Tuesday, October 28, 2008

Debt Rattle, October 28 2008: Like there's no tomorrow

Lewis Wickes Hine The Shining 1908
Bootblack boy in St. Louis

Ilargi: Wherever I look this morning, Asia, Europe, Wall Street, I see journalists and analysts claim that bargain hunters are causing the rising stock prices. They're not. There is something different going on.

Prices these days fall when and because large investors need to sell assets in order to get cash. Prices rise when large investors need to cover their shorts.

The investors involved in both cases are largely identical, though not entirely. It's important to understand that while, obviously, price drops cause loss of capital, price rises are now the result of the same. Everybody still tries to hide their losses, but it’s getting much harder. That's what happens in casino's: there comes a point where you have to show your hand. And when things get bad, sometimes you have to show both.

After Porsche said it wanted 75% of Volkswagen, VW went up 150% yesterday, and 93% more today (that’s an almost 500% increase!), to become the biggest company in the world. Not because it's doing great; in fact, it's rumored to be drowning. Which is why parties like Morgan Stanley, Goldman Sachs and major hedge funds were shorting the stock. Porsche's announcement forced them to cover their shorts and buy VW like mad men. And so you get to be the global no.1 because gamblers are paying off their losses.

The Bank of England reports today that the total cost of taxpayer funded bail-outs has surpassed $7 trillion. As insane as that is, it's just the start. Now even Roubini wants to add another $500 billion plan in the US. That’s his second whopping no-no in a week. His first was a claim that the worst in the credit markets was over, and the real problems would from now on in be in the real economy.

Yes, Libor and other spreads are down a bit, and yes, the real economy now hits the real trouble. But the credit markets are still getiing worse by the minute. That is because the underlying reason for the crash, the casino toilet paper, is still being hidden, protected and even bailed out. A plan like Roubini’s, half a trillion dollars more for 'infrastructure', is a dead in the water duck -or worse- as long as the horse race tickets are kept away from daylight. And Roubini should know that.

Turns out, the banks that got the bail-out billions are not using it to lend out, and they don’t give a hoot about Congress threatening to give them a grillling. They’ll use the taxpayers’ cash to buy other banks. Small fish gets eaten by bigger fish gets eaten by biggest fish, with Hank Paulson deciding who gets to be big.

And even that's just a humble beginning. The IMF is running out of money to put thumbscrews on the world's poor. But that won't deter the fund, it can simply start issuing AAA rated bonds, which are rated by the .... IMF, and in real life are simply more casino bathroom paper. And if you don't like that one, they’ll move to the most perverted financial instrument in centuries, the Special Drawing Rights, also called paper gold, introduced in 1969, in anticipation of Nixon’s 1971 decision to not honor US gold liabilities.

Who do you think determines the value of an SDR? Yup, you’re right, it’s the IMF. They can buy the world. That may seem far-fetched, but don't forget that for a few billion dollars in loans that have to be paid back at high interest, they’ve bought themselves financial control of the likes of Hungary, Iceland, the Ukraine and soon Pakistan, Serbia, Croatia, Latvia and Turkey. And their eye is on Russia.

I was wondering last night how much money it would have taken me to drive up oil prices to $147 a barrel, go short oil all out, drive prices back down to $40, make a killer of a profit, and kill off OPEC control, Putin and Venezuela in the process. I concluded that $1 trillion would have been enough, when carefully utilized.

I've long since realized that it's no use to fear for the future of mankind, since there's nothing kind about man. But I still am surprised at how little people focus on the symbiosis of crisis and opportunity. There are people out there busy bankrupting the entire planet, and buying it back for pennies. Just like in the 1930's US rust and dust belt, but this time on a global scale.

Global bank bail-outs cost taxpayers more than $7 trillion so far
Governments and central banks across the world have bailed out the global financial industry with £4,473bn of taxpayers' money, the Bank of England's Financial Stability Report shows. The size of the unprecedented rescue is equivalent to 12pc of the entire $60,000bn (£38,000bn) global economy.

Of the sum, £395bn will be used to recapitalise banks and £397bn will be spent buying up their "toxic" assets. State guarantees to get the wholesale markets moving again come to £2,927bn, and another £754bn has been provided in loans and through bank nationalisations. Despite the massive rescue operation, "risks remain in the financial system", the report warns. A fundamental overhaul of bank structures is now expected to reflect the "dangers [financial risks] bring to the wider economy".

The report proposes "dynamic provisioning", where banks set aside larger sums in boom years to absorb the blows of a downturn. "New counter-cyclical tools to dampen the financial cycle and stronger capital and liquidity requirements" are needed to "safeguard against systemic risk", the report says.

The unregulated shadow banking market, where the Bank estimates $14,500bn of "toxic" assets responsible for the financial crisis have proliferated, is also expected to come under tight scrutiny. The report says: "Existing infrastructures need strengthening in light of the liquidity and counterparty risks which crystalised during this crisis."

Addressing the UK, it adds that loan growth will slow markedly – from 21pc in 2005 to just 4pc next year – as lenders reduce their reliance on wholesale markets. Last year's £740bn "customer funding gap", representing British banks' dependence on wholesale funding, may need to shrink to 2003 levels of £265bn, the report suggests.

UBS markets strategist Meyrick Chapman said the global problems created during the boom "will take several years to unwind". Until the excessive levels of leverage in the financial system have been worked through, he said: "Everyone will have to get used to reduced amounts of credit and difficulties in refinancing."

Fed heads toward uncharted territory
Ben Bernanke & Co. are likely to cut interest rates again on Oct. 29. And some experts think rates could soon fall below 1% for the first time.

The Federal Reserve is widely expected to cut interest rates again this week. But could the Fed soon go where it has never gone before and bring them below 1%? The Fed lowered its federal funds rate, the benchmark overnight lending rate at which banks lend to one another, by a half-percentage point to 1.5% in an emergency announcement Oct. 8. Many investors believe the central bank will cut rates by at least another half-percentage point following the end of a two-day meeting on Oct. 29.

In fact, the fed funds futures on the Chicago Board of Trade are now pricing in a 26% chance that the Fed will cut rates by three-quarters of a percentage point to 0.75% by that meeting. Fed Chairman Ben Bernanke has said in recent weeks that economic weakness is likely to continue into next year, despite rate cuts and other recent moves taken by the Fed and Treasury Department to try and fix the credit crisis. Last week, Bernanke pushed Congress to consider a new stimulus plan to spur the economy.

"Everyone at the Fed has pretty much told you they're going to cut," said Rich Yamarone, director of economic research at Argus Research. "They're in a kitchen sink mode right now. Rate cuts, fiscal stimulus, bailouts - they're throwing everything they can at this right now." Still, would the Fed really consider lowering interest rates below 1%? The last time rates were at 1% was between June 2003 and June 2004.

Rate cuts have been a key tool the central bank has used in the past to boost a weak economy. A variety of lending rates, including credit cards and home equity lines, as well as the prime rate used to set many business loan rates, are pegged to the fed funds rate. So lower rates usually lead to cheaper credit, thus spurring businesses and consumers to spend money more freely.

But in the current credit crisis, with banks afraid to make loans due to worries about their firms' own need for cash in the near term, already relatively low short-term rates have done little to get credit flowing. (The Fed cut rates seven times between September 2007 and April before holding them at 2% for several months.) Some economists argue that another rate cut may be the least important step the Fed can take in its effort to solve the crisis.

"It's window dressing, only a psychological weapon," said Sung Won Sohn, economics professor at Cal State University Channel Islands. "Right now, the problem isn't the cost of the Fed's money, it's that the existing money supply is not circulating. The pipelines are clogged." Even Fed Vice Chairman Donald Kohn seemed to acknowledge that rate cuts aren't as important as they once were. In an Oct. 15 speech, Kohn said the coordinated global cut the previous week had already been "overwhelmed ... by the further erosion in confidence."

Still, many economists say that fear and uncertainty in the markets is so great right now that the Fed can't risk leaving rates unchanged. And they say anything that can be done to spur lending is a positive. "It's not irrelevant, even if it's not as important as usual," said David Wyss, chief economist with Standard & Poor's. Wyss said that if the U.S. credit and financial markets remain in crisis, a cut below 1% could come later this year or early next year.

To be sure, some have pointed to rates being at 1% for as long as they were as a factor in the housing bubble earlier this decade. It was the plunge from those inflated home values that sparked the credit crisis now dogging markets. Low rates can also feed inflation. But that might be a sacrifice the Fed has to make. "Inflating our way out of this mess is the Fed's only option at this point," said Peter Boockvar, market analyst of Miller Tabak, in a note Friday morning.

With the global economy slowing down, there are few economists talking about the threat of inflation. And the continued decline in home prices has negated most fears of low rates leading to another housing bubble. So even a cut to nearly 0%, a rate where the Bank of Japan left rates for much of the 1990's, is not out of the question, given the unprecedented nature of credit problems. "There's a hesitation to do it because it looks like desperation. But they're getting desperate," said Wyss. 

U.S. Should Enact $400 Billion Stimulus, Roubini Says
The U.S. government should enact an economic stimulus package of between $400 billion and $500 billion before the end of the Bush administration in January, New York University professor Nouriel Roubini said.

Roubini, who predicted the current financial crisis in 2006, said the economy risks falling into “a self-fulfilling animal spirit recession that is more severe than otherwise” because of the collapse of credit markets and weak consumer and corporate spending.

“The only way to increase aggregate demand is going to be through” government spending on roads, bridges and other infrastructure, Roubini said at a Bloomberg conference in New York. “We need a huge plan, $300 billion is not going to be enough. I think we’re going to need a plan of $400 billion to $500 billion.” U.S. Treasury officials and other policy makers are grappling with financial turmoil that has pushed down the Standard & Poor’s 500 Index by 42 percent this year, its worst annual retreat since 1931.

“If we don’t do that fiscal stimulus today, three months from now, six months from now the collapse of the real economy is going to be so severe that anything we’re doing today to recapitalize the financial system is going to be undone,” Roubini said. President George W. Bush in February signed into law a $168 billion measure that sent tax rebates of as much as $600 to individuals and $1,200 to couples. Checks went to 111 million households beginning in May.

Government efforts to revive lending have made central banks around the world the “lender of first resort” while credit and other markets remain “extremely dysfunctional,” Roubini said. “Financial markets are becoming totally unhinged,” he said. “Fundamentals don’t matter, valuation doesn’t matter the only thing that matters right now is flows, and the flows out there are sellers, and no buyers.”

Investors withdrew a record $43 billion from hedge funds last month, according to TrimTabs Investment Research in Sausalito, California. The Goldman Sachs VIP Basket of stocks with the most hedge fund ownership has lost 47 percent this year, more than eight of 10 industries in the S&P 500. “We’re entering literally a vicious circle where economies are spinning down, financial markets are spinning lower, and the policy makers in my view -- and that’s my biggest fear -- have lost control of what’s going on in financial markets,” Roubini said.

Capital One, Key Among 18 Banks Getting $35 Billion
At least 18 regional U.S. banks, including SunTrust Banks Inc. and Capital One Financial Corp., accepted $35 billion in government cash as the Treasury rolled out the second half of its $250 billion package to shore up lenders and thaw frozen credit markets.

Treasury Secretary Henry Paulson is doling out cash to recapitalize struggling lenders and jump-start takeovers in an industry suffering from the worst housing crisis since the Great Depression. SunTrust, Capital One, KeyCorp and PNC Financial Services Group Inc. are among regional lenders that have agreed to take cash so far by selling preferred shares to the U.S. "This is just unprecedented," said BMO Capital Markets analyst Peter Winter. "What the government has said is that you can't let the financial system fail, and if this doesn't work they'll come up with another plan."

The capital infusions come as governments worldwide do all they can to ensure the stability of banks. Kuwait's central bank said it will guarantee deposits at Gulf Bank KSC, which remains solvent after clients defaulted on currency derivatives contracts, the state-run Kuwait News Agency reported. Paulson already gave $125 billion to nine of the biggest U.S. lenders. Some banks are raising money on their own. Mitsubishi UFJ Financial Group Inc., the Japanese bank investing $9 billion in Morgan Stanley, said it will sell as much as 990 million yen ($10.7 billion) of stock to replenish its capital. Japan's biggest bank may sell as much as 600 billion yen of common shares in the 12 months starting Nov. 4.

The latest U.S. banks to benefit from the government's Troubled Asset Relief Program, or TARP, spanned the nation, ranging from City National Corp., in Beverly Hills, California, to First Niagara Financial Group Inc., based in upstate New York near Niagara Falls. The banks may be joined by life insurance companies, some of which are now in talks with the government about potential Treasury investments, said Jack Dolan, spokesman for the American Council of Life Insurers in Washington.

Dolan declined to say which companies are involved in the talks. Spokesmen for MetLife Inc. the biggest U.S. life insurer, and No. 2 Prudential Financial Inc. declined to comment today. Most U.S. property and casualty insurers won't participate, according to a statement today from Evan Greenberg, chief executive officer of Ace Ltd. and chairman of the American Insurance Association. Other financial firms participating in the program included State Street Corp., the world's largest money manager for institutions, which is selling a $2 billion stake. Northern Trust Corp., a custody bank that oversees $3.53 trillion, plans to sell the government a $1.5 billion stake.

"We're happy to do our part to support the financial and economic stability of the U.S.," Capital One spokeswoman Tatiana Stead said in an e-mailed statement. The McLean, Virginia-based bank is raising $3.6 billion. News of the infusions helped spur gains in U.S. financial stocks. Huntington Bancshares Inc. advanced 15 percent to $9.17 as of 4:10 p.m. in New York Stock Exchange composite trading. Regions Financial Corp., which is selling a $3.5 billion stake, added 11.3 percent. Fifth Third Bancorp, which expects $3.4 billion from the Treasury, rose 5 percent after earlier surging as much as 20 percent.

BB&T Corp., the best-performing stock in the KBW Index this year, said today it will sell $3.1 billion in preferred shares and warrants to the Treasury. BB&T is based in Winston-Salem, North Carolina. First Horizon National Corp., Tennessee's largest bank, said Friday it received preliminary approval to receive about $866 million from the U.S. Treasury. PNC on Oct. 24 announced it was buying National City Corp. for $5.2 billion in stock after receiving $7.7 billion from the Treasury. Washington Federal Inc. and Valley National Bancorp said over the weekend they would receive a total of $560 million from the government. City National said it would sell $395 million in preferred stock and warrants.

Cleveland-based KeyCorp plans to sell $2.5 billion in equity. Huntington, of Columbus, Ohio, announced its application for $1.4 billion in a statement today. The funds will help KeyCorp "gain flexibility in managing our balance sheet" and "enhance our ability to lend to our relationship clients," Chief Executive Officer Henry L. Meyer said in a separate statement today. The bank said that had the $2.5 billion capital increase been in place on Sept. 30, KeyCorp's Tier 1 ratio, measuring the ability to absorb losses, would have been about 10.76 percent, rather than 8.48 percent. A ratio above 6 percent puts banks into a "well-capitalized" category.

Another bank accepting funds was Comerica Inc. The Dallas- based bank, which also does business in Canada and Mexico, said today that it plans to sell $2.25 billion in preferred stock and warrants to the Treasury, boosting its Tier 1 ratio to 10.35 percent. Also included among banks getting funds were UCBH Holdings, the San Francisco-based company that owns United Commercial Bank, which said it expects $298 million from the Treasury. Bank of Commerce Holdings, which owns Redding Bank of California, expects as much as $17 million.

