Thursday, November 13, 2008

Debt Rattle, November 13 2008: They just don't know it yet

Lewis Wickes Hine Stand and deliver November 1913
Shreveport, Louisiana. Howard Williams, 13-year-old delivery boy for Shreveport Drug Company. Works from 9:30 AM to 10:30 PM; has been here three months. Goes to the Red Light every day and night. Says that the company could not keep other messenger boys, they work them so hard.

Ilargi: Let's see if we can paint this picture straight and clear. Global governments and central banks have so far dumped at least $4 trillion -some estimates run much higher- into their financial sectors. Their non-financial corporations need an equal amount, $4 trillion, over the next two years, as their debt has to be repaid or re-financed.

That will not happen, or at least I can't fathom how it could. For one thing, the accumulated losses in the financial sector add up to way more than $4 trillion, so the bail-out amounts will have long since evaporated when "real economy" companies come knocking for loans. Whatever may be left will be hoarded, not lent. Therefore, mass lay-offs across the board are a certainty.

If you read lines like: "Paulson shifts TARP focus to the consumer", don’t be misled. "Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards," Paulson said today in a speech at the Treasury in Washington. "This is creating a heavy burden on the American people and reducing the number of jobs in our economy."

What this means should be blatantly obvious to everyone. Not having a car loan or a credit card can be presented as "a heavy burden to the consumer", and the public will likely believe it too. But that doesn't make it true. The REAL heavy burden on the consumer is the "availability overkill" in car loans and credit cards, not their absence. In other words, hundreds of billions of dollars in taxpayer money will now be used to try and drive the taxpayer even deeper into debt. The pig must be slaughtered.

I'm toying with the idea that Paulson decided not to buy the bad assets, which is still the one and only thing Congress gave him permission to do, because he hasn't been able to figure out a way to do that without risking an overall, fully exposed, mark-to-market valuation of the assets. Which would be a huge threat to his banker friends, it would wipe out many of them. If he would have secretly paid, say, 50 cents on the dollar to his closest buds, there would have been no way to refuse that to others, including foreign interests. And since we're talking untold trillions here, that's a mission impossible.

But you know what the result is of this -once again illegal- about-face? That the markets still don't know what the assets are worth, which ones are more toxic than others, etc. And that in turn means that there still cannot be a return to trust in the markets, even though that will continue to be presented as the goal of all the bail-outs. And without trust, there will be no easing in credit markets. Which means no car loans, and no mortgages. Seen from that angle, TARP2 can't help but achieving the opposite of its stated intent. Want to bet that that is precisely the real intent?

It also means that the American companies that need their share of the $4 trillion in refinancing, the ones that provide millions of jobs as well as actual products and useful services, have been gutted and left for dead by the US government. They just don't know it yet.

Paulson throws your money at the one sector of the economy that doesn’t do anything useful, money that could have been used to support those sectors that provide your jobs and produce things that are actually useful.

And why doesn't Congress do anything, why doesn't it demand that Paulson execute the mandate it handed to him? Because the US Congress has turned into a a sleaze piece of three-penny farcical kabuki theater performed by mentally challenged grumpy old shriveled Faust impersonators who’ll sell their grandkids for a slice of the power pie. They sold their souls long ago.

Abandon all hope once you enter deflation
The price of white truffles has fallen 84%. Fine wines have dropped 65%. Lobsters are off 52%. Deflation has reached the City. It has engulfed housing and now threatens to spread through the broader economy, lodging like a virus in the British and global monetary systems.

Deflation is sometimes likened to Dante's Inferno. "Abandon all hope"once you step into that Hellfire. We are not there yet but Mervyn King, the Governor of the Bank of England, says it is now "very likely" that the UK retail price index will turn negative next year. This is a drastic reversal of the oil and food spike that played such havoc with monetary policy over the summer. "The world changed in September," said the Governor. The Bank's fan charts point to zero inflation at current interest rates of 3%, but the startling new feature is that price falls could gather pace.

This is a clear signal that the Monetary Policy Committee will cut rates again in December – perhaps by a full point to the historic low of 2%, last seen in the Great Depression. Mr King let slip yesterday that there is "obviously" a risk of deflation, although he remains sure it can be averted by a pre-emptive monetary blitz. Let us hope he is right. The curse of deflation is that it increases the burden of debts. Incomes fall: debts stay the same. This way lies suffocation. It was bad enough in the early 1930s when US farmers faced a Sisyphean Task trying to meet mortgage payments on their land as crop prices kept sliding. They suffered mass foreclosure and fled West, as recounted in John Steinbeck's Grapes of Wrath.

