argue that a balanced budget is possible in the next few years.

Both are advocating economic programs that will probably increase the deficit even more. Republican candidate John McCain is calling for some $52 billion in economic recovery spending, while Democratic candidate Barack Obama's plan would cost roughly $175 billion. Both McCain and Obama have vowed to cut taxes, which is likely to drive the deficit higher.

Washington may be forced to abandon its current easy-money policies sooner than expected, in part because of the looming budget realities of big entitlement programs like Social Security and Medicaid. But for now, big spending will continue to be the order of the day. "There's a recession," says Richard Kogen, a senior fellow at the Center on Budget and Policy Priorities who spent 21 years as a staffer on the House Budget Committee. "Recessions temporarily increase the deficit. A couple of years after they're over, everything returns to where it was before." The next President no doubt will be hoping Kogen is right.

Another Fed rescue
First, it was the banks. Now the Federal Reserve has come to the aid of money market funds as the government seeks to break the credit logjam that threatens the global economy. A week after the government announced it would spend $250 billion to buy stakes in U.S. banks, the Fed stepped up yesterday to help money market funds that have been squeezed by worried investors demanding to cash out their holdings.

Under a new program, the Fed will help buy up to $540 billion in short-term debt, including certificates of deposit and commercial paper that expires in three months or less. This type of debt has historically been used by money market funds seeking safe, conservative returns for their clients. But the recent turmoil has caused one prominent fund to fall below $1 a share, an extremely rare occurrence. Since that fund "broke the buck," many money market funds have had trouble selling assets to meet redemption requests by customers.

The new program "should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments," the Fed said in the statement. "Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households."

It was a move supported by Legg Mason Inc. Chief Executive Officer Mark R. Fetting, who said yesterday that the Baltimore company is interested in participating in the program. Separately, Legg has been shoring up some of its money market funds hurt by investments in soured mortgage-backed securities. "We and other industry players have been working on things like this and this particular development, I think, will have a real impact on bringing a real catalyst to bringing more confidence in the market," Fetting said in a brief interview.

Fed officials said that about $500 billion has flowed out of prime money market funds since August as investors worried about their ability to redeem shares. Of the total $3.45 trillion held in money market funds as of Friday, about $858 billion was in so-called "prime" money market funds - the type that typically invest in commercial paper - according to fund-tracking firm iMoneyNet.

Mutual fund managers, including Legg, also have seen skittish investors move money to Treasury funds that have lower yields. Fetting said yesterday that the federal government's latest move also could help restore investor confidence in prime money funds. "Eventually, people who are in Treasury and government funds will start to be dissatisfied with the yield differential and ... be willing to go back to prime funds and pick up some yields," Fetting said. "This helps those prime funds have the liquidity to move their portfolios in ways that make sense."

T. Rowe Price Group spokesman Brian Lewbart said the Baltimore money manager is looking into the details of the program. "Anything that helps liquidity in the market is welcomed," he said. Last month, the Reserve Primary Fund managed by New York-based Reserve Management Co., dipped below $1 per share because of losses on debt of the collapsed investment bank Lehman Brothers. It was only the second incident of investor losses in the 37-year history of money funds.

Several financial services companies decided to cover the losses for their clients invested in the fund, including the parent of Baltimore brokerage firm Ferris, Baker Watts. The Royal Bank of Canada, which acquired Ferris, promised as much as $35 million to cover customer losses.

The Reserve Primary Fund's decline prompted many money market investors to move their investments for greater safety. In response to a run on those funds, the Treasury Department announced last month that it was tapping a $50 billion Treasury fund to insure money market mutual funds. Legg and T. Rowe Price were among asset managers that signed up for the insurance program.

And the Fed agreed to give emergency loans to banks so they could buy commercial paper from the funds. JPMorgan Chase & Co. was chosen yesterday to run five special funds that will buy from money market mutual funds certificates of deposit, bank notes and commercial paper. Each of the five special units will buy assets from up to 10 bank and financial company issuers. The program may be expanded to include purchases from other money market investors.

AIG to Halt Lobbying Efforts
American International Group Inc. said it will stop lobbying lawmakers and regulators, after coming under congressional pressure and questioning over how it is using more than $120 billion loaned by the government to keep the company afloat.

The financial-services giant has also cancelled about 160 events scheduled for coming months, that were to cost a total of $80 million, AIG spokesman Nick Ashooh said on Monday. Congressional overseers have raised questions over a series of lavish events thrown by AIG in the days after its government rescue last month, including a $440,000 weekend at a California spa for top business producers.

"We're reviewing all of our expenses and activities. As part of that we have suspended lobbying activities," Mr. Ashooh said. Democratic Sen. Dianne Feinstein of California and Florida Republican Sen. Mel Martinez wrote to AIG Chief Executive Edward Liddy on Friday, telling him not to use its government loan to try and roll back tougher mortgage-industry licensing requirements and other controls.

The Wall Street Journal reported on Thursday that AIG was still engaged in a state-by-state effort to soften new federal regulations requiring mortgage originators get licenses and provide extensive background information. Abuses and fraud by mortgage originators helped ignite the crisis that threatened AIG with bankruptcy and forced the federal intervention. Sens. Feinstein and Martinez sponsored the mortgage-oversight legislation, which Congress passed in July as part of a sweeping housing-industry rescue package.

"AIG has spent millions to lobby states to soften the licensing provisions, even after taxpayers loaned AIG more than $120 billion to prevent its collapse precipitated by excessive risk-taking," the senators wrote in their Friday letter to Mr. Liddy. "We find it unconscionable." Also on Friday, House Oversight Committee Chairman Rep. Henry Waxman (D., Calif.) wrote to Mr. Liddy, asking for, among other things, information on any events held by the company since Jan. 1, 2008, through the next six months.

As part of its internal review, Mr. Ashooh said on Monday, Mr. Liddy has told employees that any personal expenses incurred during the California spa weekend must be reimbursed. Mr. Ashooh said that for now, AIG was not closing any of its lobbying offices, but that workforce reductions would be part of the company's restructuring.   "We're not suspending lobbying as a cost-saving measure but as part of an overall review of what activities we should be involved in," he said.

The Federal Reserve extended the loans to AIG in exchange for an 80% ownership stake, fearing that a collapse of the company could reverberate around the globe. AIG was not banned from lobbying under the terms of its deal with the Fed. Initially, AIG said it would continue to lobby, which it argued was important for protecting the interests of taxpayers and shareholders of the 20% of the company not in government hands. But it reversed that position after word of its activities got out last week and sparked protests from Congress.

Russia, Iran and Qatar announce cartel that will control 60% of world's gas supplies
Western concerns about global energy markets hit new heights last night when Russia, Iran and Qatar said they were forming an Opec-style gas cartel. The move by the three countries, which control 60% of the world's gas reserves, was met with immediate opposition from the European commission, which fears the group could drive up prices.

Alexey Miller, chairman of Russia's Gazprom, said they were forming a "big gas troika" and warned that the era of cheap hydrocarbons had come to an end. "We are united by the world's largest gas reserves, common strategic interests and, which is of great importance, high cooperation potential in tripartite projects," he explained. "We have agreed to hold regular - three to four times a year - meetings of the gas G3 to discuss the crucial issues of mutual interest."