Baltimore-based Provident Bankshares Corp. said today it got preliminary approval to participate in the U.S. program and didn't disclose how much it will get. Old National Bancorp, based in Evansville, Indiana, said today that it has preliminary approval to raise $150 million from the government, and hasn't decided whether to participate.

Big financials' debt losses now over $2.8 trillion, says Bank of England
Losses incurred by the world's major financial institutions on "toxic" assets hoovered up in the final boom years have hit $2,800bn (£1,800bn), according to the Bank of England. The Bank's estimates on the size of writedowns facing banks, insurers and hedge funds – published today in its Financial Stability Report – have more than doubled since its last update in April, and raise the spectre of massive new provisioning by Britain's troubled lenders. Royal Bank of Scotland, for one, is expected to reveal another £4bn of writedowns on Friday.

In the UK, the Bank calculates, "mark-to-market losses" have hit £123bn compared with the £63bn estimated in April. To date, Britain's lenders have collectively written down less than £20bn, though the Bank conceded that the market may be overstating the losses by reflecting "substantial discounts for uncertainty". Losses in the US have jumped from $739bn to $1,577bn, the Bank says, and from €344bn to €785bn in Europe.

For five of Britain's biggest lenders, Barclays, HBOS, HSBC, Lloyds TSB, RBS and Nationwide Building Society, the problems are compounded by deteriorating loan books. Once bad debts on mortgages, credit cards and corporate loans are added to their "toxic" writedowns, the Bank expects credit losses to total as much as £130bn over the next five years. The scenario appears to have been used by the Bank to calculate the £51.4bn of capital required as part of the state bail-out. "This delivers estimated capital shortfalls of £50bn in aggregate to maintain UK banks' capital at current levels," the Bank said.

Without the bail-out, which will see the taxpayer inject £37bn into the sector and provide £450bn of funding, banks would have had to shrink their balance sheets, "potentially causing customer lending to contract", the Bank said. A contraction in lending would have been unprecedented. Lenders have not withdrawn credit in the 26 years the Bank has compiled the data, Morgan Stanley analysts said. Annual lending fell once, in the year to May 1994, due to declining demand. Despite the rescue, the Bank expects credit growth to slow markedly – from 21pc in 2005 to just 4pc next year – as lenders shrink their £740bn "customer funding gap" to 2003 levels of £265bn.

The Government has insisted that banks continue to lend to businesses and households in an attempt to stimulate the economy by staving off job losses and repossessions. However, the report warned of "increasing corporate vulnerability, particularly at businesses heavily dependant on the retail and property markets" as rising numbers of companies are not sufficiently profitable "to cover their interest payments". Deputy Governor Sir John Gieve said that to prevent a repeat of the crisis: "We need to establish stronger restraints on the build-up of risks. That means not just increasing capital and liquidity requirements for [banks] but relating them to the cyclical growth of risk in the system more broadly."

Although the banks are expected to continue to use wholesale markets, strict rules governing the maturity of the funding are likely to be introduced. Over time, the report notes, "banks will need to adjust their balance sheets and funding models". "New counter-cyclical tools to dampen the financial cycle and stronger capital and liquidity requirements" are needed to "safeguard against systemic risk", the report adds. It proposes a "dynamic provisioning" regime where banks set aside greater sums for losses in boom years to absorb the blows of a downturn.

Smaller US banks fear predators armed with bail-out money
America's smaller banks are claiming they could be vulnerable to government-funded predatory takeovers as their larger rivals enjoy huge cash injections from a $250bn (£157bn) Treasury bail-out. The list of US banks signing up for government capital swelled to at least 19 today as middle-ranking names including State Street, Capital One and SunTrust announced they were issuing shares to the Treasury in return for about $17bn.

But critics have questioned whether the funds will be put to good use. Lending remains sparse on the high street and there are fears that the recipients will simply hoard the money — or use it to buy smaller players. Camden Fine, the chief executive of the Independent Community Bankers of America, said it was unfortunate that the US treasury had imposed few conditions on the way the money was used, other than a stipulation that dividend payouts to shareholders must not rise.

"When you have taxpayers' money used by larger banks to purchase otherwise healthy banks, that just promotes the kind of consolidation that got us into this mess in the first place," said Fine. "These taxpayer funds are intended to unfreeze the credit markets and to open up local economies — not to help investors in one bank buy out investors in another."

The latest group of recipients for handouts includes regional players such as First Niagara Financial in upstate New York, Ohio-based Huntington Bancshares and Chicago's Northern Trust. They join the nine top banks originally named by the treasury as targets for the recapitalisation programme such as Citigroup, Goldman Sachs, Morgan Stanley and Bank of America.

A Californian lender, City National Bank of Beverly Hills, made it clear it would consider using its $395m capital infusion to make purchases. Its chief executive, Russell Goldsmith, told the Los Angeles Times the money "clearly enhances our financial capacity to make acquisitions and to lend to a larger degree".

The pace of deals in the banking industry has already picked up. On Friday, Cleveland-based National City Bank agreed to a $5.6bn buyout by a competitor, PNC, which is getting $7.7bn from the Treasury. Keith Horowitz, a banking analyst at Citigroup, said National City did not need capital but had found itself vulnerable as a result of the bail-out. "We believe [the bail-out] in a perverse way pushed/forced National City's management to sell the bank into a buyers' market," said Horowitz in a note to clients.

Banking shares surged on Wall Street today as the government injections began to kick in. There is speculation that aid could be broadened to troubled insurers and even to struggling carmakers such as Ford and General Motors. The assistant US treasury secretary, David Nason, hinted that wider handouts were possible. "We started with the banks because that's targeted with providing more credit to the economy," he said Nason. "There are a lot of industries coming in saying they need federal assistance so we're willing to listen."

IMF may need to "print money" as crisis spreads
The International Monetary Fund may soon lack the money to bail out an ever growing list of countries crumbling across Eastern Europe, Latin America, Africa, and parts of Asia, raising concerns that it will have to tap taxpayers in Western countries for a capital infusion or resort to the nuclear option of printing its own money.
The Fund is already close to committing a quarter of its $200bn (£130bn) reserve chest, with a loans to Iceland ($2bn), Ukraine ($16.5bn), and talks underway with Pakistan ($14.5bn), Hungary ($10bn), as well as Belarus and Serbia. Neil Schering, emerging market strategist at Capital Economics, said the IMF's work in the great arc of countries from the Baltic states to Turkey is only just beginning.

"When you tot up the countries across the region with external funding needs, you get to $500bn or $600bn very quickly, and that blows the IMF out of the water. The Fund may soon have to start calling on the West for additional funds," he said. Brad Setser, an expert on capital flows at the Council for Foreign Relations, said Russia, Mexico, Brazil and India have together spent $75bn of their reserves defending their currencies this month, and South Korea is grappling with a serious banking crisis.

"Right now the IMF is too small to meet the foreign currency liquidity needs of the larger emerging economies. We're in a dangerous situation and there is the risk of extreme moves in the markets, as we have seen with the Brazilian real. I hope policy-makers understand how serious this is," he said. The IMF, led by Dominique Strauss-Kahn, has the power to raise money on the capital markets by issuing `AAA' bonds under its own name. It has never resorted to this option, preferring to tap members states for deposits.

The nuclear option is to print money by issuing Special Drawing Rights, in effect acting as if it were the world's central bank. This was done briefly after the fall of the Soviet Union but has never been used as systematic tool of policy to head off a global financial crisis. "The IMF can in theory create liquidity like a central bank," said an informed source. "There are a lot of ideas kicking around."

For now, Eastern Europe is the epicentre of the crisis. Lars Christensen, a strategist at Danske Bank, said the lighting speed and size of Ukraine's bail-out suggest the IMF is worried about the geo-strategic risk in the Black Sea region, as well as the imminent risk a financial pandemic. "The IMF clearly fears a domino effect in Eastern Europe where a collapse in one country automatically leads to a collapse in another," he said. Mr Christensen said investor sentiment towards the region has reached the point of revulsion.

The Budapest bourse plunged 10pc yesterday despite the proximity of an IMF deal Meanwhile, Standard & Poor's issued a blitz of fresh warnings, downgrading Romania's debt to junk status, and axing the ratings Poland, Latvia, Lithuania, and Croatia. The agency said Romania was "vulnerable to a sudden-stop scenario where capital inflows dry up or even reverese", leaving the country unable to cover a current account deficit of 14pc of GDP. Romania's central bank has taken drastic steps to defend the leu, squeezing liquidity so violently that overnight rates shot up to 900pc. But there are growing doubts whether this sort of shock therapy can obscure the fact that economic booms are now turning to bust across the region.

Merrill Lynch has advised to clients to take "short" positions against the leu. "The fundamental picture suggests that Romania may face a currency crisis in the near term, similar to what Hungary has gone through over the last week," it said. The bank also warned that Turkey and the Philippines are vulnerable. Hungary was forced to raise interest rates last week by 3 percentage points to 11.5pc to defend its currency peg in Europe's Exchange Rate Mechanism. Even Denmark has had to tighten by a half point, raising fears that every country on the fringes of the eurozone will have resort to a deflationary squeeze.

The root problem is that Eastern Europe and Russia have together borrowed $1,600bn from foreign banks in euros and dollars to fund their catch-up growth spurt over the last five years, according to data from the Bank for International Settlements. These loans are now coming due at an alarming pace. Even rock-solid companies are having trouble rolling over debts. Mr Schering said Turkey was likely to join the queue for bail-outs very soon. "Their external liabilities have reached $186bn, and a lot of this is short-term debt that has to be rolled over in coming months," he said.

Turkey's prime minister Recep Tayyip Erdogan said over the weekend that his country would not "darken its future by bowing to the wishes of the IMF", but it is unclear how long Ankara can maintain its defiant stand as capital flight drains reserves. Pakistan - now facing imminent bankruptcy - has also raised political hackles, balking at IMF demands for deep cuts in military spending as a condition for a standby loan. Diplomats say it is unlikely that the West will let the nuclear-armed Islamic state slip into chaos.

Governments May Have Caused Stocks Selloff: Dr. Doom
The wave of stock selloffs sweeping world markets may be partially caused by the fact that many governments increased guarantees for bank deposits, making them a much safer investment, Marc Faber, author of the "Gloom, Doom and Boom Report," told CNBC Monday.

"Now that deposits are guaranteed, basically I as an investor have no incentive to hold equities so I sell them and put my money in bank deposits," Faber told "Squawk Box Europe" by telephone. The other measures taken by various governments to try and prop up ailing markets have had the opposite effect, he added. "The interventions, they actually have increased volatility. It’s impossible to forecast market movements when you have interventions," Faber said.

The next stage of the crisis may be that companies may have to adjust their book value as it happened during the bear markets of the 70s and 80s, when book value was overstated. "If the global economy slows down by as much as I think it will… then a lot of book values will have to be adjusted downward quite substantially," he said.

And central banks cutting rates based on the assumption that the downturn will dampen inflationary effects will have another headache when the worst of the crisis is over, Faber warned."I think first we’ll have a bout of deflation that will actually be quite substantial… but then the budget deficits will go through the roof and the Fed will print even more money … and then later on we'll have very high inflation," he said.

Iceland lifts rates to 18% from 12%
Iceland’s central bank lifted interest rates on Tuesday to 18 per cent from 12 per cent on the orders of the International Monetary Fund, highlighting the dramatic impact the organisation will have on the country’s ability to control economic and monetary policy.

The move is an attempt to support the Icelandic krona, which has lost 70 per cent of its value during the crisis before trading in the currency halted. It is due to re-float within a matter of weeks, a development that is regarded as a key step in restoring Iceland’s international credibility. Following the collapse of the country’s banking system, the Icelandic economy is expected to contract by up to 10 per cent, unemployment will spike to around 8 per cent or higher and inflation could hit 20 per cent or more, according to economists.

The huge interest rate rise came as Iceland continues to try to rally international support for multi-billion dollar loans to help bolster its foreign exchange reserves, a move that should also help support its currency once its resume trading. In an attempt to stabilise the economy, the Icelandic government has asked the IMF for a $2bn loan and is seeking an additional $4bn from its Nordic neighbours and other central banks. A spokesperson for Geir Haarde, prime minister, told the Financial Times on Tuesday that Iceland had sent an application to the US Federal Reserve and the European Central Bank for assistance and had also been in contact with the Bank of Japan via its embassy in Tokyo.

Although the IMF-led rescue package represents a breakthrough for Iceland in its attempt to stabilise its economy, it has also been forced to agree to a number of conditions set down by the organisation as part of the loan agreement. David Oddsson, governor of the central bank, said the rate rise was part of an agreement between Iceland and the organisation. If Iceland had not agreed to the IMF recommendations, it may have struggled to secure the $2bn loan. The IMF conditions are not particularly stringent by the organisation’s standards, falling short of the tight controls it imposed on South Korea amid the Asian economic crisis in 1997.

They have focused on three areas: the banking sector, fiscal policy and monetary policy, and the exchange rate. The IMF sought assurances on the restructuring of the banking sector and has demanded a review of Iceland’s banking legislation to ensure it conforms with international best practice. It has also asked the government to compile a credible plan for fiscal tightening in response to government debt levels, which are expected to rise to well over 100 per cent of gross domestic product.

The krona is expected to be floated again as soon as practical, possibly within the next two weeks once the IMF’s board has approved the $2bn loan. Once approval has been secured, Iceland will be able to draw down an immediate $830m.

Short Squeeze Makes Volkswagen Overtake Exxon as World’s Most Valuable Company
Volkswagen AG became the world's biggest company by market value after Porsche SE announced plans to raise its stake in the German carmaker to 75 percent, triggering demand from short-sellers. Volkswagen rose as much as 485.01 euros, or 93 percent, to 1,005.01 euros and was up 55 percent as of 11:10 a.m. in Frankfurt trading.

Wolfsburg, Germany-based Volkswagen has risen more than fivefold this year and at its intraday peak was valued at 296 billion euros ($370 billion), more than Exxon Mobil Corp.'s $343 billion market value at yesterday's closing price in New York, according to data compiled by Bloomberg. Porsche, the maker of the 911 sports car, has accumulated Volkswagen shares since 2005 in an effort to protect ties to its largest supplier. Porsche said Oct. 26 that it aims to increase its holding from 42.6 percent.

That prompted some short-sellers to buy from a shrinking pool of stock to end their bets. BaFin, Germany's financial-market regulator, said today that it's monitoring trading in Volkswagen shares following the gains. "One of the biggest risks with the herd mentality approach to shorting is that a lot of money can be made on the outset," said Ed Oliver, a senior business consultant at Spitalfields Advisors, a London-based firm specializing in securities lending. "But you can end up losing the whole of it when you try to close the position. There's no limit."

Volkswagen's surge came as 23 of the 29 other stocks in the country's benchmark DAX Index fell on investor concern that a slowdown in the global economy is accelerating. About 12.9 percent of Volkswagen's common stock was on loan as of Oct. 23, mostly for short sales, the highest proportion of any company on the DAX, according to London-based Data Explorers. Stuttgart, Germany-based Porsche added to an earlier 35 percent stake and said two days ago that it holds options for another 31.5 percent.

"Porsche heads for a domination agreement and triggers a short-squeeze," Horst Schneider, an HSBC Holdings Plc analyst in Dusseldorf, Germany, wrote in a report yesterday, in which he upgraded Volkswagen's common shares to "neutral" from "underweight." The stock "will be more driven by covering of short positions rather than by fundamental valuations."