We forget, however, that overall borrowing was modest in the 1930s. The great credit bubble of the last 20 years has pushed debt levels in Britain, the US and other Western societies to unprecedented highs. UK household debt reached a record 165% of personal income last year. This is almost 50% higher than the burden at the onset of the recession in the early 1990s. Our sensitivity to debt deflation is therefore greater. "It is going to be absolute murder in Britain if inflation turns negative," said Professor Peter Spencer from York University. "The big difference with past episodes is that we are now much more heavily indebted. Few people owned their own houses in 1930s. Debts were miniscule."

Deflation has other insidious traits. It causes shoppers to hold back. They wait for lower prices. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop. It also redistributes wealth – the wrong way. Savings appreciate, which is nice for the "rentiers" with capital. The effect is a large transfer of income from working people with mortgages to bondholders. (These may be pension funds, of course). The modern warning to us all is the "Lost Decade" in Japan, a loose term for the on-again, off-again slump that ultimately led to zero interest rates and – when that failed – to the printing of money. After 18 years, the Nikkei stock index is now trading at 8,700 – down from a peak of nearly 40,000. House prices have fallen by half. Yet after all the stimulus, the country is once again tipping back into deflation.

Governor King said Britain was likely to avoid this fate. "We've taken action much earlier than was the case in Japan," he said. Not everybody agrees, even after the shock and awe cut of 1.5 percentage points by the MPC. Albert Edwards, global strategist at Société Générale, has long warned that central banks in the Anglo-Saxon countries have stored up trouble by stoking credit booms, and may find it harder than they think to engineer a soft-landing. "This could easily go the way of Japan. It is true that Bank of England has moved faster, but Japan was a local bubble. This time it is the 'great unwind' on a global scale with leverage spaghetti everywhere," he said. "The monetary authorities don't have foggiest idea themselves whether this is going to work. They're crossing their fingers and hoping," he said.

Nor is it clear whether rate cuts are gaining much traction. The average rate of tracker mortgages has risen 72 basis points since last month, and credit card rates have been rocketing. The Bank's transmission mechanism is not working properly. This a variant of the 1930s struggle when the central banks found themselves "pushing on a string", in the words of John Maynard Keynes. He called for public works to lift the economy out of its liquidity trap. This is more or less what the US, Japan, China, and parts of Europe are now doing – with more in store after the G20 this weekend. Britain has pitifully limited scope on this front. We had a budget deficit of 3pc of GDP at the top of the cycle – when we should have been in surplus – and we are heading for over 8pc.

This is already nearing the danger level. If the Government now lets rip on fiscal policy, we could face a 'gilts strike' as foreign investors retreat from UK debt. The Bank of England has not run out of ammo yet. It can cut rates to zero if necessary and then escalate to direct infusions of money by purchasing bonds – or indeed by buying a vast range of securities, assets and even houses if necessary. Ultimately it can print money to cover the budget deficit. As the late Milton Friedman put it, governments can drop bundles of banknotes from helicopters. If they really want to defeat to deflation, they can. Mr Friedman may have overlooked the fact that gunmen can shoot down the helicopter – the Bank of France in October 1931, when it ditched the dollar; perhaps Asian bond investors today? – but that is to quibble.

Professor Spencer says the Bank of England has learned the hard lessons. Without the constraints of the ERM, Gold Standard, or any other fixed exchange system, it retains great freedom of action. "They are very aware of the deflation risk. They are cutting rates very fast, and if necessary they too will turn to helicopters. But in the end they will keep the wolf from the door," he said.

Germany, Industrialized World Enter Recession
Germany's Federal Statistical Office has announced that the economy is now in recession, with third-quarter data even worse than expected. The figures aren't much different elsewhere, with the OECD reporting the industrialized world is slipping into recession.

Everyone knew it was coming. But on Thursday, Germany's Federal Statistical Office made it official: the country is in a recession. In the third quarter, Germany's gross domestic product shrank by 0.5 percent relative to the previous quarter. Most economists define a recession as two quarters of negative growth in succession. The third quarter results were even worse than the minus 0.2 percent that experts had been expecting. According to Thursday's announcement, the German economy -- Europe's largest -- shrank by 0.4 percent in the second quarter, a slight correction from the minus 0.5 percent previously announced.