Miller's comments, likely to increase pressure on the west to accelerate developments in wind and other renewable energy alternatives, followed a meeting in Tehran with Gholamhossein Nozari, Iran's petroleum minister, and Abdullah bin Hamad al-Attiyah, Qatar's deputy prime minister and oil and energy minister. Miller said the group was establishing a technical committee comprised of specialists and experts to discuss the implementation of joint projects embracing the entire value chain from geological exploration to marketing.

The Russians avoided the word cartel but the Iranians spelled it out clearly. "There is a demand to form this gas Opec and there is a consensus to set up gas Opec," Nozari told a news conference. With Opec due to meet on Friday to look at ways of driving up oil prices, Miller said fossil fuels were going to cost more. "We share the opinion that oil price fluctuations don't put in question the fundamental thesis stating that the era of cheap hydrocarbons has come to an end."

The European commission said last night that it would oppose the creation of any organisation that could restrict competition. "The European commission feels that energy supplies have to be sold in a free market," said its spokesman, Ferran Tarradellas Espuny. The west already suspects that Russia and Iran are happy to use energy to pursue political goals. The cutting off of gas by Moscow to Ukraine in the middle of a political and commercial spat caused outrage and worry in western Europe.

For its part, Iran, in its stand-off with world powers over its nuclear programme, has threatened to choke off oil shipments through the Persian Gulf if it is attacked. A gas cartel could extend both countries' reach in energy and politics, particularly if oil prices bounce back to the highs seen this year, prompting politicians, businesses and consumers to look toward cleaner-burning natural gas and other alternative fuels.

The gathering in Iran needs to be ratified by further meetings in Qatar and Russia but is the most significant step toward the formation of such a group since Iran's supreme leader, Ayatollah Ali Khamenei, raised the idea in January 2007. The European Union depends on Russia for nearly half of its natural gas imports. Moscow, which controls many of the pipelines from Russia and central Asia, already has a tight hold on supplies.

"To try to manoeuvre the supply makes perfect sense," said James Cordier, president of the US-based Liberty Trading Group and "Just because it doesn't have the clout of oil, it's still in their best interest to deliver natural gas where it needs to go and manage supply in order to help manage the price." Liquefied natural gas, a rapidly growing segment of the market, could be traded as a commodity similar to oil and the move by Russia, Iran and Qatar appears to anticipate that, said Konstantin Batunin, an analyst with Moscow's Alfa Bank. "My take is that it is just a commitment to create something in the future," he said. "It's just a first step."

Bush vows big push for Doha trade deal before leaving
President George W. Bush vowed on Tuesday to press hard for a successful conclusion of the nearly 7-year-old round of world trade talks during his last few months in office. "The recent impasse in the Doha Round of trade talks is disappointing, but that doesn't have to be the final word. And so before I leave office I'm going to press hard to make sure we have a successful Doha round," Bush said at a White House summit on international development.

Even with an all-out effort, it would be difficult for negotiators to finish every detail of a new world trade agreement before Bush leaves the White House on Jan. 20. However, U.S. officials have said it was still possible to reach a deal in 2008 on key agricultural, manufacturing and services trade issues at the heart of the round.

That would give important momentum to the talks and increase the chance the next U.S. president -- be it Democrat Barack Obama or Republican John McCain -- will invest early energy in steering them to a successful end. Bush said it was important countries not worsen the global financial crisis by closing their markets to imports. "In the midst of this crisis, I believe the world ought to send a clear signal that we remain committed to open markets by reducing barriers to trade across the globe," he said.

Brazilian President Luiz Inacio Lula Silva made the same argument in his weekly radio address on Monday after returning from a trip to Spain and India where he discussed the global financial crisis and trade talks with Prime Ministers Jose Luiz Zapatero of Spain and Manmohan Singh of India. "During this moment of international crisis it's important to conclude the Doha accord so we can show the world something positive, something to restore optimism in humanity," Lula said. "I came back from India more confident," he said.

Disagreement between India and the United States over safeguards in farm trade was one of the main reasons that talks collapsed in July at a trade ministers meeting in Geneva. Meanwhile, the European Union's new trade chief on Monday stressed the role the United States must play in pushing the Doha round to successful conclusion.

"Particularly at a time when the economies of the world face turbulence, we need to redouble our efforts to make sure we have agreement, and America has a very clear and strong place to play in that," EU Trade Commissioner Catherine Ashton told the European Parliament's trade committee.

Alternative Energy Suddenly Faces Headwinds
For all the support that the presidential candidates are expressing for renewable energy, alternative energies like wind and solar are facing big new challenges because of the credit freeze and the plunge in oil and natural gas prices. Shares of alternative energy companies have fallen even more sharply than the rest of the stock market in recent months. The struggles of financial institutions are raising fears that investment capital for big renewable energy projects is likely to get tighter.

Advocates are concerned that if the prices for oil and gas keep falling, the incentive for utilities and consumers to buy expensive renewable energy will shrink. That is what happened in the 1980s when a decade of advances for alternative energy collapsed amid falling prices for conventional fuels.

“Everyone is in shock about what the new world is going to be,” said V. John White, executive director of the Center for Energy Efficiency and Renewable Technology, a California advocacy group. “Surely, renewable energy projects and new technologies are at risk because of their capital intensity.” Senator Barack Obama and Senator John McCain both promise ambitious programs to develop various kinds of alternative energy to combat global warming and achieve energy independence.

Mr. Obama talks of creating five million new jobs in renewable energy and nearly tripling the percentage of the nation’s electricity supplied by renewables by 2025. Mr. McCain has run television advertisements showing wind turbines and has pledged to make the United States the “leader in a new international green economy.” But after years of rapid growth, the sudden headwinds facing renewables point to slowing momentum and greater dependence on government subsidies, mandates and research financing, at a time when Washington is overloaded with economic problems.

John Woolard, chief executive officer of BrightSource Energy, a solar company, said he believed the long-term future for renewables remained promising, though “right now we are looking at tumultuous and unpredictable capital markets.” Venture capital financing for some advanced solar projects and for experimental biofuels, like ethanol made from plant wastes, is drying up, according to analysts who track investment flows.

At least two wind energy companies have had to delay projects in recent days because of trouble raising capital. Several corn ethanol projects have been delayed for lack of financing in Iowa and Oklahoma since last month, and one plant operator in Ohio filed for bankruptcy protection last week. Tesla Motors, the maker of battery-powered cars, recently announced it had been forced to delay production of its all-electric Model S sedan, close two offices and lay off workers.

Investment analysts say initial and secondary stock offerings by clean energy companies across global markets have slowed to a crawl since the spring, and for the full year could total less than half of the record $25.4 billion for 2007. Worldwide project financings for new construction of wind, solar, biofuels and other alternative energy projects this year fell to $17.8 billion in the third quarter, from $23.2 billion in the second quarter, according to New Energy Finance, a research firm in London. The slide is expected to be sharper in the fourth quarter and next year.

In the United States, financing for new projects and venture capital and private equity investments in renewable energy this year might still top last year’s results because so much money was in the pipeline at the beginning of the year, but the pace has slowed sharply in the last month. The next presidential administration, to make good on campaign rhetoric and continue supporting renewables, will have to choose alternative energy over other programs at a time of ballooning deficits. Analysts say that is no sure thing.