Carmakers worldwide are struggling with plunging sales as credit markets seize up and economies contract, deterring consumers from making large purchases. U.S. industry-wide auto sales fell 27 percent in September, the steepest monthly slide since 1991, while nine-month deliveries in Europe declined 4.4 percent as September sales dropped 8.2 percent. PSA Peugeot Citroen, Europe's second-largest carmaker, and smaller French competitor Renault SA both had their credit ratings downgraded by Moody's Investors Service because of the risk that car markets won't recover next year. Standard & Poor's said it may cut the credit rating of Fiat SpA, Italy's largest carmaker, to less than investment grade.

Until yesterday, when the stock more than doubled, Volkswagen's biggest gain in almost two decades was a 27 percent jump on Sept. 18. People familiar with securities lending said at the time that the collapse of Lehman Brothers Holdings Inc. caused the increase by triggering recalls of borrowings. The stock fell 23 percent on Oct. 20, the steepest drop also in almost two decades, as short-sellers predicted the price would decline once Porsche gains control.

There may be little ordinary stock freely trading in Volkswagen because most of the shares are owned by Porsche, the German state of Lower Saxony and the banks that underwrote Porsche's options, Adam Jonas, a London-based analyst at Morgan Stanley, wrote in a research report yesterday. Lower Saxony is Volkswagen's second-biggest owner with a 20.1 percent stake. Index-tracking funds also hold stakes in Volkswagen, now the DAX's most-weighted stock, and must retain the holdings as long as the carmaker remains a member.

Deutsche Boerse AG, the operator of Germany's main stock markets, said Volkswagen will remain in the DAX unless the carmaker announces the freely traded stock no longer meets requirements. "We're applying our regulatory framework and, as long as Volkswagen's free float is above 5 percent, the index won't be changed," said Torsten Baar, a spokesman for Frankfurt-based Deutsche Boerse.

BaFin is analyzing trading in Volkswagen stock, though it hasn't opened a formal inquiry into whether there's any manipulation and "pure cash-settled options do not require disclosure" under the country's laws, said Anja Engelland, a spokeswoman for the Bonn-based agency. Results from any analysis are unlikely this week, she added. Until Oct. 26, Porsche had said it was aiming only for a stake exceeding 50 percent, and Chief Executive Officer Wendelin Wiedeking said at the Paris Motor Show early this month that a stake of as much as 75 percent would be "not realistic" because of market turmoil.

Short sales have largely been undertaken by investors betting on a decline in Volkswagen's common stock, which hold voting rights, or its underperformance relative to the preferred shares, which carry no votes, according to analysts. The common shares, which outnumber the preferred equity almost three to one, are the only gainers this year on either the DAX or the nine-member Bloomberg Europe Autos Index. In contrast, Volkswagen's preferred stock has dropped 62 percent, including a 14 percent decline yesterday, to 37.89 euros.

"Volkswagen has been one of the greatest shorts of hedge funds, and it's been an absolute, absolute disaster," Emmanuel Roman, co-chief executive officer of GLG Partners Inc., said at a conference in London on Oct. 23. "It's been very painful." GLG didn't participate in short-selling trading of the carmaker's common shares, he said.

Goldman, Morgan Stanley shares fall on VW exposure talk
Shares of Morgan Stanley and Goldman Sachs Group Inc tumbled on Tuesday on speculation the banks might be caught on the wrong side of a trade involving German automaker Volkswagen AG, traders said. Morgan Stanley shares were down 12 percent. Goldman slid 6.3 percent.

"There have been several 'black swan' events occurring in the markets, and there are concerns that they will lead to large losses," said James Ellman, president of Seacliff Capital. He said he does not have positions in Goldman or Morgan Stanley.
"Black Swan" events are considered hard to predict and sometimes appear to have elements of randomness.

Earlier Tuesday, Volkswagen briefly became the world's largest company by market value, following weekend news that Porsche Automobile Holding SE had taken a stake of more than 74 percent after buying much of the floating stock. This prompted a short squeeze, forcing investors who had bet on a decline in VW shares to buy the stock. Shares of Societe Generale, the French bank, fell as much as 17.5 percent on speculation it also made a bad bet on VW stock.

David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, said Morgan Stanley shares might also be down because of "problematic 'self-fulfilling fear.'" "Like peers that have either gone bankrupt or were forced to sell, we believe fundamentals were sound enough to overcome problem asset exposures, but there is no antidote for unbridled fear," Trone wrote. "Trading counterparties are crucial, because this revenue flow keeps the lights on."

Meanwhile, the cost to insure Goldman and Morgan Stanley debt rose. Credit default swaps on Goldman widened 15 basis points to 310 basis points, or $310,000 per year for five years to insure $10 million of debt, according to Phoenix Partners Group said. For Morgan Stanley, the cost widened 15 basis points to 415 basis points.

US faces deflation to compound its misery
One of Wall Street's leading economists has warned that North America faces a period of significant deflation next year on tops of its already sizeable economic challenges. David Rosenberg, Merrill Lynch's chief US economist, believes that deflation will occur, adding to the recessionary environment North America already finds itself in and potentially delaying the nation's economic recovery.

Mr Rosenberg was the first Wall Street economist to declare that the US had entered a recession back in January of this year, and had also long warned of systemic problems in the global credit markets. "We believe the next major macro-economic theme is deflation," Mr Rosenberg writes in a research report. "Within a year, we see a very good chance that [inflation] will be running below 0pc on a year-over-year basis."

He argues that just as the economy was showing signs of a recession nearly a year before economic growth turned negative, today's current economic backdrop is deflationary. His estimates suggest that inflation will drop below 1.1pc – its lowest rate to date – in the second quarter of 2009 as the result of falls in gold and other commodity prices, growing US job losses, and reductions in personal debt levels.

The respected economist goes on to explain that deflation can become self-perpetuating, as consumers begin to defer spending on hopes of further discounts as prices fall – so reinforcing the downward pressure on demand. "Likewise, firms that are faced with deflation to their top lines are typically forced to cut costs to protect their profit margins and in so doing, trigger a second-round negative income effect on their workers and suppliers, which also ends up exacerbating the trend towards lower pricing."

Mr Rosenberg is not alone to have warned of a deflationary scenario for the US economy that will prolong its problems, but is perhaps the major economist with a strong track record to do so.

U.S. consumer confidence plunges to record low
Wounded by the financial crisis, U.S. consumer confidence plunged in October, reaching an all-time low in the series' 41-year existence, the Conference Board reported Tuesday.

Despite falling gasoline prices, the October consumer confidence index fell to 38 from an upwardly revised September reading of 61.4. Economists surveyed by MarketWatch had expected an October reading of 52. Expectations turned "significantly more pessimistic," with the percentage of consumers expecting business conditions to worsen over the next six months rising to 36.6% from 21%, and those expecting fewer jobs rising to 41.5% from 26.9%.

"Their earnings outlook, as well as inflation outlook, is also more pessimistic, and this news does not bode well for retailers who are already bracing for what is shaping up to be a very challenging holiday season," said Lynn Franco, director of the Conference Board Consumer Research Center. The expectations index also reached a record low in October, hitting 35.5, compared with 61.5 in the prior month. The present situation index fell to 41.9 from 61.1.

US Home Prices Post Record Decline
The S&P/Case-Shiller home-price indexes, a closely watched gauge of U.S. home prices, showed prices in August continue to decline, with areas along the Sun Belt being hit hardest. David M. Blitzer, chairman of Standard & Poor's index committee, noted there were "very few bright spots in the data." Among them is that the acceleration in decline from July to August was "only moderate."

The indexes showed home prices in 10 major metropolitan areas fell a record 17.7% in August from a year earlier and 1.1% from July. The drop marks the 10-city index's 11th-straight monthly report of a record decline. In 20 major metropolitan areas, home prices dropped 16.6% from the prior year, also a record, and 1% from July. Both the 10-city and 20-city composites have been declining year over year for 20 straight months.

Just two of the 20 regions were able to avoid price declines in August over July -- Cleveland, with 1.1% growth, and Boston, which eked out a 0.1% gain. Month-to-month decliners were led by San Francisco, which posted a 3.5% drop. Phoenix, Las Vegas and San Diego each had declines of more than 2%. For the fifth-straight month, no region was able to avoid a year-over-year price drop. Phoenix and Las Vegas again were among those posting the largest drops, both in excess of 30%. Miami, San Francisco, Los Angeles and San Diego were close behind, with declines of more than 25%.

Year-over-year, Dallas and Charlotte, N.C., had the best relative performance, with declines of 2.7% and 2.8%, respectively. The Case-Shiller data came a day after a government report on September new-home sales showed home builders have stepped toward reducing the oversupply of homes, with sales estimated to have risen 2.7% last month. That report came on top of one released last week that said sales of previously occupied homes rose 1.4% in September from a year earlier as banks slashed prices on foreclosed properties.

The increase marked the first time since November 2005 that sales topped year-earlier levels, showing bargain hunters are nibbling at a glut of homes. Still, the glut remains, as credit stays tight and the outlook bleak as mounting job losses have added another layer of stress on American homes. Last week, government-backed mortgage investor Freddie Mac showed rising borrowing costs have constrained its ability to push down interest rates by channeling more money into the mortgage market. The focus now turns to the Federal Reserve, which is expected to lower its target interest rate by at least a half-percentage point to 1% after its meeting Tuesday and Wednesday.

New York State Faces $47 Billion Deficit Over Four Years
New York state faces budget deficits totaling a record $47 billion over four years as a weakening economy, financial slump and job losses on Wall Street reduce tax collections, the Division of Budget said. The state is projecting a shortfall of $1.5 billion in the current fiscal year ended in March 2009, $12.5 billion next year, $15.8 billion the following year and $17.2 billion in fiscal 2012, the division said.

Next year's gap is more than double the $5.4 billion deficit projected in August, after lawmakers agreed to reduce spending and Governor David Paterson froze hiring. Paterson earlier this month called a special legislative session on Nov. 18 to approve additional spending cuts.

Twenty percent of New York's tax revenue is typically derived from Wall Street. The state's financial sector job losses are expected to total 45,000, higher than after the Sept. 11, 2001, terrorist attacks, when cuts totaled 30,000, the budget division said.

New York private-sector job losses are expected to top 160,000 as the economy slows, the division said. The state's unemployment rate is expected to reach 6.5 percent next year, up from the current 5.8 percent, which is its highest level in more than four years.

UK repossessions jump 71% as arrears grow, sales fall 50%
The number of repossessions in Britain soared by 71 per cent in the three months to June after more than 11,050 people lost their homes. According to the Financial Services Authority, the City regulator, the number of people losing their houses increased from 9,172 in the first three months of last year and rose from 6,476 repossessions between April and June last year.

The number of borrowers struggling to meet their monthly mortgage bills has also risen, with 312,000 new loans accounts falling into arrears between April and June, signalling a 16 per cent increase on the same period last year. The Council of Mortgage Lenders has forecast that total repossessions this year will rise by 50 per cent to 45,000, and have given warning that the figure could rise again next year. The Government has pledged to work with lenders to make sure that repossession is a last resort.

Last week, it introduced a new code for courts so that lenders must prove what action they have taken to try and keep borrowers in their homes before they can apply to possess a property. The rise of people losing their homes emerged as official data showed that house prices slipped by 8 per cent in the year to September.

Land Registry figures, which lag other house price indicators as they reflect the prices paid for houses rather than mortgages approved, show that prices in England and Wales fell by 2.2 per cent in September, wiping nearly £4,000 off the value of an average home. Recent research showed that tumbling house prices are pushing 60,000 homeowners a month into negative equity.

If prices continue to fall at the current rate, around one in six households could be in negative equity by 2010. Borrowers in negative equity who want to move house or who cannot meet their mortgage repayments are forced to sell their property at a loss. But there are fears that house prices could continue to dip sharply as activity in the market continues to decline. The number of sales between April and July nearly halved compared with the same period the year before, the Land Registry figures show.

As the number of new buyers dwindle, vendors are forced to slash their prices in an effort to secure a sale. Persimmon, the housebuilder, said yesterday that the proportion of new buyers changing their mind about buying a new home and foregoing their £700 deposit has risen to 35 per cent, up from between 15 and 20 per cent. Some economists have forecast that house prices could fall by a total of 35 per cent from their peak last summer and may not recover until 2013.

Firefighters better scramble to save letters of credit
There's been some low-bandwidth chatter lately about the plunge in the Baltic Dry Index, which is intended to track the price of shipping dry cargo along key routes. In the sort of "oh . . . wow . . . " manner passing drivers remark on multiple collisions on the highway, it's been noted that the BDI is down. A lot.

While the BDI has been dropping for months, the real collapse took place from the week after the Lehman bankruptcy. From a level of 4949 then, the BDI had, by last week, come down to 1149, for a decline over about a month of 76 per cent. This doesn't represent some piece of high-concept securitised paper meeting its maker in front of a judge; this is the real world of physical assets being employed to do actual work.

I had followed shipping in past years, but had never seen a rate of change like that. So I called friends of mine in that world to get closer to the car wreck. I had wondered if the BDI was truly representative of real-world values, or if it was oversold in the way some credit default swap indices might be. Nope. Ships really are that cheap. As one broker told me: "I just chartered a Handymax to go to the US Gulf from India for $1,000 a day. So the BDI really is pretty accurate."

A Handymax vessel would typically displace about 40,000 deadweight tonnes. You would notice it if it dropped anchor near your dock. The cash operating costs are at least $1,500 to $2,000 a day. On top of that, figure another couple of thousand dollars a day for the capital costs. To put that in Presidential election language, what does that mean for hardworking, middle class, average, families who are sitting around the kitchen table playing by the rules? Why should they care that some Greek or Lebanese is under water, so to speak, on his ship?

How about because what you need to stay middle class and average, or hardworking, is being carried on those ships? Those low charter rates indicate that not much is being shipped, apart from cargoes going from one corporate subsidiary to another, or from one highly creditworthy entity to another. It all goes back to that Lehman bankruptcy. Among the more serious casualties of that colossal failure of leadership was the letter of credit business.

There is nothing more vanilla than the l/c for an international shipment. One bank tells another bank that it will accept the credit risk of an individual importer or exporter. They document that, with forms that have been around forever, clerks and computers shuffle the paper around. A fee is charged and goods are released for shipping, inspection, and delivery. The most boring business in the world. Until it stops.

After Lehman those clerks, and their computers, stopped trusting the clerks and computers at other banks. Treasury secretary Hank Paulson's ignorant and clumsy attempt to avoid moral hazard and systemic risk resulted in uncounted quantities of goods piling up on loading docks, and customers living off inventories and consuming less. No, I don't think the Lehman leadership, or the shareholders who went along with them, deserved to be saved. It was not, however, necessary to sacrifice the worldwide flow of goods and credit to make them an example.

The government and banking leaders might think that those clerks and computers will have been reassured by the business cable channels telling them that things will be fine. Well, it hasn't happened yet. Some critical institutions were caught in the middle of this. Wachovia, as I mentioned last week, did a lot of letters of credit for the Latin American trade. Royal Bank of Scotland has huge exposure to shipping. The line people working on trade finance need to be told that it is okay for them to take these risks, that they won't be laid off if they make one good-faith mistake. Maybe secretary Paulson could go down to the docks in New Jersey, Norfolk, Long Beach, or Jacksonville to symbolically sign some documents. I know, it's the unfamiliar real world of production and transportation, but the pain of walking around the Port Newark-Elizabeth Marine Terminal will be over quickly.

The BDI will not recover to its bubble highs, of course, and a lot of marginal ships will need to be scrapped over the next few years. This is normal. Shipping people are bipolar by nature, and now we have to go through the depressive phase. As for freight rates, they will have to recover to the point where the owners can cover their operating costs. That could take a few months longer than you would think, because the cost of mothballing a ship for that period could be higher than keeping it going at today's rates.