"The (third quarter) shrinkage is stronger than we had expected," Sebastian Wanke, an economist at DekaBank, told Reuters. "Unfortunately, the early indicators show that things won't get much better in the fourth quarter," said Dirk Schumacher, an expert with Goldman Sachs. For years, Germany's economy has been buoyed by strong exports. Now that orders and sales overseas have plunged, however, the sector is dragging the entire economy down with it, despite indications that Germans may be spending more money.

Meanwhile, the Organization for Economic Cooperation and Development also said Thursday that the entire industrialized world is likely already in a state of recession. "The OECD area economy appears to have entered recession," the organization said, pointing to data from the United States, Japan and the euro zone, Europe's common currency area. The group said that gross domestic product across its 30 member states would drop by 0.3 percent in 2009 -- forecasting a drop of 0.9 percent in the US, 0.1 percent in Japan and 0.5 percent in the euro zone.

Indeed, a sense of general economic gloom has descended over the 15 countries that belong to the euro zone. In the second quarter, the euro zone economy contracted by 0.2 percent. Recent industrial data -- showing that industrial output in France had dropped by 0.5 percent in France, by 2.1 percent in Italy and by 3.6 percent in Germany -- have most analysts assuming that third quarter numbers, once they are released, will likely confirm that the euro zone has in fact slipped into a recession.

The news from Great Britain is no better. Bank of England Governor Mervyn King warned on Wednesday that recession was coming for the United Kingdom as well and would likely be longer than expected. He said it might be the worst the country has seen since the early 1990s. King also warned of possible deflation and said that growth would likely not return to the British economy there until the latter half of 2009, raising expectations of yet another Bank of England interest rate slash.

Back in Germany, Thursday's developments come on the heels of a Wednesday forecast by an independent panel of economic advisors to the German government predicting that growth in 2009 would by 0.0 percent, lower than the German government's own prediction of 0.2 percent growth. The International Monetary Fund has a much more pessimistic view of the country's economic future, forecasting shrinkage of 0.8 percent in 2008

Producers in turmoil as Russian oil hits $10 a barrel
Leading Russian oil producers, including TNK-BP, BP's Russian affiliate, are grappling with a collapse in profits from the export of Siberian oil. Heavy export tariffs have almost wiped out the profit margin from selling crude oil outside Russia, forcing Siberian producers to sell at prices as low as $10 a barrel on Russia's domestic market. Fears are mounting that the profits squeeze may speed the decline in Russian oil output, already down 6 per cent this year.

The profits crunch, caused by the collapse in the worldwide price of crude, is provoking concern within Russia's oil community that capital expenditure budgets will have to be cut if profits from oil sales do not recover. “The tax burden is very tough,” Valeri Nesterov, an oil analyst at Troika Dialog, the Moscow brokerage, said. “The problem is that the future of the oil sector might be jeopardised if the Government doesn't reduce the tax burden.”

Transneft, the Russian state oil pipeline monopoly, reported over the weekend that shipments of crude were running at only three quarters of planned exports for November. Oil traders suggested that leading producers, including Tatneft and Rosneft, the biggest Russian oil producer, were likely to cancel tanker exports from Black Sea ports due to the heavy tax burden. A BP spokesman confirmed that Russian exporters were experiencing problems due to high export taxes. “In October, you would have made a loss,” he said. The problem has emerged because of the precipitous decline in the price of crude from its peak in July of $147 a barrel to present levels of around $56 a barrel.

Russia imposes an export duty on crude oil, a significant source of government funding, but the level of the tax is set in arrears, calculated according to the export price of Urals blend crude over the previous two months. Oil producers complain that the levy is always excessive, but when oil prices fall quickly, the change in the tax rate takes months to catch up. The Government cut the export tariff at the start of this month from $51 a barrel to $40 a barrel. However, Urals blend crude fell to $53 a barrel yesterday, suggesting that exporters would continue to suffer losses after meeting production costs and pipeline tariffs.

“Profits will decline, but the main problem is that in order to sustain oil output they need to maintain capital expenditure. It is nearly impossible to borrow money and, if your profit falls, you have less money to invest,” Mr Nesterov said. Reports from Moscow yesterday said that TNK-BP was in talks to secure a $600 million (£399 million) loan from its bankers. The fundraising was put on ice last summer when a row erupted between BP and its oligarch partners over control of the joint venture. Since then, the syndicated lending market in Moscow has virtually disappeared because of the sudden outflow of funds from Russia in the continuing global credit crisis.