“Government funding for renewables is now going to have to compete with levels of government funding in other areas that were unimaginable six months ago,” Mark Flannery, an energy analyst for Credit Suisse, said. The central questions facing renewables now, experts say, are how long credit will be tight and how low oil and natural gas prices will fall. Oil and gas are still relatively expensive by historical standards, but the prices have fallen by half since July. Some economists expect further declines as the economy weakens.

Wall Street analysts say most utilities and other builders can profitably choose big wind projects over gas-fired plants only when gas prices are $8 per thousand cubic feet or higher. Natural gas settled Monday at about $6.79 per thousand cubic feet, down from about $13.58 on July 3. “Natural gas at $6 makes wind look like a questionable idea and solar power unfathomably expensive,” said Kevin Book, a senior vice president at FBR Capital Markets.

Government mandates already on the books, including state rules requiring renewable power generation and federal requirements for production of ethanol, ensure that to some degree, alternative energy markets will continue to exist no matter how low oil and gas prices go. But the credit crisis means some companies that would like to build facilities to meet that demand are going to have problems. “If you can’t borrow money, you can’t develop renewables,” Mr. Book said.

Renewable energy now meets 7 percent of the nation’s energy needs, and public subsidies have promoted a leap for several alternative energy sources in recent years. Ethanol is sold nationwide as a gasoline additive, and federal legislation aims to replace a major share of the oil now imported into the United States with domestically produced biofuels in the next 15 years. Enough new wind power was installed in the United States to serve the equivalent of 4.5 million households in 2007, the third year in a row the country led all nations in new wind power.

Renewable energy has become a big business worldwide, with total investment increasing to $148.4 billion last year, from $33.4 billion in 2004, according to Ethan Zindler, head of North American research at New Energy Finance. Mr. Zindler said the upward momentum had halted, and that total investment this year was likely to be lower than last.

In the 1970s, just as in recent years, high prices for fossil fuels led to rising interest in renewables. But when oil prices collapsed in the 1980s, the nascent market for renewable energy fell apart, too. Congress eliminated tax credits for solar energy, ethanol could not compete with cheap gasoline and a wind farm boomlet in California failed to catch on in the rest of the country.

The epicenter of investment and development moved to Europe, with its strong government support for renewables, and began shifting back only when heating oil and natural gas prices shot up again in recent years. There are some differences this time. Coal, another major competitor of renewables, remains expensive and is facing increasing scrutiny over environmental concerns. Most important, renewable energy entrepreneurs and experts say, is the growing government and public backing for renewable energy in the United States.

“What is driving the market this time is that we’re at war and this is a security issue,” said Arnold R. Klann, chief executive of BlueFire Ethanol, a California company that is planning to make ethanol out of garbage with the help of $40 million in financing from the Energy Department. In its recent financial rescue package, Congress provided $17 billion in tax credits to promote various forms of clean power, for everything from plug-in electric vehicles to projects that will capture and store carbon dioxide from coal-burning power plants.

Production and investment tax credits were extended for wind energy for one year, geothermal energy for two years and for solar energy for a full eight years. Meanwhile more than 30 states have enacted standards demanding that utilities generate a minimum proportion — typically 10 to 20 percent — of their power from renewable sources in the next 5 to 10 years. But some analysts say the government supports may not be enough to propel continued growth for renewables, noting that several states have already relaxed their goals. “When they can’t meet their targets,” Mr. Book said, “they change them.”


Ilargi said...


The CNN piece on mass pay-offs is in today's Rattle. I see all the stuff pass by, 4000 jobs at National, 1500 at Yahoo, etc. I'm just waiting for someone who actually gets paid for it to do some research, and come back with an overview.

What struck me today was someone saying that a lot of stores will close before Christmas, simply because they can't get credit to purchase inventory.

As you know, I've been talking about this for a long time. It's the trickle down economy. At its best.

Anonymous said...

Ilargi, that was a great quote of Deepak Chopra. Thanks for sharing it.

While children, the elderly and the weak are evicted from their homes, corporate welfare has become limitless and endless.


Anonymous said...

.....and ultimately till the value of human life itself will be discounted to a hair’s width above absolute zero.

I met a Nigerian ex-neighbour of mine who had sold his London house at a peak price and was trying to build another one over there. He was carrying what looked like a pearl-encrusted walking stick.

He told me that in Nigeria human life has no value and that despite the nation's oil wealth poverty is everywhere. The best bet for most people to get a square meal is to attend a funeral, he said, where no expense is spared. It doesn't matter if you didn't know the deceased, just turn up and party.

Is this the wake now? Feed now before the body is buried?


Anonymous said...

"The recent impasse in the Doha Round of trade talks is disappointing, but that doesn't have to be the final word. And so before I leave office I'm going to press hard to make sure we have a successful Doha round." -- Bush II

I feel quite sick.

Unknown said...

That chart associated with the first Wells Fargo article is a stunning summary of the money blown by the U.S. so far... thanks for including it, Ilargi. I am passing it around to some folks.

Anonymous said...

Stoneleigh -- Thanks for your reply to me the other day. Eliza

Anonymous said...

Hello El Pollo,

Glad to hear you finally regained control over your bonds. However, I would not discontinue the process of opening an account at the DFA. The dollar is gaining strength daily and this could be a good time to spread some of your risk. Even if you start out with only 1 k€ of bonds outside the U.S., you would have that backdoor ready and waiting if you need it.

The yield today on the 5-year bond (114153) that you can purchase directly via the DFA is 3.40.

Even Tagesgeld stands at 3.30.

Just a thought.


DJ said...
This comment has been removed by the author.
Ilargi said...




"The US spent $27 trillion dollars last year on health care "

Think not...........

Anonymous said...

wow 27 Trillion on HC...and 14 Trillion of it on Valium for the FED.

DJ said...

Yeah, I think he missed a decimal point there. I'll ask him and correct it. Besides the obvious error there, how is that not a proposal?

The Lizard said...


This "rights" thread is O/T here, but no, I'm afraid we're not talking the same language at all.

Ghosts and jesters tell the truth about "rights".

Anonymous said...

"Make the president tell us the truth" is not much of proposal. If someone wants to know the truth they can find without the president(a lot of it here). Most people don't look for it because the don't want it (too painful). Now Denninger, for example, (right or wrong) has a proposal. One other tiny little thing we need is leaders who can execute a proposal. In other words, we are toast.

Anonymous said...

I& you said...just wait...

Oct. 22 (Bloomberg) -- "...The cost of protecting corporate bonds from default rose on investor concern that money-losing hedge funds may not be able to meet their commitments in the market for credit-default swaps. Credit-default swaps on the benchmark CDX North America Investment Grade Index rose to the highest in eight days as a performance gauge showed that hedge funds worldwide posted record losses last month. Contracts on Citigroup Inc., the second- largest U.S. bank, rose the most in a week. Contracts on Deutsche Bank AG climbed and a benchmark European credit swap index reached a record earlier today in London..."

el gallinazo said...