The Chinese shipyards that have taken on a lot of new orders can expect many of those to be cancelled, if there is any leeway in the contracts. As one ship broker told me: "Values are down by half within the past six months, but nothing is actually being sold right now. The problem isn't with a single trade route. It's global." This better be the next fire that's put out.

Japan Cracks Down on Naked Short Selling
Japan moved Tuesday imposed new restrictions on so-called "naked" short selling of stocks, stepping up its efforts to arrest the tumble in domestic share prices. The Tokyo Stock Exchange has asked member brokers to stop accepting naked short-sell orders, TSE President Atsushi Saito told a news conference.

The TSE's move followed comments from Finance Minister Shoichi Nakagawa, who said that regulations on naked short selling would be tightened. Mr. Nakagawa didn't say that the practice would be banned, but the TSE's move and local media's interpretation of his comments suggested that the new strictures, to be enforced from today, will be a ban in all but name. Short-sellers typically borrow stocks and then sell them on, profiting from the fall in price when they buy back the securities.

Naked shorting removes the need to first borrow the stock, which means that larger volumes of shares can be dumped on the market. Short-selling generally has drawn fire from regulators across the world, who say it has contributed to the sharp market declines of recent months. The Japanese government had planned to ban naked short selling from Nov. 4, but the recent plunge in local share prices has caused the new rule to be introduced a week ahead of schedule. The Nikkei 225 Stock Average closed at a 26-year low on Monday, as investor sentiment was battered by the global financial crisis, the rising yen and concerns about an international economic slowdown.

Traders said the naked short-selling ban was one reason for a big recovery in Japanese shares Tuesday. The ban "was one of the positive factors behind the Nikkei's gains (in the afternoon), but I don't think it's the main catalyst," said Yukio Takahashi, market analyst at Shinko Securities. The Nikkei ended 6.4% higher Tuesday, erasing most of Monday's sharp slide, due mainly to the yen's weakening and firmness in major Asian stock markets, traders said.

The naked shorting ban comes as the government mulls a series of measures to improve confidence in Japan's financial sector. Among other steps, the government wants to raise the cap on possible injections of taxpayers' money into domestic banks from ¥2 trillion ($21.37 billion), ease fair-value accounting rules, loosen capital adequacy requirements for banks and enlarge tax breaks for stock investors.

At Tuesday's news conference, Mr. Nakagawa highlighted the urgency of the task at hand. "I've discussed with Prime Minister [Taro Aso] the fact that the coming few days will be very important and that we must take steps immediately," he said. "Our assessment is that the coming several days will be very important -- and therefore dangerous -- for the Japanese stock markets."

Mr. Nakagawa also said the government will immediately open investigations into possible illegal practices linked with naked short selling. The Financial Services Agency, the Securities and Exchange Surveillance Commission and the TSE will work together in looking into past records on such sales practices, he said. "If we find out any violation of the law," Mr. Nakagawa said, "we will retroactively deal with it strictly."

Japan Will Ease Mark-to-Market Accounting Rules
Japan will ease mark-to-market accounting rules that are forcing companies to book losses on illiquid holdings of securities as the global credit crunch pushes down asset values, Finance Minister Shoichi Nakagawa said. The government accepted a recommendation from the Accounting Standards Board of Japan to allow companies to calculate asset values themselves, Nakagawa said at a media briefing in Tokyo today.

Under the changes, management will be allowed to take into account measures including estimates of future cashflow, interest rates and values determined by exchanges, rather than the latest prices in illiquid markets. The move comes a day after Japan's Nikkei 225 Stock Average plunged to a 26-year low, putting pressure on the balance sheets of Japanese companies. The Securities and Exchange Commission is reviewing the accounting practice in the U.S., and European Union leaders have endorsed easing requirements.

Critics say mark-to-market rules force firms to report losses they don't expect to incur, exacerbating the recent slump in global markets. Backers say the rule gives investors accurate information about the true value of a company's holdings. "A temporary measure on mark-to-market rules may be needed, but it should not last forever,'' Atsushi Saito, president of the Tokyo Stock Exchange, said at press conference earlier today. "The bottom line is that you value assets based on market prices. Otherwise, Japan will repeat the same mistake that led to two dark decades of companies massaging the asset side of their balance sheets.''

Shinsei Bank Ltd., forecasting an 80 percent drop in annual profit as asset values slump, has called for an immediate suspension of mark-to-market accounting rules. "As an emergency rescue measure, mark-to-market rules should be halted,'' said Chairman Masamoto Yashiro said in an interview on Oct. 17. New rules would provide time for securitized investments to return to their "economic values,'' according to Yashiro. He said banks are now being forced to book the assets at lower than their intrinsic worth because of a dearth in transactions.

Former executives at failed U.S. insurer American International Group Inc. told Congress this month that the rule forced the company to book unrealized losses on distressed mortgage-backed securities and credit-default swaps.
The global market rout has also hurt profitability at Japanese banks, including regional lenders, as they write down the value of holdings on their balance sheets.

"We want you to consider suspending the current mark-to- market accounting under the idiosyncratic market circumstances,'' Tadashi Ogawa, chairman of the Regional Banks Association of Japan, told Nakagawa on Oct. 15. Ogawa is also president of Bank of Yokohama Ltd., Japan's biggest regional lender by assets.

Europe Faces 'Huge Threat' as Emerging Markets Slide
The European economy's close ties to emerging markets are turning from a blessing to a curse. Already skirting recession, the 15 euro nations face greater pain as economies which gave them an edge over the U.S. and Japan stumble. Neighbors to the east, that buy about a third of the region's exports, are faltering as their banks weaken and currencies slide. Meanwhile, the halving of oil prices since a July record is slowing demand from the Middle East.

European companies such as France's Schneider Electric SA and Finland's Kone Oyj are saying orders will weaken as emerging-market countries from China to Argentina succumb to the credit crunch. Citigroup Inc.'s economists now expect deeper interest-rate cuts and a recession in the euro region. "It's a huge threat to the euro area," said Nick Kounis, chief European economist at Fortis in Amsterdam. "It had been hoped these markets would hold up better and drive European growth."

As recently as Oct. 6, European Central Bank President Jean-Claude Trichet was betting "ongoing growth in emerging- market economies might support a gradual recovery" next year. Yesterday, he said the bank may lower rates next week as the financial crisis damps inflation. The 14-month credit crunch is prompting investors to sell riskier stocks, bonds and currencies, while punishing banks they view to be short of capital. Emerging-market stocks dropped to a four-year low yesterday.

Ukraine, Hungary, Belarus and Pakistan are seeking aid from the International Monetary Fund and Argentina's markets are in turmoil after its government tried to take over private pension funds. European Union spokeswoman Amelia Torres said today the bloc is preparing a package to help Hungary. Russia has pledged more than $200 billion to stem its worst banking crisis since 1998 and China is slowing after expanding more than 10 percent for five years.

At the same time, U.K. Prime Minister Gordon Brown said today the IMF is running out of cash and China and Persian Gulf oil-producing nations should pay into a new fund to help eastern Europe. "The IMF has $250 billion available," Brown said. "This may not be enough. We need a multilateral solution. The big surplus countries are in a position to help the most."

Europe's vulnerability to a downturn in emerging markets is reflected by how it benefited from their upswing. Exports to them were equivalent to about 6 percent of the continent's gross domestic product in 2006, compared with about 4.5 percent in 2000 and less than 4 percent in the U.S., says Juergen Michels, an economist at Citigroup Inc. in London. The dozen, mostly Eastern European, nations which joined the broader European Union since 2004 account for 15.3 percent of the euro-area's foreign demand, up a third since the start of the decade, according to the ECB.

The contributions of China and Russia have almost doubled. By contrast, the U.S. and U.K. portions have each dropped about 4 percentage points to 11.9 percent and 14.5 percent respectively. "With a higher share of exports to emerging markets, the European countries benefited much more than the U.S. from booming emerging-market economies in recent years," said Michels. Now they are "more exposed" to their downturn. The euro-area economy will contract for the first time since 1993 next year, forcing the ECB to cut its benchmark rate to at least 2 percent from 3.75 percent, he predicts.

he Bank of England said in a report today that turbulence in emerging markets is posing heightened risks to Britain's financial stability. Schneider Electric, the world's biggest maker of circuit breakers, now expects emerging markets to slow after four years. Even China "isn't immune to external forces," Chief Executive Officer Jean-Pascal Tricoire said Oct. 22. Kone, a manufacturer of elevators, said the previous day that investment is slowing from Mexico to India to Qatar and that Russia is a "question mark."

Gareth Williams, an equity strategist at ING Bank NV in London, says more companies will downgrade earnings forecasts. Firms in Austria, Portugal and Spain have the most revenues from emerging markets, while Ireland, Greece and Italy have the least, he said in a report to clients yesterday.

Eastern Europe is "rapidly becoming a key risk" to the euro area, said Stephane Deo, chief European economist at UBS AG in London. He estimates 30 percent of euro-area exports at the start of this year went to its eastern trade partners, double the shipments to the U.S. Germany and the Netherlands are most at threat with 3.5 percent of their GDP accounted for by sales to the former communist bloc, he said. Buoyant demand from Russia and the Middle East is ebbing as falling oil prices curb their purchasing power.

Crude rose 625 percent from 2001 to a record $147.27 per barrel in July, enabling oil producers to buy equipment such as MAN AG's trucks and "Made in Europe" luxury goods including handbags from Gucci Group NV. The demand was strong enough for Europe to recoup two- thirds of its higher oil bill in the past five years, calculates Klaus Baader, chief European economist at Merrill Lynch & Co. While the drop in energy costs will "be good in the short-term for domestic demand, over the medium term, reductions in demand for exports are going to weigh on the European economy," he said.

Already retrenching as they try to cover $221.8 billion in losses and writedowns, European banks also stand to be hurt more than most if emerging markets goes sour, said Stephen Jen, chief currency strategist at Morgan Stanley in London. European banks lent $3.5 trillion to these economies, compared with $500 billion from the U.S. and $200 billion from Japan, according to his estimates. Those in Austria and Spain were particularly exposed, he said. Three quarters of loans to China and India originate in Europe. "Pressures on emerging-market economies could have a particularly negative boomerang effect on European banks," Jen said.

Fears grow of domino effect; Turkey and Russia cause greatest concerns
The spectre of a cascade of failing economies from the Baltic to Turkey was raised yesterday as a $16.5bn IMF bailout for Ukraine was mired in political infighting and Hungary sought its own $10bn rescue package. A showdown in Kiev between Ukraine's president and prime minister threatened to torpedo the emergency loan deal secured by the beleaguered ex-communist country.

With Hungary putting the finishing touches to its rescue package analysts predicted that the growing crisis could force even oil-rich Russia to seek help from the IMF and EU. Turkey, in political crisis and financial meltdown, began talks with IMF officials on a second loan package within the past decade. Belarus and Serbia also turned to the fund for help. Iceland, already bailed out with a $2bn loan but facing a 10% decline in national output, indicated it would need a further $4bn as it turned to its Nordic neighbours, Norway and Sweden, for aid.

With global financial turmoil sweeping central and eastern Europe, experts pointed to a likely wave of falling dominos as countries living way beyond their means succumbed to frozen global credit. The immediate focus of concern was on Ukraine where a clash between President Viktor Yushchenko and his ex-Orange revolution ally, prime minister Yulia Tymoshenko, over elections next month put at risk the IMF package which includes controversial measures to shore up the banking system.

The scale of the Ukrainian crisis, exacerbated by plunging prices for steel, its main export, was underlined when the central bank indicated it was seeking as much as $20bn in support from international bodies, including the IMF. Ukraine's warring political factions have seen the currency, the hryvnia, collapse by 20%, the stock market by 80% and the central bank raid its reserves to defend the currency.

Russia, where stock markets have crashed by more than two-thirds since May, has been buoyed by a $500bn stabilisation fund drawing on its colossal oil and gas assets. But Daniel Gros, head of the centre for European Policy Studies, warned that its growth in output and living standards could plummet to zero if oil prices stayed low - threatening a political crisis in the medium term.

Belarus said it would ask the IMF during talks in Minsk for $2bn this week. But Hungary, already bailed out last week with a €5bn credit from the European Central Bank and forced to raise interest rates from 8.5% to 11.5%, became the first EU country to turn to the IMF for help. Emerging economies in central and eastern Europe within the EU for the past four-and-a-half years have enjoyed powerful economic growth fuelled by excessive lending from western banks which have taken over local institutions. The result has been soaring inflation and trade deficits.

Andreas Wörgötter, a senior OECD economist in Paris, said: "A common aspect of their problems is an over-expansion of domestic demand, particularly in areas like real estate, which helped create the property bubble - and this was loan-financed. If the loans were in foreign currencies then the wind is blowing on these countries from all four directions." Gros calculates EU banks have $2 trillion in outstanding loans to these countries and "you need only a small percentage of these to go bad and you can imagine the scale of the recapitalisation required".

The countries seen as most vulnerable to EU/ECB/IMF bail-outs are the three Baltic states - Estonia, Latvia and Lithuania. Slovenia, already within the eurozone, Slovakia, soon to join, the Czech Republic and Poland are viewed as relatively safe - so far. It is, however, Turkey immediately and Russia, eventually, that cause the greatest concerns.

Ukraine's IMF Loan Endangered by Feud
Ukraine's feuding president and prime minister welcomed a proposed emergency bailout by the International Monetary Fund on Monday, but a fresh round of finger-pointing by their aides left it unclear whether the two could agree on legislation needed to win the $16.5 billion loan.

As Ukraine's currency fell to a historic low and its critical steel industry urged global action to stop a devastating slide in prices, Prime Minister Yulia Tymoshenko scheduled a vote on the legislation for Tuesday and called on the nation's fractured political leadership to unite in the face of "global financial Armageddon." Her former ally, President Viktor Yushchenko, also endorsed quick action on a legislative package that officials say includes unpopular spending cuts and other measures intended to strengthen Ukraine's wobbly banking sector.

But the outcome of the vote was uncertain Monday night, as each camp accused the other of trying to use the economic crisis to get its way in an extended political standoff over whether the country should hold early parliamentary elections. Yushchenko and Tymoshenko were allies in the 2004 street protests known as the Orange Revolution, which brought Yushchenko to the presidency. He dissolved parliament this month after the collapse of his coalition with Tymoshenko and has called for elections in December that could oust her as prime minister. Tymoshenko opposes the elections and has blocked legislation needed to finance them.

In a statement Monday, Andriy Goncharuk, deputy chief of the president's secretariat, accused Tymoshenko of trying to use the economic crisis to "pursue an alternative foreign policy" and the IMF legislation to thwart the elections. "Unfortunately, the position of the prime minister's office reduces the chances for the country to receive" the IMF loan, he said, adding that "mass unemployment" could result. He argued that elections were necessary to resolve the political stalemate in Kiev, which has increased investors' anxiety over the economy.

But Hryhoriy Nemyria, deputy prime minister for European integration, said it was Yushchenko who was putting the IMF bailout in jeopardy, accusing the president's allies of demanding a vote on funding for elections before they will consider the financial package. "We cannot accept that," he said by telephone from Kiev. "It's a matter of priorities, and what can be a higher priority than dealing with the economic crisis?" Nemyria added that it would be irresponsible for the government to spend $80 million on early elections during the crisis, especially given that Ukraine has had parliamentary elections in each of the past two years and that a presidential vote is scheduled for next year.