Alexei Kudrin, the Russian Finance Minister, said yesterday that the Government was forecasting an average oil price in 2009 of $50 a barrel. He said that Moscow would consider using its foreign currency reserves to prop up state finances next year. They had been budgeted on an oil price of $95 a barrel. Russia continued to intervene in the markets yesterday, selling dollars in its effort to prop up the sagging rouble. “You will see more support measures for the economy this week. I think we will need to work hard for at least another year,” Mr Kudrin said. “The Finance Ministry has been put into army barracks regime, and the central bank is working until 2am, reacting to everything.”

Oil falls to $50 amid slowing global demand
Oil prices plunged to $50 a barrel today on gathering concerns the global economic slowdown and the perilous state of the US car industry are driving down demand for crude. In London, Brent North Sea crude fell $1.77 to $50.60 following heavy declines earlier in the week. While overnight in Asia, prices for New York oil fell to near $55 a barrel. Oil is now trading 66 per cent below the $147.27 peak reached in July.

Stephen Roach, chairman of Morgan Stanley Asia in Singapore, said: “As the global economy continues to weaken, we’re going to see further downward pressure on oil. I think we’ll certainly challenge the $50 threshold. We could challenge the $40 threshold.” However, the fall follows a report from the International Energy Agency, released yesterday, which said that the world's existing oil producers faced “huge challenge” to keep up with a projected rise in global demand. The report from the IEA, the respected Paris-based energy advisor to the Organisation for Economic Co-operation and Development (OECD), said that to compensate for the depletion of existing oilfields, by 2030 the world would need to find new production equivalent to 45 million barrels per day, or the output of four Saudi Arabias, to maintain present levels of supply.

The IEA, which based its findings on a landmark study of decline rates at 800 of the world's largest oilfields, said that there was, in theory, enough oil left in the ground to meet demand. However, it would require investment of about $450 billion (£300 billion) a year, with the bulk of this spent in the 13 member states of Opec, where most of the world's remaining supplies lie. Last month, Chancellor Alistair Darling increased pressure on major oil companies to pass on the falling price of crude after BP and Shell reported record quarterly profits.

In contrast, since oil prices have started to fall, Britain's major supermarkets have cut the cost of petrol on their forecourts. The falling price of oil will contribute the declining UK inflation which is expected to shrink from its current 16-year peak of 5.2 per cent. However, Mervyn King, Governor of the Bank of England yesterday cautioned that the UK could be heading for a period of deflation. Mr King was speaking as he revealed the Bank's quarterly Inflation Report, which continued to impact the value of the pound.

Sterling sank further after reaching a record low against the euro and a six and a half year low against the dollar. It opened today at $1.4864, having yesterday fallen below $1.50 for the first time since 2002. Mr King said the Bank was prepared to cut rates even further after its shock 1.5 percentage-point cut last week. He said that the British economy is facing its toughest challenge in nearly 30 years.

So far, Washington is on the hook for $5 trillion
For all the fury over Treasury Secretary Henry Paulson's $700 billion emergency economic relief fund, it seems downright puny when compared to the running total of the government's response to the credit crisis. According to CreditSights, a research firm in New York and London, the U.S. government has put itself on the hook for some $5 trillion, so far, in an attempt to arrest a collapse of the financial system.

The estimate includes many of the various solutions cooked up by Paulson and his counterparts Ben Bernanke at the Federal Reserve and Sheila Bair at the Federal Deposit Insurance Corp., as the credit crisis continues to plague banks and the broader markets. The Fed has taken on much of that total, including lending a cumulative $1 trillion in overnight or short-term loans since March to primary dealers through its emergency discount window and making a cumulative $1.8 trillion available through its term auction facility, plus a series of short-term transactions it began making available twice a month in January. It should be noted that a portion of the funds lent in these programs has been repaid and that the totals represent what has been made available.

The Fed also took on tens of billions in debt, including $29 billion in debt of Bear Stearns, and made $60 billion of credit available to American International Group. It is also taking $22.5 billion of AIG's residential mortgage-backed securities holdings and putting them in a newly created special purpose vehicle, and doing the same for a $70 billion chunk of AIG's collateralized debt obligations portfolio. All totaled, another $181 billion.
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The Treasury, in addition to the $700 billion raised in the Emergency Economic Stabilization Act, agreed to guarantee money market funds against losses up to $50 billion, will inject $40 billion of capital into AIG and is backing the conservatorship of Fannie Mae and Freddie Mac, to the tune of $200 billion. The FDIC, meanwhile, is guaranteeing $1.5 trillion of senior unsecured bank debt. Not included in the total are the Fed's long-existing discount window lending to commercial banks, the mortgage modification plan announced by regulators on Tuesday, support for the Federal Home Loan Banks and a myriad of other programs.