Hello Francois,

Yes, I held on to those German treasuries way too long simply because I wanted some eggs that couldn't be confiscated by our bald men from Corleone. Not only was the Euro tanking fast from 1.60 but I held them with UBS which is a dead man walking. I could bail out the Queen Mary with my sea kayak easier than Switzerland can bail out that sucker. But your suggestion is good, and I will continue to pursue it now that the pressure is off. Thanks for your recommendation.

Crystal Radio

Are you suggesting that I join the carry trade between Canada and the USA :-) In September the Can $ was 0.95. I should have waited a month and I could have saved $10 on my Sask. jackfish license. Actually I have my eye on Icelandic krona - now that's a deal and great fish once again :-) The US 13 week treasury is all over the map. In the past two weeks it's been betweem 0.30 and 1.30 %. Actually I am just trying to hold on to my money so I can buy a Cadillac Escalade SUV for $300 next year. My island has over 50 km of paved roads.

DJ said...
This comment has been removed by the author.
Starcade said...

Ilargi: What real assets are there left?

And, on top of it: I would be surprised, really, if there are basically any real stores or malls left by mid-2009. The retail sector is going to be abjectly _BEHEADED_!

bobe: And it'll be our bodies which are buried first. The only real question left is _when_...

I mean, I'll be blunt: I don't have long left. It almost would be better to find out _how long_, though...

dark_matter: Truth = Riot. That's it. That's why the PPT exists. That's why the whole economy is a rigged Ponzi scheme. Truth = riot. _Because_ our lives aren't worth sh*t to them.

Greenpa said...

Ilargi- thanks. Not surprised you saw it too; delighted you also saw it as significant. Hours later- still not hitting the news.

Just saw this one I think you'd like: Time to Invest in "Emerging Markets!"

My jaw was kind of dropping on the floor. Like you, I still boggle at the sheer cluelessness of the experts.

Basically - this car you're trying to sell me- has 4 flat tires and a flat spare- no gas- a rusted through gas tank- 10 blown fuses- a busted windshield - no spark plugs, or spark plug wires- and brakes that have rusted shut-

And, you assure me, it's going to win the Kentucky Derby next week?

Sounds good. Sign me up.

Ilargi said...


You may want to check the planned demonstrations at End the Fed .

And Porposal still makes me think of happily jumping dolphins.

Ilargi said...


I just now noticed that I wrote pay-offs instead of lay-offs. Hello uncle Sigmund.

Much as I would like to, I see nothing good in emerging markets, A 66% loss in the BRIC countries should make that clear enough.

Still, there will be a rally, designed to take out what is left in our economies. And boy, will they fall for it.

DJ said...

Thanks, Ilargi. I must have read that 10 times, and I completely missed it. I'll fix that too, as not embarrass myself any further.

DJ said...

Again, with the spelling error fixed this time. Too bad we can't edit comments! And I'll certainly look at that site, Ilargi.


Like many Americans, I watched the last debate and was stunned and upset by the fact that again, neither candidate would answer the question, “What programs will you have to cut when you assume office?”.

On November fourth, with the economy in free fall, America votes for a new President. It’s a difficult time to pick new leadership and we Americans are displaying a high level of frustration over the candidates’ unfocused statements about the economy and how to fix it. Yet it would be naïve to expect more from two men in the political center asking for votes from the left and right. We can only parse their words and try to wring meaning from presidential haiku.

Part of the problem is that both McCain and Obama know the volatile collision of a recession and the collapse of the economic system gives them a free pass once they enter the White House. Simply put, all bets are off and all promises used to get your vote will absolutely be revised after January 20th. That’s a reality, not only because of where the economy is now, but more importantly, how bad it’s going to be by January, 2009.

There is only one goal Americans should be insisting on today; that immediately following the inauguration, our next elected President – whoever he is - come clean with the American people and tell us finally, truly how bad the problems are.

As we now know, we’ve lived for decades beyond our means as citizens and as a country. We’ve ignored the implacable laws of economics and refused to live with facts, preferring instead to invest in the fiction that what goes up doesn’t have to come down.

Going forward, Americans need to join together now to say in print, on the net, on TV and radio that while it may not be up to our candidates to tell the truth, it most certainly is up to our next President to do so. Americans need to insist, loud and clear, that whoever wins in November, opens the books to share with us the whole story about the real state of our economy, our indebtedness, our infrastructure, educational system, health care and energy policies. These are the pillars of our future and they’re in a sorry state. A few examples:

* The interest on our ten trillion dollar national debt means we are sending billions of dollars every month to China just to keep up with the interest payments.

* The US spent $2.7 trillion dollars last year on health care but we rank 23rd in infant mortality and 20th in life expectancy for adults.

* In spite of spending more on education than any country in the world, US teenagers in science rate 29th in the world, behind countries like Croatia and Liechtenstein.

* We are allocating only10% of the monies needed to repair and keep our infrastructure in good order. The problem will only get worse as bridges roads and rail continue to fail and decay.

These bits of information and hundreds more, are common currency plastered all over the web but how many have the whole picture? I listened to a report on radio recently, highlighting the number of people who now can’t bring themselves to open their monthly, 401K statements. That fact brings to mind the classic parable about three blind men who encounter an elephant. Each one touches a different part of the beast and so they argue about whether it’s a tree, a snake or a spear. That’s what happens when you only get a piece of reality.

Only our reality isn’t a parable. It isn’t a myth. The elephant is in every living room in the country and we must collectively turn on the lights, take its measure and show it the door. The only person who can turn on that light nationwide is the next President of the United States.

The next President has to put us on a war footing alright but it isn’t about social issues, political preferences or even Al Qaeda. This is a war to protect the financial underpinnings of our country; underpinnings which are the pillars holding up this great house. If we fail to unite, to take these issues head on, if we fail to join together as a people to take the extraordinary measures and cutbacks needed on a personal and national level then we will all be too busy paying the piper in the next decade to have the luxury of social discussions about Roe V Wade. The current bailout may or may not alleviate the immediate pain, but the most dangerous mistake we could make as a country is to once again imagine that when the pain is gone, the disease is vanquished.

Our task is to tell the President exactly what we want. This is not to suggest that we can unite to decide on solutions. I’m saying the discussion about deciding on solutions cannot take place until we know the size of the problem. We, the citizens of America, regardless of political preferences, must demand that we are told how bad things really are. How else can we help the President and help ourselves, our neighbors, cities and states to join up, take heart and inspire a unified national effort, unlike anything seen here since the World War?

But here’s the risk. The one opportunity a President has are those few golden weeks, right after the inauguration before the long knives of politically driven imperatives return to the White House. Those few weeks post-inauguration are the only moment our new President will have to connect with the American people and drive a national consensus about the sacrifices in store for all of us.

Unfortunately, as the Washington Post said in a recent editorial, “This may be the shortest honeymoon in history”. Our risk is that in the blush of victory, the excitement of making new appointments and injecting presidential power into the system, our most compelling problems will be put aside until it’s too late to come clean, to steady our aim and call for a new reality. Without unparalleled and immediate leadership right after the inauguration, congress will continue to kick this garbage can down the road. Who among us can accept leaving our children and grandchildren with this mess? Who can imagine telling them “it wasn’t our fault?