Elections would also make it more difficult for the government to implement the painful reforms requested by the IMF and needed to rescue the Ukrainian economy, he said. "There would be pressure on lawmakers to be populist, and they would criticize the government for agreeing with the IMF on policies that are very difficult and sensitive." The largest party in the legislature, the opposition Party of Regions, has already come out against the IMF proposal, arguing that it is unnecessary and could further damage the economy. Its position makes it unlikely that the legislation would pass without some kind of truce between Yushchenko and Tymoshenko.

Ukraine's currency, the hryvna, has plunged more than 20 percent against the dollar, amid a run on banks that has drained more than $1 billion from deposits and a collapse in the price of steel, the nation's main export. About 500,000 people are employed in Ukraine's steel industry, and layoffs of tens of thousands have already been announced. The government said Monday it was appealing to world metal producers to cut production and bolster prices.

Many analysts say the economy is fundamentally sound. But most of Ukraine's leaders agree that it makes sense to adopt the IMF legislation and get access to the loan in case it is needed, said Igor Borakovsky, director of the independent Institute for Economic Research and Policy Consulting. "The situation is not a full-fledged crisis, but everyone understands that externally and internally, the situation could radically worsen."

"In principle, the politicians are more or less very close in terms of the economics," he added. "But when it comes to the politics of the decision, it becomes very difficult. There is a very specific competition among them to take credit for the rescue, to be seen as the savior of the country, and right now, this competition is extremely detrimental."

Yen Rises on Bets Carry Trade to Evaporate on Economic Turmoil
The yen rose to the strongest level versus the euro since May 2002 and traded near a 13-year high against the dollar as global economic turmoil encouraged investors to sell higher-yielding assets funded in Japan. French Finance Minister Christine Lagarde said in an interview with Bloomberg News that the Group of Seven doesn't plan to intervene to weaken the yen after the G-7 said in an unscheduled statement that excessive movements in the currency may threaten financial stability. The pound slid after an industry report showed U.K. house prices slumped.

"It's a combination of unwinding carry positions and money going home to Japan and the U.S.," said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York. "It's not an environment where one should be looking for return on capital, but for return of capital." In the past month, Japan's currency has increased 14 percent against the dollar, 33 percent versus the euro, 55 percent versus the Australian dollar and 44 percent against the New Zealand dollar on speculation investors will unwind carry trades, in which they get funds in countries with low borrowing costs and seek higher returns elsewhere.

The yen gained 3.4 percent to 56.73 against the Aussie and 3.2 percent to 50.79 versus the New Zealand dollar today. The Bank of Japan's 0.5 percent target lending rate compares with 3.75 percent in Europe, 6 percent in Australia and 6.5 percent in New Zealand. The appreciation of the yen accelerated as investors bought the Japanese currency "as insurance to protect" against the potential declines in stocks, said Sebastian Galy, a currency strategist at BNP Paribas Securities SA in New York.

Stocks in Asia and Europe tumbled as investors bet the credit crisis and mounting bank losses will lead to a global recession. Hong Kong's Hang Seng Index sank as much as 15 percent, and trading was halted in the Philippines and Thailand. The Standard & Poor's 500 Index dropped 3.3 percent. A JPMorgan Chase & Co. index of G-7 currency volatility touched 26.55 on Oct. 24, the highest level since its inception in 1992. Higher volatility can reduce profits in carry trades. The G-7 made its statement after a request from Japan, said Finance Minister Shoichi Nakagawa in Tokyo, adding that his government was ready to act if needed.

"We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," the G-7 said in its statement, read by Japan's Nakagawa. The group comprises Canada, France, Germany, Italy, Japan, the U.K. and the U.S. Japan last sold its own currency in March 2004. Asked by Bloomberg News in an interview in Montpellier, France, if the G-7 will intervene to sell Japan's currency, Lagarde said the group had no plans to do so.

"Her statement essentially was to send a clear signal to the markets, `Don't read too much into the G-7 statement,"' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston. "That statement did not necessarily mean that everybody in the G-7 is necessarily concerned with yen appreciation. The concerns about an immediate intervention in dollar-yen are unfounded." Upadhyaya has been betting that the yen will appreciate against other currencies.

Australia's central bank bought its currency for a second day to stem its decline. Central banks intervene in foreign- exchange markets when they arrange purchases and sales of currencies. The Aussie dropped as much as 3.2 percent to 60.25 U.S. cents, the lowest since April 2003. The pound fell 1.4 percent to $1.5668, near the lowest in five years, as London-based Hometrack Ltd. said the average cost of a residential property in England and Wales slipped 7.3 percent from a year earlier. Sterling decreased 1.7 percent against the euro to 80.67 pence.

The euro stayed lower against the dollar and the yen after a survey by the Ifo institute showed business confidence in Germany, the largest of the 15 economies sharing the currency, declined to the lowest level in more than five years in October. European Central Bank President Jean-Claude Trichet said policy makers may cut interest rates at their Nov. 6 meeting.

The dollar is reasserting its status as the world's reserve currency as investors seek a haven from plunging emerging-market stocks and bonds. The ICE futures exchange's Dollar Index, which tracks the greenback against the currencies of six major trading partners, soared to the highest in more than two years. The sell-off in emerging markets may "set the stage" for bigger gains, according to Barclays Capital.

Lagarde Says Intervention Would Be 'Purely Japanese,' Not G-7
French Finance Minister Christine Lagarde said Japanese authorities may sell the yen for the first time since 2004 after the currency surged to its strongest in almost 13 years. Speaking hours after the Group of Seven nations warned against the yen's "excessive volatility," Lagarde foreshadowed a "purely Japanese" intervention to weaken it, saying in an interview that the G-7 had no plans to help.

That leaves investors testing Japan's resolve as the yen's advance threatens to erode the earnings of exporters such as Canon Inc. and pushes stocks to a 26-year low. "Lagarde has weakened the force of the G-7's statement," said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London. "It still suggests the Japanese wanted permission to intervene so it provides some approval for going ahead with unilateral action."

The global credit crunch is forcing investors to race from risk, prompting them to repay loans they previously took out in Japan to take advantage of the lowest interest rates in the industrial world. As a result, the yen has climbed 14 percent against the dollar this month and almost 30 percent versus the euro. The yen yesterday advanced 1 percent to 93.36 per dollar at 11 a.m. in New York, from 94.32 on Oct. 24, when it touched 90.93, the strongest since 1995.

The yen's surge is also generating volatility in foreign exchange markets with a JPMorgan Chase & Co. index showing the major currencies whipsawing the most in at least 16 years. The G-7 yesterday issued an unscheduled and rare statement of concern "about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability."

In the interview in Montpellier, Lagarde said the statement came at the initiative of Japan and was aimed at showing G-7 support for the "possible intervention of Japanese authorities, knowing this would be about a purely Japanese intervention." Asked specifically if the G-7 nations would together sell the yen, she said "no." Even without the support of counterparts, Japanese authorities may still act alone as they last did in March 2004, when they sold the yen at 103.52 per dollar. Vice Finance Minister Kazuyuki Sugimoto said yesterday that the government was prepared to act "quickly" in the currency market.

"It is mostly up to the Bank of Japan to act," said Roberto Mialich, Milan-based currency strategist at UniCredit MIB. "There is a risk that the markets are being pushed to test the sustainability of the yen." The G-7 nations comprise the U.S., Japan, France, Germany, Italy, the U.K. and Canada. They haven't intervened together in currency markets since September 2000, when they sought to buoy the euro after it fell as low as 82.30 U.S. cents.

A study published this month by European Central Bank economist Marcel Fratzscher found the G-7's currency statements since 1975 proved most effective when followed by action such as the 1985 Plaza Accord to weaken the dollar and the Louvre Accord of two years later to boost it. The governments and central banks don't always back their talk with action. The last time the G-7 singled out an appreciating yen for criticism was in January 2000 and that wasn't followed by intervention. It also didn't act this year when the dollar fell to its lowest in trade-weighted terms since Richard Nixon decoupled it from gold in 1971, a drop that prompted the group to warn against "sharp fluctuations" in April.

Eisuke Sakakibara, Japan's top currency official from 1997 to 1999, said yesterday that the statement may have been all Japan was able to secure from its G-7 colleagues. The U.S. is wary of selling dollars as it relies on foreign capital to support its own markets, while intervening would also undermine the G-7's five-year lobbying of China to stop managing its currency, economists said. Japan "got the minimum," said Sakakibara, currently a professor at Waseda University in Tokyo. If the G-7 "were to intervene, they'd do it without making a statement."

Even if the Bank of Japan does seek to sell its currency, the "chances of success are weak at best" as the credit crunch stops the Japanese from investing abroad and prompts them to repatriate their money, said Ashraf Laidi, chief currency strategist at CMC Markets in New York. Turner at ING predicted financial markets would retest the yen's 1995 low of 80 per dollar as central banks such as the Federal Reserve and European Central Bank keep cutting interest rates. The Bank of Japan has less room to do so with its benchmark at 0.5 percent, the lowest in the industrial world. "Even if intervention were to occur this week, we very much doubt it will reverse recent exchange-rate trends," Turner said.

Insurers May Tap U.S. Treasury After Banks Get $160 Billion
U.S. life insurers are in talks with the government for potential investments as companies jockey for the remaining $90 billion of the $250 billion set aside to prop up ailing financial companies. The Treasury has been "asking us how we can fit into the program," said Jack Dolan, spokesman for the Washington, D.C.- based American Council of Life Insurers, declining to name companies that may participate.

Life insurers, including MetLife Inc. and Prudential Financial Inc., have lost more than half of their value this month on concern that investment declines will squeeze liquidity and force them to raise capital. American International Group Inc., once the world's largest insurer, ceded control to the U.S. on Sept. 16 after losses from bad bets tied to housing. "Investor confidence in the sector has recently come under considerable pressure in the aftermath of AIG's bailout," Nigel Dally, an analyst at Morgan Stanley, said yesterday in a research note. "Access to lower-cost equity would help bolster capital ratios and help put to rest lingering liquidity concerns."

MetLife and Prudential are among companies that may receive the government assistance, Jeffrey Schuman, analyst at KBW Inc., said yesterday in a note. MetLife spokesman Christopher Breslin and Prudential's Bob DeFillippo declined to comment. Nine of the biggest U.S. banks including Citigroup Inc., Bank of America Corp. and Goldman Sachs Group Inc. will get $125 billion from the Treasury. In a second phase of injections, at least 20 regional lenders agreed to take about $35 billion in government cash to help thaw frozen credit markets.

Life insurers asked the Treasury last week if they would be eligible to participate in the program, said an industry official with knowledge of the discussion. Some of the firms asked the government to make the participation mandatory because they don't want to identify themselves as needing funds, the person said. Life insurance stocks are heading for their worst monthly decline in more than a decade. The 11-stock S&P Life & Health Insurance Index is down 50 percent since Sept. 30. The next biggest drop on record, according to Bloomberg data, is a 19 percent slide in February of 2000.

Meanwhile, a group representing U.S. property-casualty insurers said the firms are well capitalized and a "substantial majority" won't sell stock to the government under the $700 billion bailout. Fitch Ratings cut its outlook on the U.S. life insurance industry to "negative" on Sept. 29 on concern that declines in the value of fixed-income investments will erode capital. Standard & Poor's followed by lowering its outlook on Oct. 10. Life carriers may also suffer "significant losses" tied to their variable annuities businesses as equity markets decline, Jeff Mohrenweiser, a Fitch analyst, said in an Oct. 22 note.

The capital needed to support variable annuities operations rose by $15 billion since the beginning of the year, Fitch said. Insurers that sell the retirement products guarantee minimum returns on equity investments even when stocks slump. Declining equity markets hurt returns in MetLife's annuity business and caused Chief Executive Officer Robert Henrikson to lower the insurer's projections for full-year earnings. Sliding stock values crimp fee income from investments on which insurers charge a percentage of the assets managed. The S&P 500 Index has dropped about 42 percent this year.

MetLife sold $2.3 billion in new stock this month to bolster its finances after fixed-income holdings dropped in value by $7 billion in the third quarter. Hartford Financial Services Group Inc., the life and property-casualty insurer based in the Connecticut city of the same name, agreed to sell $2.5 billion in debt and equity to Allianz SE after Fitch and Moody's Investors Service lowered the company's outlook to negative.

The largest insurers in the U.S. and Bermuda posted more than $93 billion in writedowns and unrealized losses on holdings tied to the collapse of the U.S. subprime mortgage market since the beginning of last year. AIG accounts for about $48 billion of the declines. Insurers invest policyholder premiums in bonds before paying claims.

Insurers may find competition for the government money from the automobile industry. The Bush administration said yesterday that automakers' financing units may qualify for aid as part of the government's aid package. "Automakers do have financing arms, many of them do, and it's possible that some of those financing arms could be a part of the rescue package," White House spokeswoman Dana Perino said at a briefing.

Aegon Gets $3.8 Billion Lifeline From Dutch Government
Aegon NV, the owner of U.S. insurer Transamerica Corp., got a 3 billion euro ($3.8 billion) lifeline from the Netherlands and said it will post a third-quarter loss of 350 million euros. The loss reflects 400 million euros in pretax charges related to the bankruptcies of Lehman Brothers Holdings Inc. and Washington Mutual Inc., and 400 million in fair-value markdowns of assets including derivatives and hedge funds, the insurer based in The Hague said today in a statement. Aegon fell 2.6 percent in Amsterdam trading after saying it will scrap its final dividend for the year.

Aegon follows Amsterdam-based ING Groep NV in drawing on the 20 billion euros set aside by the Netherlands to prop up financial firms. Aegon, which gets about two-thirds of its sales in the U.S., may seek government funding there as well, Chief Executive Officer Alex Wynaendts told reporters today. MetLife Inc. and Prudential Financial Inc. are among insurers that may try to tap the remaining $90 billion in the $250 billion U.S. rescue fund.

"Aegon has strengthened its balance sheet ratios to such an extent that we no longer have to fear a dilutive share issue," Ton Gietman, an Amsterdam-based analyst for Petercam, wrote in a note today. Gietman said he may lift his recommendation on Aegon to "buy" from "hold." Aegon, whose pyramid-shaped building is a landmark in San Francisco's financial district, fell to 3.29 euros at 11:10 a.m. in Amsterdam, valuing the firm at 5.1 billion euros. Aegon, with origins dating back to 1844, is down 72 percent in Amsterdam trading this year, the second-worst performer in the 31-member Bloomberg 500 Insurance index.

The insurer will sell 750 million non-voting securities at 4 euros apiece to Association Aegon, its largest shareholder. Association Aegon will in turn be funded by the Dutch State, it said. Governments from Washington to London to Berlin have rushed to shore up banks' capital and unlock lending since credit markets froze up following the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.

Aegon agreed to much the same terms as ING and Brussels-based KBC, Gietman said. The Netherlands will name two representatives to the company's supervisory board, and Aegon's executive board will forego bonuses related to 2008 performance, the insurer said. Based on 2008's first-half dividend, The Netherlands will receive about 128 million euros in May 2009 from Aegon, company spokesman Greg Tucker said.

ING, the biggest Dutch financial-services firm, will receive half of the country's aid pool by selling non-voting securities to the government after reporting a preliminary third-quarter net loss of about 500 million euros. The Dutch government bought local units of Fortis and ABN Amro Holding NV for 16.8 billion euros earlier this month before starting the recapitalization fund.