Paulson and Bernanke have tried any number of ways to stop the free fall in housing prices and unfreeze the credit markets, with limited success. Rates that banks charge each other for three-month loans have dropped to 2.1 percent over the corresponding Treasury security, from their high of 4.8 percent in October. But lending is contracting as banks brace for rising credit costs and corporate borrowers hunker down. The Treasury has turned its focus from attempting to buy troubled assets from banks, which was the original intent of the October Emergency Economic Stabilization Act, to injecting capital in the form of preferred equity stakes.

It started out with $125 billion worth of investments in eight major U.S. banks and has since expanded the program to an increasingly broad range of financial and nonfinancial companies. And with just $60 billion left of its initial $350 billion authorization under the emergency act, the Treasury faces a growing number of companies — including Detroit's automakers — begging for assistance.

David Hendler, an analyst at CreditSights, says it looks as if government is left holding the bag, and of course that translates into everyone. "The losses have to be taken, but no one wants to take them," Hendler said at a conference Wednesday, speaking about the banks and their handling of troubled assets. "It seems like the taxpayers are going to be taking a good portion of that."

The looming corporate crunch
Here's another big number for the global financial crisis: $4 trillion.
That's the bill non-financial corporate borrowers face over the next two years as a chunk of their debts become due for repayment or refinancing, according to data from Dealogic. In normal times borrowers would roll the debts over with their lending banks, or maybe issue new bonds. But as financial firms cram down their bloated balance sheets, doing so is harder, where it’s possible at all.

Those who borrow direct from the banks – around 85pc of the total in Europe, though much less in the US – will find there are simply fewer loans to go round. Banks are under pressure to shrink the asset side of their balance sheet, even as they are forced to bring off-balance sheet vehicles onto their books. The IMF estimates that European and US banks alone will cut $10 trillion of assets over the next five years.

Speculative borrowers such as hedge funds, oligarchs and highly leveraged asset buyers get burned first. Anecdotal evidence, though, suggests ordinary, moderately leveraged corporates too are finding the door closed – notable those in wobbly consumer-facing sectors, or those who pushed too hard on terms when the going was good. Where there is lending to be had, it will be more expensive. Some banks are calculating rates on new lending based on how much it costs to insure against the borrower defaulting. Borse Dubai, Nestle and Nokia have all taken out facilities linked to their credit default swap (CDS) price – an unattractive proposition, since CDS spreads are influenced not by companies themselves, but by the whims of the credit markets.

When banks say no, there’s always the bond market. Bonds were eschewed in recent years as borrowers sought the tight spreads and flexible repayment of syndicated bank loans. But they’re still not for everyone. First, bonds are expensive. Altria, the US tobacco firm, just issued a $6bn bond at a punishing 600 basis points above the rate on US Treasuries. Second, issuing them is a name game. Fine if you’re a Nestle or an Altria, but harder for their smaller, less trusted cousins.

Not all borrowers will be equally crunched. The wider margins from more expensive lending will attract new entrants to the market. Some Japanese banks are reportedly stepping in - but they won't be able to absorb the full amount. The result is that some businesses will fail. And others will need to take evasive action, such as cutting staff, stopping dividends, shutting branches or slashing costs and capital expenditure.

Less credit for speculators looks like a healthy correction. It's not so healthy if otherwise viable companies go to the wall through a lack of lending. That would make corporate debt more than a corporate problem. Keeping those lines of credit open should be high on world leaders' agendas when the G20 nations meet in Washington this weekend.

Treasury Redefines Its Rescue Program
Treasury Secretary Henry M. Paulson Jr. announced a series of moves yesterday that redefine the federal government's $700 billion rescue plan for the financial industry in order to tackle what he called a dire situation in the consumer credit markets. In recasting the program, the Treasury no longer plans to buy troubled assets from financial firms, the idea initially presented to the country, but instead will offer aid to banks and other firms that issue student, auto and credit card loans in part by jump-starting the market that provides financing for these companies.

"This market . . . has for all practical purposes ground to a halt," Paulson said at a news briefing. "Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy." In recent years, sales of securities provided the funding for 40 percent of consumer loans, Paulson said. Lenders issued $42.5 billion worth of such securities last October. This October, they issued less than 2 percent of that amount.

The volume of car loans, for example, declined 6 percent in the third quarter compared with the corresponding period last year, according to the Federal Reserve. Average interest rates on car loans almost doubled from July to September -- the most recent month for which data are available -- and borrowers were required to make much larger down payments, an average of $2,000 more down on a $20,000 car. And without the ability to borrow money, lenders that provide private student loans have been raising rates or have stopped issuing them altogether. Of the 60 major lenders in the business, 37 have dropped out.