I believe that Americans are more exhausted today by feelings of helplessness than the prospect of cutting back. I believe they are more sick of the lies than of the truth. I think they’re ready to step forward now with energy and commitment and be a single voice insisting we want to learn about our problems in cold hard language. I think Americans are ready willing and able to participate in our own revival, to sacrifice for the greater good, to tell the cynics who treat us like children, “Go to Hell”.

Our two candidates know we are in the middle of a national drama greater than anything we have faced since the great Depression. One of these men will be our next President. If we fail to convince them that we can accept the awesome magnitude of the problems we have ignored for decades, then the long term consequences of short term solutions and four more years of the same disingenuous leadership are almost unimaginable.

Join me in raising expectations. Together, we can make certain our next President will have no choice but to accept the fact that in February 2009, we must hear the whole truth and nothing but the truth.

Email me at -

Stoneleigh said...

E Brown (from two days ago),

We agree stockmarkets are very sensitive gauges of the nation's population's sentiment. How did you get your predictions so right, while Prechter has bumbled through a number of awful predictions? If I'd taken his advice in 2002 I'd have missed out on a lot of gains. Having taken Ilargi's and your advice I've preserved money.

Forecasting with elliott waves is probabilistic rather than prescriptive. There are always several potential interpretations ranked in order of probability based on the number of guidelines they satisfy. There are also upper and lower boundaries that act as stops for traders (signals to exit a stance - to take profits or limits losses), so that their risk in pursuing a particular course of action is limited.

It isn't necessarily obvious to which degree of trend a move belongs, given that moves at all degrees of trend unfold simultaneously. Following the principle of minimizing the cost of being wrong, if you are confident that a market collapse is coming, it is better to err on the side of caution by being early than missing the boat by being too late. Although there is an opportunity cost to being early, being late can easily be fatal. Assuming that a decline on the scale of the tech wreck was the beginning of something larger was prudent at the time.

In fact, in real terms (looking at the DJIA in terms of ounces of gold for instance) the high was in 2000 and the very large scale market did begin then. The nominal high of October 2007 did not compensate for the fall in the currency in which it was measured, as the money supply essentially doubled between 2000-2007. The nominal rally disguised a crash in real terms, a crash that unfolded silently until recently. For most people, even those who appeared to win, their real net worth and/or purchasing power actually declined during the rally years.

Of course the Wall street fat cats did very well indeed, but many will pay for that once the public mood turns ugly. Quite a few will end up in jail, while others may even pay a higher price. Some will disappear to international havens, but may find the locals far more hostile than they had anticipated.

Did you think the onset of this great deflation were starting back when Prechter did? Do you use Elliott waves and interpret them in a different manner than he does? I'm curious...

I was certainly open to the possibility, having watched the credit bubble inflate and knowing what happens when credit bubbles implode, as they inevitably do. I have been preparing for depression since the late 1990s, not knowing how long we would have before we had to rely on what we had accomplished. Fortunately we've had longer than I would have expected.

I don't really interpret elliott waves differently, but I do factor in many other aspects that financial analysts wouldn't consider. Basically, my big picture is bigger, in that I include peak oil (understanding the role of energy as the master resource), environmental factors, carrying capacity and population in addition to the collective psychology underpinning elliott waves. I think that gives me a more complete notion of where we're headed.

Pure finance types also tend to have a kind of built in optimism that their profit-making system will survive. Even Mish, Roubini and Denninger, all of whom understand credit bubbles, nevertheless assume that we can save the system is only we do 'x', and can't seem to imagine what might happen if economic activity were to come to a grinding halt for a period of time.

They're still looking for investment opportunities, partly because they write for the relatively wealthy, rather than for ordinary people trying to rescue what little they have from a voracious deflation. As libertarians (in two out of three cases), I think they don't fully appreciate the nature and implications of socioeconomic collapse. Margaret Thatcher, who had similar political convictions, once famously said that there's no such thing as society, and that is a blinkered view if ever there was one.

Prechter is another libertarian financial type, but I find his work a very valuable piece of the overall puzzle. Just don't pay any attention to his views on peak oil, which he doesn't understand.

Anonymous said...

Oh please, let there be one more rally...

I've been afraid to look at my portfolio lately. My massive 40K of investments is at 19K and dropping by the second.

It's all non-US oil, oil-services, and mining companies. Canada, Australia, Singapore.

It had been up 30 -40% for quite a while...

Should I just give up? I thought oil was going to be the big winner with the peak at hand...

I don't 'need' the money now - will it rise up again some day? (praise jesus!)

Other than not cashing out I'm thankful for all the good advice. Economize, localize, produce.

Easy come, easy go. It was an inheritance a few years back. At least I took a few surf trips...

Irrational exuberance on Monday ---> panic by Friday ---> Meetings Fri pm and Saturday ---> Bailout on Sunday.


Anonymous said...


DJ, your proposal is just about exactly 1000 words longer than Lincoln's Gettysburg Address.

I would strip it down, regroup the ideas into two paragraphs and not exceed 350 words.

Your chances of being read will be much higher.

For what it is worth,

Stoneleigh said...


IMO there is a rally coming, and a significant one at that. It could be a steep retracement, should last at least a couple of months, and should be accompanied by a new wave of denial. IMO we'll see new lows first though.

I would use the rally to cash out, as a better opportunity is unlikely to be forthcoming.

el gallinazo said...


Did you hear about the Libertarian who was ex-communicated for sharing a chocolate bar with a stranger?

Anonymous said...

Denninger thinks we are "days away" from a complete blowup due to Treasury being unable to finance their 13 week bills. My question is: if the World hasn't stopped buying U.S. Treasury notes over the past year, why stop now?

Anonymous said...


I would appreciate your thoughts on this question.

We settled on our coastal land 15 years ago thinking that we would stay here forever. My husband has a secure job here, for now. Then came along catastrophic climate change forecasting and now we know that eventually we must leave our homestead to higher more northerly grounds. We are planning on paying cash for a few acres and building a small and simple homestead in New England, for our young adult sons as well as ourselves.

We have already visited the area and know what we want. From reading your comments I gather that we should hold out on the purchase of the land until housing prices decline further, probably during the next year or two. Our cash is under our control. We've contemplated buying land now or waiting until spring 2009 to buy the land and start building the house. We are afraid that if we wait too long, materials might not be readily available, etc.

Do you think it is "safe" to wait until next spring to purchase land (thinking it might cost less then) and build a house?

Your response will be much appreciated.


Anonymous said...


"My question is: if the World hasn't stopped buying U.S. Treasury notes over the past year, why stop now?"

Just a guess, but trying to auction off $3 trillion+ more in T-Bill debt in a short span of time when the total outstanding foreign held Treasury debt is about $2.7 trillion might have something to do with it.

More than doubling external held treasury debt in one fell swoop has got to give anyone pause and cause to wonder how the US taxpayers will repay this in full, not to mention how it dilutes the overall value of the dollar.

Blue Monday

Anonymous said...


It sounds like you're in the same position as me and my family. Land prices have come down 10-15% so far but we need another 40% decline in order to afford something. Buying at this reduced price will probably mean we too will lose real estate value as the financial collapse takes in earnest hold but no matter. At this point, we would be happy to take such a paper loss in trade for more time to figure out how to become more self-reliant before support systems also collapse.