KBC, Belgium's biggest bank and insurer by market value, will sell 3.5 billion euros of non-voting securities to the government, it said yesterday. Aegon may repurchase one-third of the securities in the first year from the government at a price between 4 euros and 4.52 euros, Gietman said. This is one feature that makes Aegon's deal slightly more attractive compared with ING and KBC, he said.

Aegon's shareholders' equity will be about 9.4 billion euros at the end of the third quarter, it said. That includes a 2.5 billion-euro decline in estimated valuation to reflect the widening in credit spreads, it said. The company determined it is prudent to reinforce capital and retain its AA rating, the company said. "This allows us to enter 2009 with a significantly reinforced capital position," Wynaendts said in the statement.

China to lend Russia $25 billion as part of oil deal
Russia and China will sign a much-delayed long-term oil supply deal on Tuesday and Beijing is in talks to lend Russian companies $20-$25 billion in export-backed loans, industry sources said on Monday. The deal will give Beijing access to 300 million tonnes of Russian oil over the next 20 years, accounting for 4 percent of its annual demand, while allowing Russian firms to sort out immediate financing needs during an acute liquidity squeeze.

The deal will be on the agenda when Chinese Premier Wen Jiabao meets Russian officials on Tuesday, at a time when Moscow's relations with the West are at a low ebb. The Kremlin is seeking to diversify its export routes away from the West and is targetting China as the main market for its East Siberian oil. "It is a huge deal. The biggest ever between Russian and Chinese oil firms," said one source with the knowledge of the situation.

Sources said that if the loan was agreed, Russia's state-run oil major Rosneft would get three-fifths of the funds, while state pipeline monopoly Transneft would obtain the other two-fifths. Rosneft and Transneft declined to comment. Russia's government has pledged $50 billion from its $500 billion reserves, the world's third largest, to help Russian firms repay and refinance some $120 billion in foreign loans, due by the end of 2009. China has the world's largest reserves of $1.9 trillion.

Rosneft borrowed $6 billion from China in 2004 to help fund its purchase of assets belonging to bankrupt oil firm YUKOS. Under that deal, Rosneft pledged its entire railway exports of around 10 million tonnes of oil to China, but has warned that it would not extend the deal beyond 2010 because it considered it poorly priced. The new export-backed loan would come at a time when Russian companies find it difficult to refinance Western loans they have amassed to fuel growth at home and abroad in the past years.

Rosneft owes over $20 billion to creditors. Transneft also needs cash to finish construction of Russia's first pipeline to Asia, which will have a spur to China and a link to the Pacific. The 600,000-barrels-per-day pipeline is estimated to cost over $14 billion and it needs to be finished by the end of next year. It will become the main link for exports of crude from East Siberia, mainly from Rosneft's fields, to China.

Now there are runs on countries
The sickness afflicting the global financial economy has entered a new and worrying phase.
It started last summer with the closing down of big chunks of the wholesale money and securities markets.

Then we saw a succession of crises at individual banks, as institutional providers of funds withdrew their cash from banks they perceived as weak (culminating here in the nationalisations of Northern Rock and Bradford & Bingley, and the rescue takeover of HBOS). In September the entire banking system was on the brink of total meltdown, because of semi-rational fears that almost no bank was safe from collapse.

And now we're seeing a massive flight of capital out of economies perceived to have been living beyond their means - either because they have a substantial reliance on foreign borrowings, or because they are net importers of good and services, or both. Commercial lenders to these economies - banks, hedge funds, mutual funds and so on - want their money back now. That's driving down their currencies, pushing up the cost of borrowing for their respective governments and undermining the strength of their respective banking systems.

So they need financial help to tide them over - and with the global economy slowing down, those economies perceived as lacking the resources to cope on their own may need support for months and years. Queuing up for the intensive care ward are Iceland, Hungary, Pakistan, Ukraine and Belarus, all of which are in discussions about accessing special loans from the International Monetary Fund, the emergency medical service for the global economy.

But there has also been a substantial withdrawal of capital from South Africa, Argentina and - most worrying of all - South Korea. Let's put this into some kind of context.

The annual economic output of Pakistan, Hungary and Ukraine is something over $100bn each - which is not trivial but does not put them near the top of the rankings in terms of the size of their GDP. However, the output of Argentina is well over $200bn and that of South Korea is around $900bn. In fact, South Korea is the 13th biggest economy in the world. If you add together the GDPs of all the economies currently diagnosed with toxic BO by international investors you arrive at a sum that's not far off the economic output of the UK.

And the sums of debt involved are also fairly substantial. Hungary has external debt of more than $100bn, Ukraine has foreign borrowings of $50bn, while Pakistan's dependence on overseas funding is nudging $40bn. As for South Korea, which hasn't requested formal help from the IMF, its foreign debt is nearer $200bn. Now you may think this is all about remote countries, with no relevance to you. Well, that would be wrong. We're all connected.

It's been very fashionable for pension funds to invest in developing economies in recent years. If you're saving for a pension, you may own a chunk of South Korea or Argentina. If you're very unlucky, your pension fund may have belatedly put some of your cash into one of the many hedge funds being royally mullered by the way they borrowed vast sums to invest in some of these emerging economies. And of course the woes of these economies reduce their ability to purchase from abroad, which acts as a further serious drag on global economic growth.

Also the UK is being buffeted directly by international investors' re-awakened distaste for economies perceived to be too dependent on foreign capital or credit from institutions and companies. What's happening to South Korea - where its currency, the won, has fallen 29% in the past three months, and shares have fallen well over 20% in a week - is particularly worrying for us.

South Korea is a great manufacturing and exporting nation. Its balance of trade is vastly healthier than the UK's. But like the UK, South Korea's banks are dependent on wholesale funds that are being withdrawn because of fears that those banks face losses on imprudent deals (not lending to homeowners, as is the case in the UK, but currency hedges with local companies.

Of course, our banks - and South Korea's - are being shored up by massive financial support from taxpayers.
But if investors no longer think the UK's banks are at risk of collapse, they then look at our other vulnerabilities - such as public sector borrowing which is rising very sharply because of the costs of the bank rescues, dwindling tax revenues and the need to spend our way through the economic downturn. They also look at our structural trade deficit and our huge reliance on financial flows generated by a City of London and a financial services industry that's shrinking fast.

As I've pointed out in a tediously repetitive way, the sum of all we've borrowed - the aggregate of corporate, personal and public sector debt - is equivalent to three times our annual economic output. That's a vast amount of debt to repay - and it's all the harder to do so at a time when our most successful industry, financial services, is in some difficulty and the global economy is slowing down. If international investors fear our credit isn't what it was and are selling pounds, we should hardly be surprised.

Volatility returns with a vengeance
A couple of years ago – or before banks started to go bust – economists sometimes liked to talk about a phenomenon they christened The Great Moderation. This was the idea that the 21st-century financial system and global economy had become so stable and sophisticated that dramatic swings in activity had seemingly disappeared. Volatility, in other words, was supposed to be an issue of the past.

These days a new phrase is needed to describe these Not-So-Moderate-After-All times (the Great Panic, perhaps?). On Friday, the Chicago Board Options Exchange Volatility Index, the Vix, rocketed 32.1 per cent to 89.53, as equity markets suffered another dramatic sell-off. The gyrations of the yen, euro, sterling and dollar have also been wild, pushing levels of currency volatility to heights barely seen in decades. This has at least two crucial implications for the financial world. First, as volatility returns with a vengeance to the investing world, many market players are experiencing a profound psychological shock.

After all, in recent years many investors had bought into the “Great Moderation” argument, either deliberately or by intellectual osmosis. Many of them had never before seen a world where almost all asset classes could swing wildly in value. What has happened recently has left many investors and bankers utterly dazed and confused. No wonder some senior policy makers argue in private that one of the biggest problems dogging the financial system is a dire shortage of investors with enough courage to buy assets now trading at distressed levels.

On one level the absence of scavengers might seem “irrational”, given that plenty of cash-rich institutions still exist. On another level it makes perfect sense, given how shell-shocked many institutions now seem – and the sheer difficulty of predicting what other disorientated investors might do next. The second, more tangible implication of the return of volatility relates to the models that banks and hedge funds use to measure their assets. When banks extend credit to hedge funds, they often use so-called “value at risk” models (VAR) to measure the risks attached to such loans. These models typically assess the riskiness of an asset by measuring how its market price has moved in the past.

During the Great Moderation, this approach cast a fabulously flattering light on the investment world, creating the impression that it was safe for banks to extend massive volumes of credit to hedge funds. Moreover, since banks typically use VAR to measure the risk attached to their own assets too, these models also seduced banks into feeling complacent about their own risks. Now, this process has gone violently into reverse: as volatility surges, VAR models are showing that the risk attached to almost any transaction has exploded upwards.

Thus banks are selling assets and slashing loans to the funds – in turn sparking more fire sales and increasing volatility in all asset classes. It is a vicious trap that does much to explain why the market upheavals have infected so many asset classes, ranging from subprime to sterling to Shanghai shares.

It is hard to see how policymakers can halt this spiral quickly. In recent days, some senior policymakers have been quietly talking to the banks, and encouraging them to “think about the wider system” before they cut credit lines to hedge funds. But policymakers are reluctant to order banks to stop selling assets or squeezing hedge funds, let alone directly bail out any hedge funds. Instead, they appear to hope – if not pray – that injections of capital will lessen the need for banks to readjust themselves to their VAR models in such a violent manner.

It is to be hoped such prayers will be met. If so, this deleveraging storm should gradually blow itself out in the coming months. But it remains a delicate war of investor psychology and computer models. What is crystal clear is that it was sheer madness for financiers ever to have relied so heavily on these VAR models during the first seven years of this decade – particularly when they were so badly distorted by a false belief that the Great Moderation would always last.

Thailand seeks oil-for-rice deal with Iran
Thailand is preparing to barter rice for oil from Iran as part of its attempt to empty the government's huge stockpiles more quickly. Apiradi Tantraporn, the director-general of the Commerce Ministry's Foreign Trade Department, is scheduled to visit Iran by mid-November to discuss the specifications of oil and rice that would be exchanged, according Commerce Minister Chaiya Sasomsab.

He said that talks would also continue with authorities in Teheran for a straight government-to-government deal for selling rice. Iran is one of Thailand's major rice customers, purchasing around 600,000 tonnes of its one million tonnes in annual imports. However, it has bought only 60,000 tonnes of Thai rice so far this year, staying on the sidelines during the first half of 2008 when Thai rice prices surged to a record high of $1,080 per tonne.

Iran has high demand for rice but no commercial banks accept letters of credit from Iran because of United Nations sanctions related to Teheran's nuclear programme. Mr Chaiya also said yesterday that the government might delay its plan to release 2.1 million tonnes of old rice from its stockpile, because prices have fallen and sales would be made at a loss.

The government has accumulated 4.3 million tonnes of milled rice in intervention schemes since 2006. Around 2.1 million tonnes of that are old rice that officials had intended to release quickly to prepare space for a new buying scheme starting on Nov 1. "We could hold back the plan for some time until Vietnam sells out its rice at cheaper prices, otherwise we would suffer losses," Mr Chaiya said. Vietnamese traders currently quote rice export prices at around $400 per tonne, compared with $630 for Thailand's benchmark white rice.

According to Mr Chaiya, Vietnam is likely to speed up selling 400,000 tonnes of surplus rice before the harvesting of the new crop early next year. Chookiat Ophaswongse, president of the Thai Rice Exporters Association, said a temporary halt was a good idea because accelerated sales would place further pressure on rice prices and discourage exporters from bidding.

"If the government sells now, prices will fall further," said Mr Chookiat. "The government needs instead to fine-tune its rice marketing strategy, as Vietnam itself is expected to speed up selling its grain, as its exporters own no large warehouses, and more importantly they need cash to repay loans that carry interest rates as high as 22%." However, Mr Chaiya said the government may sell rice from its stocks at a loss because it must empty warehouses before the next crop arrives.

"Given the rice price slump, the government is suffering a loss of 2,000 baht per tonne (from the existing stockpile)," said Mr Chaiya. "The market mechanism alone is to blame for this loss." Officials have pledged to buy more rice from farmers at assured prices even as the export price of white rice has dropped 36% since May. Between January and October, Thailand exported 8.7 million tonnes of rice, up 31% from the same period of last year when it sold 6.6 million tonnes.

Björk: After financial meltdown, now it's smeltdown
After touring for 18 months I was excited to return home a few weeks ago to good, solid Iceland and enjoy a little bit of stability. I had done a concert there earlier this year to raise awareness about local environmental issues and 10 per cent of the nation came to it; but I still felt it wasn't enough.

So when I returned I decided to contact people all over the island who had attempted to start new companies and bring in new greener ways of working but had not succeeded. For a long time Iceland's main income was fishing, but when that become uneconomic people started looking for other ways to earn a living. The ruling conservatives thought that harnessing Iceland's natural energy and selling it to huge companies such as Alcoa and Rio Tinto would solve the problem.

Now we have three aluminium smelters, which are the biggest in Europe; and in the space of the next three years they want to build two more. The smelters would need energy from a handful of new geothermal power plants and the building of dams that would damage pristine wilderness, hot springs and lava fields. To take this much energy from geothermal fields is not sustainable.

A lot of Icelanders are against the building of these smelters. They would rather continue to develop smaller companies that they own themselves and keep the money they earn. Many battles have been fought in Iceland on these issues. One resulted in the Environment Minister insisting for the first time that an environmental impact assessment should be carried out before any smelters or dams were built.

And then the economic crisis hit. Young families are threatened with losing their houses and elderly people their pensions. This is catastrophic. There is also a lot of anger. The six biggest venture capitalists in Iceland are being booed in public places and on TV and radio shows; furious voices insist that they sell all their belongings and give the proceeds to the nation. Gigantic loans, it has been revealed, were taken out abroad by a few individuals and without the full knowledge of the Icelandic people. Now the nation seems to be responsible for having to pay them back.

What makes people furious is that those responsible for putting Icelanders in this situation are now the ones trying to get us out of it. Many here want those in charge to resign and allow others to tidy up after them. Most criticism is aimed at Davíd Oddsson, who made himself chairman of the central bank after 19 years as Mayor of Reykjavík and then 13 years as Prime Minister. A crowd is gathering in downtown Reykjavik once a week to demand his resignation.

Then a huge and most spectacular strike came surprisingly from your own Prime Minister. I quote a petition signed by a tenth of the nation: “Gordon Brown unjustifiably used the Anti-Terrorism Act against the people of Iceland for his own short-term political gain. This has turned a grave situation into a national disaster...hour by hour and day by day the actions of the British Government are indiscriminately obliterating Icelandic interests.”

Usually I don't notice politics. I live happily in the land of music-making. But I got caught up in it because politicians seem bent on ruining Iceland's natural environment. And I read last week that, because of the crisis, a number of Icelandic MPs are lobbying for the environmental assessment to be ignored so that the dams can be built as quickly as possible to give Alcoa and Rio Tinto the energy they need for the two new smelters.

Iceland is a small country. We missed out on an industrial revolution and my hope was that we would skip it completely and go straight to sustainable hi-tech options. If anyone could achieve this, we could. There is a wonderful characteristic in the Icelandic mentality - fearlessness, with an addiction to risk-taking to the point of being foolhardy. In music-making, storytelling and creative thought, this risk-taking is a great thing. And after my introduction to a lot of Iceland's small, growing companies, I realise how many of them have shown this fearless approach either in biotechnology or high technology.

Icelanders are highly educated in advanced sciences. We have ORF, one of the best biogenetics company in the world; Össur, an artificial limb-maker; CCP, a computer games maker, and so on. We also have a lot of doctors and health professionals. Because of the hundreds of naturally hot pools all over the island and our (so far) almost untouched nature, Iceland could easily become one big lush spa where people could come and nurse their wounds and relax. If only the Government could put its money into supporting these companies rather than serving Alcoa and Rio Tinto.