Paulson said the Treasury's bailout effort, called the Troubled Asset Relief Program, should not be spent helping ailing Detroit automakers or homeowners facing foreclosure because that would violate the intent of the initiative but that they deserved help in other forms. "I don't think TARP should be a place people look to whenever there's an economic issue," Paulson said in an interview yesterday evening. "We ought to keep our eyes on what the purpose of the TARP is, which is the stability of the financial system."

The steps unveiled yesterday are Paulson's latest effort at using the bailout to support lending by making capital investments in an ever-widening array of firms in return for ownership stakes. So far, the government has allocated $250 billion of the Treasury package for banks and $40 billion more for insurance giant American International Group. If the Treasury's new initiative succeeds in increasing the availability of consumer credit, it would probably give a huge boost to the nation's automakers by ensuring that car buyers could find loans. But Paulson added that automakers won't be helped at all in the absence of a plan to make the industry viable.

Congressional leaders immediately expressed their disappointment with his announcement. But citing their goal of getting money to homeowners and automakers, these lawmakers said his decisions could be overturned once President-elect Barack Obama takes office. "I am concerned that we may have to wait until the next administration before we have the real change in economic policy that our nation needs," Sen. Christopher J. Dodd (D-Conn.) said. Paulson responded in the interview that such changes, including the use of bailout money to reduce foreclosures, were "not what the American people were expecting, and it's not what many in Congress are expecting."

But Paulson cannot ignore Congress. Once the first $350 billion has been drawn down, Paulson must go back to Congress to obtain access to the rest of the money. When Paulson first presented the rescue plan to Congress, he pitched it as a program to buy up "toxic securities" -- complicated investments backed by failing mortgages and consumer loans -- that were sapping the confidence of investors. "We moved away from it because we have a great responsibility to always evaluate the facts in front of us and say how do we take a finite amount of resources and how do we get the most powerful results?" he explained.

He added that the program for making capital purchases in financial firms was "quicker, more efficient and more powerful." Paulson added that he shied away from other measures to broaden the Treasury program because he wanted to ensure that there would enough money left to shore up the financial system, especially in the event of another shock, such as the implosion of a major bank. "The longer we looked at it, the clearer it became that we should be saving more of the TARP," he said.

The details of the Treasury's program for loosening consumer credit are still to be worked out, officials said. Among the options they are considering is investing in financial firms outside the traditional banking sector. But the Treasury would insist there be matching investments from private companies, officials said. That would give the department some confidence that the investment of public money would be safe. The firms that would be eligible for this new round of capital purchases would include insurers, such as Prudential and MetLife, and specialty lenders for small businesses, such as GE Capital and CIT Group, officials said. But Paulson said the program would not begin until Treasury officials had evaluated whether the initial round of investments in banks was successful.

The Treasury Department is also considering giving tens of billions of dollars to the Federal Reserve to back the purchase of highly rated securities that are made up of large pools of student, auto and credit card loans. The market for these securities has shut down despite their high credit rating because investors no longer trust the ratings agencies after they failed to accurately evaluate securities based on mortgages. Treasury officials said they hoped this would jump-start trading and get the credit markets working again.

Despite mounting concerns over the health of consumer credit markets, banks have not reduced the volume of credit card lending. The balance of outstanding loans has risen slightly this year. But banks increasingly are reducing credit limits and declining to issue new cards, suggesting to regulators that a lending crunch is imminent. "What's happened is that financial institutions have basically done what they always do under these circumstances -- they overreact when crises hit," said Joel L. Naroff of Naroff Economic Advisors, a consulting firm in Pennsylvania. "They went from giving anyone any amount of credit they wanted to giving very few people credit."

The market that provides private student loans is in particularly bad shape. Since late last year, no lender has been able to raise money for loans by selling them to investors. Instead, these lenders have relied on traditional sources of finance, such as banks. But in the past few months, those wells dried up, too. Mark Kantrowitz, publisher of FinAid, which provides financial advice to students, said those attending for-profit colleges may see the most immediate impact because they generally have poorer credit ratings. But eventually, all students that rely on private student loans to supplement their federally guaranteed loans will feel the pain, he said.