If I were you, I'd buy as soon as I found something that met my minimum requirements and left a bit of cash for a few improvements.


Anonymous said...

A Matter of Life and Debt

THIS week, credit has begun to loosen, stock markets have been encouraged enough to reclaim lost ground (at least for now) and there is a collective sigh of hope that lenders will begin to trust in the financial system again.

But we’re deluding ourselves if we assume that we can recover from the crisis of 2008 so quickly and easily simply by watching the Dow creep upward. The wounds go deeper than that. To heal them, we must repair the broken moral balance that let this chaos loose.

Debt — who owes what to whom, or to what, and how that debt gets paid — is a subject much larger than money. It has to do with our basic sense of fairness, a sense that is embedded in all of our exchanges with our fellow human beings.

But at some point we stopped seeing debt as a simple personal relationship. The human factor became diminished. Maybe it had something to do with the sheer volume of transactions that computers have enabled. But what we seem to have forgotten is that the debtor is only one twin in a joined-at-the-hip pair, the other twin being the creditor. The whole edifice rests on a few fundamental principles that are inherent in us.


As for what will happen to us next, I have no safe answers. If fair regulations are established and credibility is restored, people will stop walking around in a daze, roll up their sleeves and start picking up the pieces. Things unconnected with money will be valued more — friends, family, a walk in the woods. “I” will be spoken less, “we” will return, as people recognize that there is such a thing as the common good.

On the other hand, if fair regulations are not established and rebuilding seems impossible, we could have social unrest on a scale we haven’t seen for years.

Is there any bright side to this? Perhaps we’ll have some breathing room — a chance to re-evaluate our goals and to take stock of our relationship to the living planet from which we derive all our nourishment, and without which debt finally won’t matter.

Anonymous said...

Part of my 'big picture' in understanding economic matters is to look at the US not as a producer of anything but as a dumping ground for the world's exporter countries. (basically everyone)

This is labeled 'free trade' but it is actually a one way street.

The US keeps going deeper and deeper into debt and everyone else has a nice trade surplus.

Globalization is the other term for this.

The US trade (consumer) deficit is huge and Japan's carry trade (almost zero% loans) helped finance this truly unbalanced situation.

Japan and the world loves this.

As long as the Interest on this enormous trade deficit could be serviced (NOT the principle mind you) the global economy hummed along.

This can not go along like this indefinitely because eventually the Interest on the US trade deficit can't increase to infinity.

It hit the 'tipping point' last July and the SHTF when the Japanese carry trade stopped, essentially because it could no longer facilitate the servicing of the US trade deficit Interest.

And here we stand today, with 'free trade' and globalization grinding to a halt because the US can't/won't assume anymore debt via an unbalanced essentially one way world trade.

The consumer nation is broke, dead broke and cannot even pay the Interest on it's debts, much less the Principle, without of course, resorting to printing greenbacks.

Fade to Black

Make that Fade to Red

Anonymous said...

A few questions:

Why would the market rebound for a few months? Won't the next few months bring more obvious consequences to light? How do both those things happen at once?

It seems Obama may win('s hard to see a R winning but it's in reach). What happens to all the bailout/financial sector people and decisions that are being put into place right now? Aren't they going to be replaced by new people? Obama wouldn't want to keep Bush's people in place? It feels to me like we are not actually pulling the strings anymore. I get the feeling people in Washington are doing what they are told to do but I don't know from whom.(?)

Asia looks horrible already. It seems like the Fed/Paulson/etc let this go on for a few days and then propose an urgent new fix that costs billions or more. I get the feeling all this talk of another stimulus package,etc is just to buy a week or two more but cannot figure out why. Why is it better to drop the truth of where we are after the election. I guess it feel like they have an outcome they'd like to see at the Fed and I don't know who it is.

Could someone rig the whole election? How would that look. Forget voter fraud. You cannot get enough people to do it well to avoid a court case. Could someone just make someone particular win? I've never heard any good conspiracy theory on that but as someone who hates them both equally, I am not feeling blinded by some kind of loyalty. It leaves me more curious about the goings on in a mechanical sort of way. The 'how'.

Last one: what do you all think Joe Biden was talking about the other day with his gird your loins comment. Seems he and the rest were given some top secret briefing about the state of things in the world. Any theories. Seems like it was so overwhelming to him he had to find a way to talk about it/around it. The man is a psychoanalysts dream..
Sorry to many questions rattling around in my head.

The Lizard said...

"Japan and the world loves this."

1 - Open tab in your browser.
2 - Visit Google.
3 - Search on Japan fiscal crisis
4 - Click on the second link to to open the PDF.
5 - Read.
6 - Note that what happened was not a Shinto Conspiracy to smear the good names of the American Founding Fathers.

Anonymous said...

Your Idea that the mistake all candidates,and others, are making is to assume that the system is fixable struck a chord with me.I have figured it out now,I think.Paulsons job at this point is to get Bush out the door before it all blows sky high,as well as attempting to ensure the right people get out with the china and the silver when things disintegrate.Because I am pretty sure thats the level we are looking at now.Not being able to get christmas junk in walmart,or target ect. would send shockwaves through our society.Seeing k-mart,and the rest empty would get the point to America "its over."
Thats when it would start to get strange.

No one would be able to deny that we are well and truly f#cked.

I had not caught the "gird yer loins"comment.Like maybe after Christmas,it all goes boom

Our country allowed a wastrel,a man with a history of failure to rule.He broke the bank,alienated every friend we had,allowed our good name to be used by thieves...stole,and murdered,and tortured...sent men to their deaths for the enrichment of his class...all in all showed us what happens when a world class sociopath is enpowered by those who really rule our nation.

I cannot listen to him.I shut off whatever devise is being shat thru.

I hope that those who put him there,are now beginning to see what misery their actions have caused.There is no hell of a prison fit to hold those justices on the supreme court whose action may very well have destroyed the the usa as we know it.I hope they never have a days peace.Those around them will know it was them...and I hope their children will disown them,their friends forget them and they spend every wretched day of their lives regretting this sin against america.Their actions were treason.

I know the day of reckoning is coming,where this countries people will stand broke,destitute,chained by debt on the land they once walked as free .

Biden is giving warning now...its coming...and its going to be bad.

I cannot see whats coming.those that know are too busy hiding their ass'ets.

Be good/or carefull


The Lizard said...

Chris Martenson has Chapter 20 of his Crash Course up and running:

Sorry for no link, but Blogspot suddenly doesn't allow HTML and I'm not seeing the regular comment box. (??)

EBrown said...

Thanks for the long reply Stoneleigh. I appreciate it, and a big part of the reason I give weight to your analysis and that of Ilargi is your understanding of the big picture. I followed you over here from TOD, as the financial crisis struck me as more imminent than PO. Now it looks like there is little/no doubt this is the case.

bluebird said...

1st question
The U.S. has over $10T in debt. If U.S. confiscated private pensions, as Argentina, how much debt would remain? If there remained a lot of debt, what would U.S. confiscate next? 401Ks? IRAs? Finally, how how would the U.S. pay off the rest of the debt? or default?