Flexibility is important: we will have to live with the three aluminium smelters that are here already and try to find ways of making them greener. But do we need five? In the past, having all our eggs in the same basket has proven far too risky, as we discovered in the days when we got 70 per cent of our income from fish. Now we are facing a disaster from betting everything on finance. If we build two more aluminium smelters, Iceland would become the biggest aluminium smelter in the world, and be known only for that. It would leave little room for anything else. If the price of aluminium falls - as it is doing - it would be catastrophic.

Iceland can be more self-sufficient and more creative - and still have an approach that is more 21st than 19th century. It can build fewer, smaller and greener dams. Let's use this economic crisis to become totally sustainable. Teach the world all we know about geothermal power plants. Support the Icelandic seed companies. Support the grass roots. It may take longer to build and deliver profits but it is solid, stable and something that will stand independently of the rollercoaster rides of Wall Street and volatile aluminium prices. And it will help Iceland to remain what it is best at: being a gorgeous, untouched force of nature.

The Depression of the 1930s-Why No Societal Collapse?
There are some substantial differences between our society in the early 21st Century, and America in the 1930s. With these differences, our society is now much more fragile and vulnerable to collapse. Here are a few that come immediately to mind:

Consider the Attributes of America in the 1930s :
  • A largely agrarian and self-sufficient society. (Now, just 1% of the population operating farms and ranches feed the other 99%.)
  • Not heavily dependent on computing and communications, technology, grid power, and petroleum-based fuels.
  • Shorter chains of supply. Most food was grown within 100 miles of where people lived.
  • A very small underclass that was dependent on charity or public welfare.
  • Lower property tax rates and lower (or nonexistent) license fees, vehicle registration fees, et cetera.
  • The majority of workers lived near their work.
  • Most displaced workers were willing to accept lower-paying jobs--even doing hard physical labor.
  • The entire nation was economically self-sufficient and could carry on without many imports.
  • Far greater self-sufficiency at the household level (domestic water wells, windmills, wood burning stoves, home vegetable gardens, home canning, and so forth)
  • A much lower level of indebtedness (public and private). At the outset of the Depression most families had cash savings. (We are now a nation of debtors.)
  • A sound currency, still backed by specie. (Although FDR's administration seized most privately-held gold in 1933, the currency was at least still fully redeemable in silver coinage until 1964.)
  • Lower percentage of corporate employment--so there were less risk of huge layoffs that would devastate communities
  • A significantly more moral society that still had compunctions and a prevalently law-abiding attitude.
  • A homogeneous population that largely shared common Judeo-Christian values. A much larger portion of society attended church regularly
  • A simpler, less extravagant lifestyle, with tastes in cooking and entertainment that did not require large outlays of cash.
  • Most families owned only one car (with proportionately lower registration and insurance costs), and they lived in smaller homes that were less expensive to heat.

In summary, in the 1930s it cost a lot less to live (as a percentage of income) and people were willing, able, and accustomed to "making do" without. When people lost their jobs, in many cases they didn't lose their homes because they were paid for. Many folks could simply revert to a self-sufficient lifestyle and earn enough with odd jobs to pay their property taxes.

The bottom line: If America were to experience a Second Great Depression, given the high level of debt and systems dependence, there would be enormous rates of dislocation and homelessness. And with modern-day immorality and the prevalent "me first " attitude, I have no doubt that riots and looting would absolutely explode.


Anonymous said...

This is all getting so BIZARRE! What's that song, "So bizarre, so bizarre...?" This timing couldn't be more perfect. The worst 8 yrs of leadership ever in America followed by an economic crisis. This sets up the media to care only about getting the Obama Religion into office. So all of the media watchdogging that could be going on to protect the rights of individuals is narrowly focussed elsewhere. Stocks go up when they should go down. Countries are said to be rescued when they are being destroyed. Is everything the opposite of what it looks? Maybe it just confirms that life is an illusion. You just couldn't make this stuff up.


Anonymous said...


1st off, AMAZING post Ilargi...


I am STILL having trouble wrapping my brain around the differences between WEALTH, the ILLUSION of wealth, and all of the Trillions of Confederate dollars being traded out there in the swindlesphere.

So, assuming you are right---and I have NO REASON to disagree with your thoughts on shorting vis-a-vis VW and Porche---how is ACTUAL wealth created in this scheme? And how does this wealth interact with all of the IOU "wealth" that remains hidden from view?

The Lizard said...

The morality of the Ruling Class

Unknown said...

Don't know why but your posts are usually one week old before showing up on Google Reader (example, received Oct. 20th post today).

Enjoy reading them, btw.

Anonymous said...


"...After Porsche said it wanted 75% of Volkswagen, VW went up 150% yesterday, and 93% more today (that’s an almost 500% increase!), to become the biggest company in the world. Not because it's doing great; in fact, it's rumored to be drowning. Which is why parties like Morgan Stanley, Goldman Sachs and major hedge funds were shorting the stock. Porsche's announcement forced them to cover their shorts and buy VW like mad men. And so you get to be the global no.1 because gamblers are paying off their losses..."

So...grand collusion? Between not only Porsche and VW, but also one must assume governments trying to get in on the scheme?

AND...isn't ALL of this "wealth" that was instantaneously created at this earth-sized crap table FALSE, as in worthless paper like the rest?

Anonymous said...

I read Straw Dogs yesterday. Among others, John Gray seems to convey the idea that citizens have an unrealistic belief in the magical powers of technology, in technology’s power to solve all human problems and bring happiness. This belief can be seen in the science fiction dreams of flying cars and an example Gray uses, cryogenically frozen bodies waiting for their resurrection when eternal life shall be bestowed by a super-advanced society. Everyone will be happy if technology just solves the next problem and material abundance will lead to everlasting happiness.

Unfortunately, the technological fortress we have built is potentially a greater problem than the frail bodies that mediate our pleasures and discomforts. Its growth and maintenance are directly harmful to the natural system that maintains our bodies. It is massive, requiring continual upkeep and growth based upon an ever-increasing use of depleting poisonous energy resources (climate change, mercury, lead, pcb,………..).

Are we truly making progress with technology? Is the world a better place? Yes, because we can access more and more energy and material to build a system that alleviates our pain and manages the potentially unpleasant things that could happen to us, until the energy runs out..... and then what.

The rate of deterioration will outpace the rate of maintenance and growth. Unpleasant things begin to creep into our lives like lower wages, less food, less driving, no credit, unaffordable healthcare, theft of our wealth by corrupt financial mobsters. We will be fed more drugs, religions, coliseum games and perhaps a war or two to keep us spinning in circles. There will be panics, nothing like a panic to make one forget their daily misery.

As this occurs, living within the technological fortress will become more and more a struggle for those inside and nearly impossible to enter for those still outside. Many of those inside will soon find themselves outside the fortress walls, anchored in place, a bad place, by mortgages that greatly exceed the value of their homes. They will be debt slaves to their masters of the inner sanctum. Eventually the outer walls of the technology fortress will be breached and the painful things will seek us as those with resources make a hasty retreat.

How fast will the walls come down? Will the common folk notice the financiers carting-off their wealth as they head for the inner sanctum? Will the common folk look away from the T.V. long enough to see the pigmen draining their pensions and home equity and forever damning their children to harsh existence outside the fortress walls……probably not, because it’s not physically painful, as the pigmen and their gurus know, man is captivated by his well-nurtured addictions and delusions.

Where is the kindness? Yes. I suppose that was one of the last thoughts of the pregnant black woman hung by her heels in Georgia and gutted as a crowd cheered their approval, the unborn child, falling to the ground had it’s skull crushed beneath the foot of a Mr.Hyde. Gray also provided the example of people's predictable behavior in the extermination of the native Tasmanians. Straw Dogs is a book well worth reading if you are a student of human nature.

perry said...

Thanks, Hangedman!

My point exactly! and timely, too.


Anonymous said...

DJIA is 889 points up today
What happened?

Anonymous said...


Thanks for the book review. I'll have to check it out.


Very timely, indeed.


Anonymous said...


One must wonder what Porsche is thinking given that Niedersachsen has those 20% with special voting rights.

Are they counting on the EU to strike down the VW law?

I would not read too much into this, i.e. nefarious governments and the like, it is simply your standard capitalistic ploy.


Ilargi said...

John Gray:

All -western- religions and philosophies commit the same error: they propagate the notion that man can be improved and find salvation, either on earth or in an afterlife.

Technology provides a two-pronged form of progress:
1/ it allows for a huge increase in population.
2/ it allows for for the development of technology that is capable of killing ever more people in one strike.

We cannot change ourselves.

Greyzone said...

"DJIA is 889 points up today
What happened?"

The government began, in earnest, to try to buy ABCP thus trying to unfreeze a market that has been frozen for a year. The automatic assumption is that the government cannot fail, therefore the ABCP will begin to trade again, therefore... right on down the line.

Unfortunately, the first assumption in that chain is unproven and almost certain to be erroneous.

I note that out in the real world the Baltic Dry Goods Shipping index is still looking wretched (meaning no real goods are being shipped anywhere). I note that over at Naked Capitalism they record that South Korea has had to ask the US for food and fuel. I note that the IMF is imposing "austerity" plans (I get your money and you get to be poor) on Iceland, Ukraine, and Pakistan... so far. I note that refinery utilization is falling, meaning either direct shortages or slightly (not massively) higher prices may appear in a month or two. I note that GM wants $10 billion from the government so they can get at the $11 billion in Chrysler's war chest so they can survive another 6-12 months.

This is the stuff of recoveries? This is a recovering economy? I think not yet, Sherlock. I stand by my prior prediction of DOW below 5000 by December 31, 2009. And quite frankly, I fear my worst case scenario could come to pass - DOW below 1000 by December 31, 2009, with the attendant social collapse that would bring.

But don't take my word for it. S&I have been saying much similar things for a very long time and they've been the ones who have been right, not Paulson, not Bernanke, not Bush.

Andrew said...

Sorry to digress, but ... a ghostly bootblack boy? Now I'm really freaked out.

Bigelow said...

Needing a little reassurance...
what is missing from this argument?

“Today, the Fed is opening new windows through which to transmit policy. It can inject liquidity directly into money markets, and now commercial paper markets. It can lend directly to primary dealers. It can buy mortgages. It can pay interest on deposits, which will have two effects: exposing the hidden reserves (above) and luring money into the Fed. The latter is deflationary, but the interest payments are inflationary, if “unsterilized.” At every crisis that is bigger than the last, the deflation argument is always compelling. But it is fundamentally misguided if it is related to the idea of asset deflation or deleveraging. These concepts are not interchangeable with deflation.

Deflation, for instance, hasn’t occurred since 1933, but deleveraging and asset deflation have, often — last in the 2000-02 bear market, and even as the Fed and banking system created a bunch of money.


Deleveraging and asset deflation are not bearish for gold, as they don’t necessarily imply a contraction in money supply, and rarely have. They may be bearish for gold stocks, but they are bullish for gold prices, because they are the very factors that motivate the near-certain cries for new credit (or more money) arising from a bad understanding of the true causes of the crisis. They are not new and are ultimately dwarfed by the next crisis.

But maybe the deflationists will be right about the behavior of banks this time. They have been wrong at each point in history when the economy faced a crisis caused by inflation. The thymological (historical) experience is that when the Fed inflates, the banking system does soon after. The Fed has never inflated in one month as much as it did in September. So the odds are against deflationists.

Indeed, the money supply could grow 25-50% in less than a year if that liquidity isn’t taken back.”
Stumbling into a Bull Market Whiskey & Gunpowder
October 28, 2008
By Ed Bugos

Ilargi said...

"Deleveraging and asset deflation are not bearish for gold, as they don’t necessarily imply a contraction in money supply"

John, I don't know Ed Bugos (you sure it's not Bogus?), but I do know I'm getting real sick of terms like 'asset deflation'. I first talked about the silliness of 'cookie inflation' a long time ago, and it's the same thing. You can't have inflation or deflation in one part of your economy, be it assets, commodities or cookies.

"...maybe the deflationists will be right about the behavior of banks this time. They have been wrong at each point in history when the economy faced a crisis caused by inflation.... So the odds are against deflationists.

Indeed, the money supply could grow 25-50% in less than a year if that liquidity isn’t taken back."

This part is so braindead that, I'm sorry, I don't want to comment. Just another guy who fits the numbers to whatever he first made himself believe.

Ed Bogus ain't worth a comment. But you are.

el gallinazo said...

Re Stoneleigh (cont)

Alpacas are amazingly cute. They also smell much better than llamas when wet as does their wool. One way to know if you have been cheated by substituted llama wool for alpaca is to get it wet and smell it. Strangely enough, alpacas and llamas can interbreed and produce fertile offspring. They are Camilids as are guanacos and vacunas. All four species can be found in the Peruvian highlands near each other. They have been living in the same proximity for millions of years, yet alpacas and llamas have remained separate species.

Now back to the perversity of the human species.

Greenpa said...

el pollo- it's amazing what the affects of "amazingly cute" can turn out to be. On my recent trip, I encountered some sheep farmers who were positively venomous about the incursions of the alpaca people. Loathsome, useless, cute creatures, according to them. Hence their hilarity when I suggested the imminent onset of the Alpacalypse, at least in their neighborhood.

scandia said...

I've been thinking about roubini's support of another stimulus package. One could find a similar view coming from Martin Wolf over at FT. I have respect for both these men. I just hate having to disagree with them. Well sort of.
Roubini's goal is to " increase aggregate demand" in order to arrest the recessionary forces. Wolf suggests we throw all we've got at the problem. What, I believe drives both men to want to stimulate demand is that they have looked into the abyss as we have. Perhaps with even more clarity see worse than I can conjure.
Alas, increasing demand is a false hope under current debt levels, under finite resource conditions with the drums of war to be heard in the distance.I suspect their position is motivated to save us from a terrible outcome. Any cost is better than what is seen in the abyss. Neither man seeems to be aware of the intentionality at play in this crisis?
Stoneleigh, you spoke of learning how the world works. If these counting house wizards did understand how the world works they would behave otherwise. What they do know is how human society /mankind works.
Perry, Re your reference to Machiavelli, I recently read a review of " The Prince" which highlighted something surprising. Machiavelli advised Princes and would-be Princes to seek and hold the goodwill of the governed. Interesting that the CEO's following Machiavelli's guide to power skipped that piece of very good advice.

Greenpa said...

or the uffects, or iffects, for that matter.

el gallinazo said...


What's their beef with alpacas? I am partial to alpacas because I think their wool is really fine. Not as good as vacuña, but that is over $100 per kilo, even in Peru. Feels much better than sheep wool. Taking a bus from Cuzco to Puno, it's high plains, 11-12,000 feet, few trees, cold and damp, some glaciers above the highway. I expected to see alpacas and llamas, but I saw mostly sheep and some cattle. Going out to Chalco canyon, at 13,000 feet plus, mainly alpacas and llamas. They seem to herd them together. Next time I am in Peru, I am going to try to learn more about the llama, alpaca, sheep situation. If my Spanish didn't suck, it would be easier. But I am reaching the point where I can count my functional synapses. I did have a couple of alpaca cutlets in Puno. Not bad. But anyway, why do the sheepherders hate alpacas? Sounds like a 50's western with the sheep and cattlemen.

el gallinazo said...


Yen went form 93 to almost 100 per USD in two days. Obviously, this is really important. What's happening?

bluemarble said...