With Obama pressing the need for a new economic stimulus package, Paulson said that bolstering the credit market would provide its own bump to the economy. "I cannot imagine anything else will have a bigger stimulus impact than getting credit going again, getting lending going again," Paulson said. To encourage more active lending, the four federal agencies that regulate banks issued a joint statement yesterday reminding the banks of their responsibility to make loans to creditworthy customers. The statement said that banks should prioritize lending over dividend payments and other uses of money. It also warned banks against compensating executives in ways that encourage risk-taking -- for example, awarding bonuses for making a large number of loans without weighing whether they would be repaid.

One of the most politically fraught questions facing Paulson is how to help homeowners. The legislation creating the $700 billion program states that one of its purposes is to preserve homeownership. But Treasury officials are struggling with how to get more companies to modify the terms of troubled mortgages. "I just can't tell you how many proposals I've looked at to modify mortgages and keep people in their homes," Paulson said at the briefing. "This is a very complicated area. There are no easy answers."

While citing what he called the success of Hope Now, a private-sector effort put together by the Treasury, Paulson said officials were still exploring ideas. These include one proposed by Federal Deposit Insurance Corp. Chairman Sheila C. Bair, which would potentially lower monthly payments so that struggling homeowners could afford them. But he drew a sharp distinction between those types of mortgage-modification programs and the other uses of the TARP money. He views the bank programs as investments in the financial system, not outright grants. The mortgage programs, he said, involve outright grants.

Paulson's TARP Reform Spells Return of Systemic Risk
Treasury Secretary Henry Paulson's decision to abandon the purchase of toxic mortgage-linked securities under the Troubled Asset Relief Program may trigger a return of systemic risk to credit markets, BNP Paribas SA said. "Substantial risk still remains within the U.S. financial system," said Rajeev Shah, a London-based credit strategist at BNP Paribas. "Uncertainty about existing troubled assets could lead to increasing systemic risk."

Paulson moved the focus of the $700 billion TARP program yesterday to help relieve pressures on consumer credit including auto loans and credit card debt. Shares of Citigroup Inc. and Goldman Sachs Group Inc. tumbled more than 10 percent as a result, according to Shah, on investor concern holdings of mortgage-related assets will cause further losses. The Treasury Secretary's decision not to save Lehman Brothers Holdings Inc. from bankruptcy in September sparked a surge in the cost of protecting corporate debt from default amid investor concern the financial system could be irrevocably damaged. "Solvency issues could come back into play," Shah said in an interview. "The TARP has not helped to spur lending."

Credit-default swaps on the benchmark Markit CDX North America Investment Grade index rose to a record 240 on Oct. 27. The index declined 1.5 basis points to 197.5, according to broker Phoenix Partners Group prices at 8:26 a.m. in New York. The contracts, conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Residential and commercial-mortgage backed bonds tumbled after Paulson's about-turn on the TARP program. All 24 of the ABX indexes of credit-default swaps tied to subprime mortgage bonds fell to new lows, according to Markit Group Ltd. One of them, known as ABX-HE-PENAAA 07-2 linked to AAA rated bonds created in the first half of 2007, dropped 8.4 percent to 41.83. The level suggests the bonds might fetch about 42 cents for each dollar of balances. Financial companies worldwide have lost or written down $950 billion since the start of the credit crisis, according to data compiled by Bloomberg.

The cost of default protection on European bank bonds was little changed today with the Markit iTraxx Financial index of credit-default swaps liked to 25 banks and insurers dropped 2 basis points to 112, according to JPMorgan Chase & Co. prices. The Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings decreased 9 basis points to 830.5.

Paulson Shifts Focus of Rescue to Consumer Lending
U.S. Treasury Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets. "Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards," Paulson said today in a speech at the Treasury in Washington. "This is creating a heavy burden on the American people and reducing the number of jobs in our economy."

His remarks are an acknowledgement that the pitch he made to Congress for the bailout hasn't delivered what was promised. Paulson sold the Troubled Asset Relief Program as a way to rid bank balance sheets of illiquid mortgage assets, and he may encounter resistance from Congress for the remaining $350 billion after using most of the first half to buy bank stakes. Lawmakers will "put his feet to the fire," said Kevin Petrasic, a former official at the Office of Thrift Supervision, now an attorney with the Paul, Hastings, Janofsky & Walker law firm in Washington. "I'm not sure how you get around dealing with what is clearly the congressional intent."

Charles Grassley of Iowa, ranking Republican on the Senate Finance Committee, said the shift makes "you wonder if they really know what they're doing." Grassley, in a letter to Paulson and Federal Reserve Board Chairman Ben Bernanke, raised the possibility Congress could block appropriation of the remaining $350 million under the rescue package.
"Congress can act any time to revoke the Treasury's authority," Grassley said. "They will be watched and they will be questioned." Paulson said he has no regrets for the revised plan. "I will never apologize for changing a strategy or an approach if the facts change," he said.