2nd question
So Hank & Ben are running around trying to save themselves and their rich crony friends before the big crash. But everything they try, is not working. If the crash occurred before they got all the loot, then they lose too, just like everyone else globally?

Anonymous said...

It occurs to me that Obama may be the one chosen to take a hit for the team,so to speak,and do what no other pres could do w/o a revolution...privatize social security to "stabilize" the would be the "statesman" like thing to do w/the current crop of advisers he has.

bluebird said...

DJ - I agree that the next President needs to explain to us that our nation is broke, why it is broke, what we are facing as a nation and globally, and what needs to be done. He needs to do this, perhaps at the State of the Union address, or earlier. And he will need everyone, poor & rich, to help get thru the difficult times ahead.

bluebird said...

Anonymous@ 9:45 - With our national debt at over $10T, I am not sure we will be able to have a social security, medicare, or other entitlement programs. I feel they will be sacrificed to pare down the debt.

Dan said...

@ Bluebird:

RE: "Hank and Ben 'losing'"

NO! No no no. The ones who will "win" are the ones who can survive the mayhem without having to interact with it. The rich peeps, like Spanky P., can use cash to essentially block out reality and keep to themselves for a few years. big homes, gated 'communities', on-site dining, etc. Sequestered living, but still high-on-the-hog.

Dan said...

@ BB and DJ

The concept of a President telling the truth makes me chuckle. Political leaders are about as capable of being honest as Waiters in a restaurant are about telling patrons how "clean" the kitchen is.

Stoneleigh said...

Denninger (in his Cat 5 warning piece):

Ben and Hank produced a dislocation in this section of the marketplace by favoring other debt instruments with federal guarantees, thereby forcing money out of these instruments.

This in turn created major problems for money market funds who buy this paper as a routine matter of course in that when they needed to redeem deposits they suddenly found no buyers for the securities, as those people had fled to other instruments that Ben had guaranteed payment on!

As each new facility is rolled out by Ben and Hank a new area of debt becomes backstopped by the government in some fashion, thereby forcing money out of other instruments and causing those instruments to become distressed!

Guarantees are spreading far and wide for exactly this reason, but each new guarantee leads to all guarantees being more worthless - a larger and larger bluff with less and less chance of being able to keep the promise. It's a desperate bid to restore confidence (in the hope that the promise will therefore not have to be kept), but when it fails nothing will be guaranteed. In the meantime of course, it makes things worse by spreading the distress far beyond the original targets.

Denninger says: There is a very real risk that this Treasury Issue could force GDP return on new debt below zero. If that happens then the stability of the monetary system disappears immediately and you will see instantaneous and very large fails in the Treasury marketplace.

The consequence of this event would be catastrophic. Ben would have only two choices - print raw money, which would immediately collapse the Treasury marketplace, or get Treasury and Congress to immediately reduce issue and spending to sustainable levels.

What would "sustainable levels" be? Given that issue is running $3 trillion year-on-year, this could result in an immediate and forced cut in all federal spending by fifty percent or more as the TARP and other program money will have been spent and cannot be recalled.

Yes, you read that right. Now go look at the Federal Budget and you will find that you could eliminate all discretionary programs and all of the military and not get there. This means that in order to attain stability we would have to immediately gut Medicare and Social Security by about 50%, cut our military budget dramatically, perhaps by 25% or more, and eliminate essentially all discretionary spending - all farm subsidies, the Department of Education, Unemployment Assistance and more.

Oh, and having done that, the long end of the curve would probably still spike to 10%, which means 13-14% mortgage rates. Cut the value of every house in America in half - again - from here.

This is essentially the scenario I see unfolding, and I see no way at all to avoid it. I think we'll see yields spike and prices fall in the long end of the curve (ie 10 and 30 year bonds rather than 13 week T-bills), and rates on other lending are set to spike as well.

Remember that in a deflation, real interest rates would be high even if nominal rates were low - the nominal rate minus negative inflation. If nominal rates shoot up, as I think they will, probably next year, it means that real rates are going through the roof.

That equals a credit crunch the like of which no one alive today has ever seen, and is the reason why debt is anathema under these circumstances. How many people could continue to cover their debts with rates that high, even if they could keep their jobs, which will not be the case in general?

There is no safe level of debt, and if you owe that debt on an asset that will be illiquid (ie especially real estate), by the time you find you can't cover the debt anymore, it will be far too late to sell the asset.

I agree with Denninger that we are going to see drastic cuts in services and entitlements (as the printing money option won't work for reasons we have covered here before). This is why you need liquidity now - you will be on your own in a pay-as-you-go world.

Denninger says: There is exactly one way to stop this idiocy, and that is for the bad debt that exists out there to be forced into default and thus cleared from the system.

True, but that also means living through deflation, as we are destined to do whatever congress does or does not do. The scale of the bad debt is such that it cannot be cleared in an orderly way. Either we force it out of the closet now (which we won't do), or we postpone the day of reckoning until the point where the GDP return on new debt drops below zero (the exploding debt scenario) and exactly the same unwinding process occurs (sometime in the new year IMO).

Denninger says: This will produce a monstrous number of foreclosures but that is preferable to the alternative - an economic depression.... A massive number of consumer bankruptcies sounds bad, but is in fact good, as clearing the bad debt from the system is necessary to prevent its collapse.

True in theory, but in practice the system collapses either way because the number for foreclosures, bankruptcies, consequent bank collapses and then blow ups in the CDS market will be staggering.

Denninger: Those in the media who are chuckling at the folks stockpiling beans and rice will be begging for some of that stash.

The media will probably be demonizing hoarders and demanding that supplies be shared, even though there would only be a drop in the bucket for anyone if that happened. It can be difficult to benefit from foresight under those conditions. Basically, don't make it obvious what you are doing, as you can't afford to supply everyone in your neighbourhood who didn't take precautions.

Denninger: We may be literally days away from a second, far more serious credit and equity market dislocation, this time originating outside the United States.

This is entirely possible, as the crisis is truly global and there are huge problems brewing in Europe and Asia. I don't think we've seen a bottom for this phase of the decline yet, so an even like this could be rationalized as the cause for an spike low prior to the coming rally.

Denninger: If Congress fails to act (given that Treasury and The Fed have demonstrated they will tie our sovereign debt to the commercial credit markets to the greatest extent possible) and this second dislocation occurs the probability of an economic Depression rises to 80% or more and the odds of the 2003 market lows holding into 2009 and beyond are essentially zero.

I think an economic depression is guaranteed, and the odds of the October 2002 lows holding into next year is minimal at best.

bluebird said...

Dan says "keep to themselves for a few years". Yes, that is so, but this bubble is so big, globally, that eventually, the bubble will burst them too.

Anonymous said...

Can someone comment on the price of gold right now? Spot gold is at ~710, and has been dropping for several days now. Rumor has it that there is a widening spread between the price of 'paper' gold and physical gold, in effect a manipulation to get those who hold gold as an investment to sell out on 'dropping gold prices'.

Anonymous said...

Pardon, the prices I quoted are in USD

bluebird said...

Stoneleigh says "There is no safe level of debt, and if you owe that debt on an asset that will be illiquid (ie especially real estate), by the time you find you can't cover the debt anymore, it will be far too late to sell the asset."