"This the time to be afraid.

I am."

Well, fear is becoming a normal part of my day. So, I'll bite, why be more afraid with this lowering of interest rates?

Also, I've read about shorts but I'm still not clear about how that would drive the market up. I know this is a basic question...can someone translate?

Ilargi said...

A little sample from Denninger:

"Treasury approved $7.7 billion for PNC knowing full well they were going to use nearly all of it to acquire National City, another bank (that is, a competitor.)"

No. They did it BECAUSE they wanted PNC to buy National City. It's consolidation in its most shining glory.

perry said...

The rest of Machiavelli's comment was to "hold the good will of the governed" in order to control and fleece them the easier (after having gained their confidence). [or words to that effect]

That's a role for Sarah Palin...smile pretty while you pick their pockets.


Greenpa said...

El Pollo- I think their problem with alpacas was mostly that they aren't sheep. You know, totally logical, just like the rest of the world. They were also ticked that breeding stock can go for $10-$20K/animal right now. Which is silly, of course, and deserving of our scorn. :-) And, hence, they're too expensive to eat.

Anonymous said...

Alpacas can be used as guard animals for sheep.

Anonymous said...

If the financial system completes its self-destruction -- and that's looking more and more like a real possibility -- there will be several pretty awful consequences. One is that the United States will be forced to declare bankruptcy by repudiating its own debt. All those who took refuge in US Treasury bonds and bills will be like folks who sought shelter from a tornado in their out-house.
That would go hand-in-hand with a massive currency inflation that is likely to follow the current phase of compressive liquidating deflation -- in which every possible asset is being sold off for less than its face value. That process is self-limiting due to the finite supply of real salable assets. The trillions of dollars injected into system while this is happening must eventually snap-back as people shed the last fungible article and compete for necessary commodities like food and fuel with dollars that are suddenly plentiful but worthless. At some point, the government may have to summon up a new currency. I don't think it will be anything like the "Amero" which the paranoid fringe incessantly mutters about as part of their fantasy in which the US, Mexico, and Canada all join up to become one country. But any "new dollar" would probably have to be backed by gold.


I hope you're enjoying the temporarily cheap prices at the gas pumps, because this is purely a function of the compressive deleveraging that is going on right now, as contracts and positions held in energy markets are being dumped by everybody and his uncle to raise cash to meet margin calls. My guess is that oil and its byproducts will become much more difficult to get in the months ahead -- not just more expensive, but literally not available

Easthampton Burning

Greenpa said...

Greg: "If the financial system completes its self-destruction -- and that's looking more and more like a real possibility -- there will be several pretty awful consequences. One is that the United States will be forced to declare bankruptcy by repudiating its own debt."

Yes. There is another historical possibility, though, and I'd like to hear from I&S on where they think it might actually happen. My own first guess would be Thailand, which still has a very strong and respected royal family.

What they used to do, in the good old days, was declare the big nasties (like, say, Citigroup) to be treasonous enemies of the state. Hence, all their assets were forfeit to the state, and all debts owed to them were- canceled.

I kinda like it, myself. Why not? Someone out there will certainly remember this nice possibility- and might well try it. Russia?

I'd be tickled pink, personally, to wake up and find all assets for JPMorgan Chase, etc- now the property of the USA; and all their debts- non-existent.

I know, Ilargi- you'll say it can't happen, because JP et all are actually the ones pulling the strings. But how about elsewhere?

Anonymous said...

Ilargi -- Thanks for turning the light on. Today the room was really dark and I was having a heck of a time finding the switch.


Anonymous said...

Can anyone add (accuracy or opinion) of this explanation for the freezing up/collapsing of the banking system?
Evil Wall Street Exports Boomed With `Fools' Born to Buy Debt
By Mark Pittman
Before the invention of securitization, banks loaned money, received payments and profited from the difference between what the borrower paid and the bank's funding cost.
[b]During the mid-1980s, mortgage-bond traders at Salomon Brothers devised a method of lending without using capital, a technique at the heart of securitization. It works by taking anything that has regular payments -- mortgages, car loans, aircraft leases, music royalties -- and channeling the money to a trust that pays bondholders principal and interest.
With this new technology, a bank could originate $100 million in loans, sell off some to investors, transfer the rest to a special-purpose entity and not have to hold any capital. The profit could be as much as 1.25 percentage points of the amount loaned, or $1.25 million for every $100 million issued.
``The banks could turn a low return-on-equity business into one that doesn't use any equity, which was the motivation for this,'' said Brad Hintz, a Sanford C. Bernstein & Co. analyst and former chief financial officer at Lehman. ``It becomes almost like a fee business because it requires no capital.''
Like most new products, securitization found a market at home before going abroad. Bankers at Salomon and First Boston Inc. raced from bank to bank to convince issuers it was the wave of the future.
Last Updated: October 27, 2008 00:01 EDT [/b]

Anonymous said...

AP reports:
WASHINGTON - The Federal Reserve says it will supply New Zealand's Reserve Bank with up to $US15 billion, as part of its ongoing effort to break through a global credit clog.

Under the new "swap" arrangement, the US central bank will provide US dollars to the Reserve Bank of New Zealand in exchange for New Zealand currency.

"This facility, like those already established with other central banks, is designed to help improve liquidity conditions in global financial markets," the Fed explained in a brief statement.

The goal is to spur banks and other financial institutions to lend more freely, something that will help the US and global economies.

The Fed has set up similar arrangements with the European Central Bank and with central banks in other countries, including Australia, Canada, and Japan.

A full court press by the Fed.

Frank said...

I am a small time sheep farmer who uses llamas as guard animals. Alpacas are really too small. (ob money) Also, the pyramid scheme in llamas already collapsed from $2500 in 1985 to $500 in 2005, while Alpacas peaked at over $15k in the early 00s but are (were last summer) still over $10k.

el gallinazo said...


Alpaca's are dirt cheap in Peru. I wouldn't be eating cutlets of a smallish, $10,000 animal. Must be a horrendous veterinary control procedure in the USA and Canada to keep the prices that high. I did see a llama on a cattle ranch in northern Sask. last month, and I was told that it was to guard the calves against coyotes.

Stoneleigh said...

Frank is right that alpacas are too small to be guard animals. A couple of my huskies got in with them once and we had to call the emergency vet. They'd have had little chance against a larger coyote or a wolf. Llamas, on the other hand, can kick a wolf to death. I may get one eventually.

Bigelow said...

“The problem is also getting worse as populations and consumption keep growing faster than technology finds new ways of expanding what can be produced from the natural world. This had led the report to predict that by 2030, if nothing changes, mankind would need two planets to sustain its lifestyle. "The recent downturn in the global economy is a stark reminder of the consequences of living beyond our means," says James Leape, WWF International's director general. "But the possibility of financial recession pales in comparison to the looming ecological credit crunch."”
World is facing a natural resources crisis worse than financial crunch
• Two planets need by 2030 at this rate, warns report
• Humans using 30% more resources than sustainable

Unknown said...

Not long after Canadian banks pushed to have mark-to-market accounting dropped from their valuation standards, it appears that companies providing federally regulated pension plans are trying for the same. The companies say they are faced with bankruptcy if they have to meet current pension funding shortfalls.

There's some doozy quotes in this article.

"“If you actually force some of those companies out of business, it would be a disaster for the poor pensioners who only get 70 cents on the dollar or 80 cents or whatever it was at that point,” the executive said."

I wonder how much on the dollar the pensioners will get later, when the pension has been chronically underfunded for years, if not decades.

"a Finance official said Tuesday the department has had a history of providing help to pension funds in difficult circumstances, offering temporary relief in 2006, for example, to help plans cope with funding shortfalls built up earlier in the decade...

Ms. Cameron said about half the pension plans OSFI oversees were in a shortfall position prior to this year, so are doing valuations annually. That means a majority of Canada's federally regulated pension funds will be required to do a valuation report at Dec. 31 this year, giving companies no leeway to wait to see whether asset values recover over the next year or two."

So most of these funds were already in the red. This isn't about a sudden funding shortfall. This is about getting out of long-neglected obligations. Wonderful.

"Another pension industry expert said the funding situation is especially exaggerated because pension funds are required to measure their obligations and assets on a “solvency” basis, which assumes a company is going to shut its doors immediately and must fund its pension now.

He said the calculation is artificial for most companies that are in good health, but they must nonetheless make large contributions to allow for this worst-case scenario.

A worst-case scenario like the one happening right now? Yes, it would be so unfair to have to plan for that, particularly given that you were supposed to all this time and failed to do so.

This crap is ridiculous.

Greenpa said...

Bigelow: "• Humans using 30% more resources than sustainable" - yeah, saw that article. My opinion as an ecologist: the article is well written, primarily by public relations people cashing in on the opportunity for sharp comparisons with the economic collapse.

And- I'm afraid it's wildly optimistic. I'd personally say we're currently using about 150% more resources than is sustainable. They probably didn't want to sound too scary. Part of my background includes doing math on global warming stuff.

Anonymous said...

Stoneleigh said...

"Frank is right that alpacas are too small to be guard animals."

How about guard dogs like the great pyrenees?

Greenpa said...

Stoneleigh- I truly appreciate the glimpses into your lives. I like it.

Now, quick- before the Wrath of Ilargi descends on us for inappropriate topics here - one more alpaca question.

I need grazing animals in my operation; and am just moving in that direction. One friend tells me that his male alpacas can be trusted not to eat his bush crops- but his females cannot. Do you have any experience along those lines?

And for others here; since most alpaca-lama hybrids are fertile, it should almost certainly be possible to breed an animal with alpaca wool and smell, but lama size and toughness. It would take probably 4-5 generations; and real understanding of genetics (which is why it hasn't already been done, probably). But quite doable. Basically, the intermediate hybrids are likely to look and perform like crap- which is what discourages amateurs.

Stoneleigh said...


Guard dogs would be a good idea. Huskies can pull a sled for miles on very little food, and they're intelligent with wonderful personalities, but guard dogs they're not. They're not territorial and they love all people. They also go walkabout (including unauthorized hunting expeditions) for days if they get the slightest chance, so they can't be allowed to run free. Unfortunately, they particularly like to run along train tracks as those seem like trails. We lost one that way once (we know because the railway maintenance men gave us back her collar).

I'd like to get a couple of great pyrenees or something comparable to look after us and our animals.

Anonymous said...

A farmer friend highly recommends livestock guardian dogs to protect family, animals and property. Great pyrenees are excellent. We have a very protective and loving female border collie mix.

On livestock guardian dogs:



Bigelow said...


When I read “…deleveraging and asset deflation have…” I see “deleveraging and asset price declines have”; clearly thanks to you guys. The nerve Mr. Bugos touched in me was that nothing has stopped the FED inflationists before now.

Doug Noland has amply explained credit and financial assets have the quality of “moneyness”. As long as the FIRE sphere could be kept apart from the real productive sphere, banksters could blow all the damn bubbles they liked and this high velocity moneyness created wouldn’t increase the supply of cash or push up the price of a beer. Soon we notice this extra stuff with moneyness and we do have inflation.

Bugos wrote “(historical) experience is that when the Fed inflates, the banking system does soon after. The Fed has never inflated in one month as much as it did in September. So the odds are against deflationists.” So the trend continues, till it doesn’t.

Perhaps there is a lot more hiding behind the word ‘deleveraging’ than Bugos reckons perhaps. Or maybe this is just another piece to drive us lemmings over the nearest cliff. I am obviously not very good at this.

Besides I don’t care about gold at the moment...not that you can buy physical gold anyway, dealers are all out; as the paper gold price goes down.

Thank you.

perry said...

Physical gold is still available; check eBay.

You just have to pay the going rate.


Toddman said...

wassup with the greatglam.com ads?

el gallinazo said...


There's a lots of llama/alpaca hybrids in the Chalco canyon region. I forgot the Spanish name for them. When I was in Nepal, they had a hybrid of yaks and cattle. They were popular in the 7500-10000 foot range, but they died of "old age" at three years.


To spare Ilargi a dyspeptic reply, of course the Fed is pumping like crazy. But the bursting bubble, the greatest popped bubble in human history, is hugely greater than anything the Fed can currently do. The Fed is like the bilge pumps on the Titanic. "Not to worry - we'll have this water pumped out in a jiffy."

Stoneleigh said...


Not everyone sees the same ads. What you see depends partly on your location, partly on your own or your family's surfing habits and partly on our site content. We have no control over what people see as Google does it automatically.

Anonymous said...

A friend raises sheep and has had great guard dogs with Briards. They sort of look like sheep and the puppies are kept with the sheep when little. They bond and think they are sheep after a while.They are not 'house pets', they live with their sheep.

Briards don't scare coyotes or wolves away. They wait for them patiently among the sheep. They say to themselves when they see a coyote or a wolf..come a little bit closer..A little bit closer,,and then they kill them.

Coyotes and wolves don't expect a 'sheep' to suddenly and very quickly lunge at their throats and crush their windpipes. Surprise is everything in the guard dog game.

Blue Monday

Anonymous said...


we could have used some of these Briards on the bankstas.

Anonymous said...

Hey Todd lend me your sites, alls I gets is ads for trusses and hair restorer;)

el gallinazo said...

re Briards

From Wikipedia

"Their long coat requires an extensive amount of grooming. Interestingly enough, Briards with lighter colors in their fur are often mistaken for haystacks."

Bigelow said...

el pollo,

The FED is the bilge pump, speaking of which, there is the joke from a couple weeks ago “oh look dear, it’s the Hindenburg landing on the Titanic.”

Novel approaches are being found to shove credit in every corporate crack available these days.
[sarcasm] We should incorporate ourselves, then they can shove credit in our pockets too. [/sarcasm]

Anonymous said...

Oct. 29 (Bloomberg) --
gained for the first time in three days, led by two-year notes, on speculation the Federal Reserve will cut its key interest rate by a half-percentage point today to 1 percent.

Odd though, the TED seems to have risen a bit as well, does this mean the Libor rates are increasing or am I reading this backwards as usual? Sheesh I really hate these neverending stories. I mean if we are going to watch Japanese drama I think I would even prefer aGozilla pot boiler..

and to be a bit obscure what ever happened to attribution?

Anonymous said...

For everyone that has livestock, if PO happens how will you make hay? I guess by hand...

Anonymous said...

The contrast between the
"Great Glam" Ad to the left and the main post picture is hilarious!

Anonymous said...

House of Cards
By Danny Schechter.

A nasty blizzard
By Julian Delasantellis

rachel said...

@ todd...I am getting the glamor girls too, maybe I'm the target market, I am female, although look nothing like the woman in the red dress! I click on all ads on TAE website to boost click through numbers.

rachel said...

Henry Kaufman was a guest on OnPoint today, wbur.org talking about global economic crisis. I had to call in, I am disgusted with the way the IMF is being painted as a savoir for struggling "developing" countries as he called them. I asked that he comment on the history of the IMF and WB "helping" these countries but in reality taking their sovereignty and opening them up to ravaging of their natural resources, populations and environments. .....his answer was round about and not very clear tome…it’s sad, Americans are allowing our economic system and government to steal our money, but the havoc it is then wreaking on other countries is atrocious.

el gallinazo said...


"For everyone that has livestock, if PO happens how will you make hay? "

While the sun shines


and I get ads for Jitterbug telephones

Toddman said...

>The contrast between the "Great Glam" Ad to the left and the main post picture is hilarious!

Gives new meaning to the phrase "doomer porn"!

Maybe google decided this site needed some "levity"?!?

Stoneleigh said...


We appreciate it when people do that :)