Does this mean, if I have a low fixed-rate mortgage, that the government can increase the rate? Or rather that the value of the house declines so much that I am paying the same monthly payment with same low rate, on a basically worthless house?

Anonymous said...

Greenspan was on CNN saying that very thing that the Fed and treasury need to "tie sovereign debt to the commercial credit markets to the greatest extent possible "

The only thing lacking in th speech were the words " my precious"

Dan said...

@ CrystalRadio


"Riddles in the Dark"


Stoneleigh said...


Does this mean, if I have a low fixed-rate mortgage, that the government can increase the rate? Or rather that the value of the house declines so much that I am paying the same monthly payment with same low rate, on a basically worthless house?

I'm not convinced that fixed-rate mortgages will actually stay fixed-rate. Even if they do, the income needed to make the payment may disappear. What seems like a small, or at least affordable, monthly amount now may seem an impossible sum in a cash-constrained future.

Also, I think there's a distinct possibility that lenders will call in loans, even though that would be against the current rules. Current rules probably won't mean much by the end of next year, and margin calls are a prevalent feature of deflation.

People don't understand how much worse deflation is than inflation. Deflation can pull the rug out from underneath people's feet so quickly that they have no time to adapt, whereas inflation is a chronic scourge that builds up much more slowly. Both debtors and creditors are typically ruined by mass default during deflation, and there can be very few places to hide. That's why, in a world of no risk-free options, he who loses least is the winner.

Anonymous said...

"... Rumor has it that there is a widening spread between the price of 'paper' gold and physical gold, in effect a manipulation to get those who hold gold as an investment to sell out on 'dropping gold prices'..."

Everyone can easily verify by contacting those who actually use gold ... jewelry stores ... where are they getting it from and at what price.
Also, contact the banks and ask if they can "deliver" some gold.

The readers of this blog are world wide and therefore would give a good indication of what is happening.

bluebird said...

Thanks Stoneleigh. My house is paid for, but my two thirty-something kids have houses with low fixed-rate mortgage. Unfortunately, neither understands the deflation nightmare about to befall us.

Unknown said...

"Roubini Says 'Panic' May Force Market Shutdown"

He says many hedge funds will go belly up and the resulting market panic will force the gov to close them, like russia did a few weeks ago.

Anonymous said...

Thanks for yesterday's Denninger link, CrystalRadio.

"We may be literally days away from a second, far more serious credit and equity market dislocation, this time originating outside the United States."

Wonder where. I was thinking, possibly, the flight of western capital from Russian equities could trigger a large run on the banks in Russia, which would then spread contagion westward through depleted Eastern European markets and into Western Europe. Or is the really dry tinder elsewhere?

-Reluctant Poseidon Hamster

Anonymous said...

You indicated that there will be a rally some time in Nov. which could possibly last a couple of months.
I am having trouble wrapping my head around this concept. The information that I am reading here and what I am hearing in the news is quite dismal and frightening. It is going to take a couple of weeks to get my mutual funds over to the bank, and so I'm not sure if I should wait now or just go ahead.

Dan said...

More Conjuring:

Oct 21: "...A central clearinghouse for credit-default swap trading may open November after pressure from the U.S. Federal Reserve for a means to absorb losses should a market maker fail, according to Barclays Capital strategists. A CDS contract is traded over the counter between to parties without strict margin requirements--> $54 trillion CDS market introduces substantial counterparty risk. Jorion/Zhang (NBER) show that the observed excess clustering of company defaults can be explained with credit contagion from counterparty risk...Technically, a clearinghouse, capitalized by its members, all but eliminates the risk of trading partner default by being the buyer for every seller and the seller for every buyer. It employs daily mark-to-market pricing where margin calls are made if a trader's position has lost money that day. Traders who can't pay have their positions liquidated..."

"Liquidated"? (In law, liquidation refers to the process by which a company (or part of a company) is brought to an end, and the assets and property of the company redistributed. /WIKI)

ASSETS REDISTRIBUTED?!?!??!?!? Do you mean DEBT redistributed?!?!??!?!?!!!!?

This seems like YET another bit of Hokus Pokus...meant to somehow try and make the debt simply go away.

Anonymous said...

this is an interesting dialog between Economist Nassim Nicholas Taleb and his mentor, mathematician Benoit Mandelbrot, as they speak with Paul Solman about chain reactions and predicting the financial crisis.

Anonymous said...

oops, the link

Anonymous said...


Treasury bonds are perfect for dumping. They are liquid, so investors can sell them easily. And they have high prices. Unlike my friend's bank stocks, you can generate lots of purchasing power by selling them.

My concern is, if this credit crisis gets worse, it's going to trigger even bigger whales to liquidate their Treasury bond holdings... whales like the Chinese, the Japanese, or the oil exporters.

So far, we've only seen what happens when banks and hedge funds liquidate. If Japan and China start unloading – or even if they just slow down their purchases – the Treasury bond market will fall through the floor.

This sets off another vicious cycle. As prices fall, the interest rates Uncle Sam must pay rise. The higher interest rates rise, the more the US must pay... which makes bond traders mark down the country's credit rating. This sends bond prices even lower...

If the trend grows, we'll see a biblical collapse in the Treasury bond market.

Why bond prices could collapse

Anonymous said...


If lenders/servicers can't prove ownership of the mortgage note how can they recall the loan? Challenging the lender in court to produce the original note has shown some success in court. Worth a try?

Anonymous said...

@ Hangedman
The Paul Burkett who co-authored the Japan Fiscal Crisis peice you cited lives in our town, and occasionally goes to our congregation with his wife.

-Brian M.

team10tim said...

Re: divergence of paper and physical gold prices

I think the prices are diverging because lots of little folks are trying to get their hands on something tangible while large institutional players are selling their gold positions to raise cash.

I am wondering about getting the physical gold at the market price by buying gold futures and then actually taking delivery. It looks to me like the cheapest way to get physical gold if that's what your heart is set on. Is there some reason that this won't work?

Stoneleigh said...


This sets off another vicious cycle. As prices fall, the interest rates Uncle Sam must pay rise. The higher interest rates rise, the more the US must pay... which makes bond traders mark down the country's credit rating. This sends bond prices even lower...

If the trend grows, we'll see a biblical collapse in the Treasury bond market.

I'm particularly concerned about this with regard to 10 and 30 year bonds. We're seeing a flight to safety to those at the moment, but I would avoid them. In order to get your money back you either have to wait that until they mature or find a buyer. If many are selling, prices will be depressed and you won't be able to sell them for what you paid, meaning that they aren't a good wealth preservation vehicle. The resulting high yields will represent high risk as the US enters the exploding debt phase.

Short term treasuries are much less of a risk. You can wait until maturity to get your money back so you don't need to find a buyer at depressed prices. I don't think we're near the point where we would see a default in short term debt (like Russia in 1998). While nothing is entirely safe, short-term T-bills should be one of the safest options around in a sea of risk.

Stoneleigh said...


If lenders/servicers can't prove ownership of the mortgage note how can they recall the loan? Challenging the lender in court to produce the original note has shown some success in court. Worth a try?

It's worth a try, but the odds aren't great.