Treasury and Federal Reserve officials are exploring a new "facility" to bolster the market for securities backed by assets, Paulson said, adding that the program would be "significant in size." Officials are considering using a portion of the bailout money to "encourage private investors to come back to this troubled market," he said. The Treasury chief said the department is also considering having companies that accept new taxpayer funding get matching private capital. Buying "illiquid" mortgage-related assets -- the reason the program was established a month ago -- is no longer being considered, he said. "We will continue to examine whether targeted forms of asset purchase can play a useful role," he said.

Paulson has committed all but $60 billion of the initial $350 billion allocated by Congress to take equity stakes in banks and in insurer American International Group Inc. Lawmakers, who could reject Treasury requests for the remaining $350 billion, are pushing for aid to automakers including General Motors Corp. Paulson is resisting. House Financial Services Committee Chairman Barney Frank today proposed giving General Motors Corp., Ford Motor Co. and Chrysler LLC $25 billion in loans from the Treasury rescue fund. "A collapse of the American automobile industry would be the worst possible thing that could happen at a time when we are already weakened," Frank, a Massachusetts Democrat, said in an interview on Bloomberg Television. He also said he disagreed with Paulson's decision to forgo buying bad assets. "That was an important part of the way we sold the program, and I think he's making a mistake," Frank said.

Automakers "are a key part of our manufacturing industry and manufacturing is critical," Paulson said in response to a question after his prepared remarks. "We need a solution, but the solution has got to be one that leads to viability." Paulson said he has no timeline for notifying Congress of his intent to use the remaining TARP funds, and reiterated that he's "comfortable" that $700 billion is "what we need" to stabilize the financial system. With less than three months left in the Bush administration, demands for assistance from foundering companies will likely escalate. The Treasury two days ago took a $40 billion stake in AIG. American Express Co. this week converted into a bank-holding company, making it eligible for funds.

President-elect Barack Obama, who takes office on Jan. 20, last week said his economic team will "review the implementation" of the rescue plan, suggesting he may have different priorities for its use. Paulson said today he met with a member of the incoming president's transition team as well as someone "who is going to have responsibility" for the program after the end of the Bush administration. The Treasury chief and his team have decided to stick with the success they've had with the capital injection program, rather than try to deal with setting up the asset purchases before the change in administration, said Martin Regalia, chief economist at the U.S. Chamber of Commerce in Washington.

"It's going to be the next guy's issue," he said. "At this point, they're just trying to make sure the pieces don't come apart at the seams." Some lawmakers are also calling for greater oversight over use of the funds. Senator Charles Schumer of New York today reiterated his calls for Paulson to require banks taking public capital to increase lending rather than use the money to finance takeovers. "The TARP really gave no incentive for the banks to lend the money, carrot or stick, and that's a big problem," he said on a conference call with reporters.

Mortgage Bonds Fall to New Lows as Paulson Scraps U.S. Buying
Residential and commercial-mortgage backed bonds tumbled after Treasury Secretary Henry Paulson said the government no longer plans to buy devalued mortgage assets, credit-default swap indexes suggest. All 24 of the ABX indexes tied to subprime mortgage bonds fell to new lows, according to Markit Group Ltd. One of them, known as ABX-HE-PENAAA 07-2 linked to AAA rated bonds created in the first half of 2007, dropped 8.4 percent to 41.83. The level suggests the bonds might fetch about 42 cents for each dollar of balances.

Paulson's decision follows announcements of different plans by JPMorgan Chase & Co. and Citigroup Inc., two of the country's largest banks, and Fannie Mae and Freddie Mac, the largest mortgage-finance companies, to rework bad mortgages. The government's exit as a potential buyer added to confusion that's deterring investors in the bonds. "No one in the market knows what to believe any more," David Castillo, a senior trader of structured-finance bonds at Further Lane Securities in San Francisco, said in an e-mail today. "Things change on a daily basis."

Non-agency home-loan bonds, which rallied ahead of the creation of a $700 billion financial rescue program last month, had already returned to setting new lows as the credit-market slump broadened; data signaled a weakening U.S. economy; Paulson spent funds on capital injections into banks; and concern grew that foreclosure-prevention efforts may boost losses, in part by encouraging more defaults. The second half of the program will be used to help relieve consumer credit, not buy mortgages and related bonds, Paulson said today in a speech. Treasury and Federal Reserve officials are exploring a new "facility" aimed at bolstering the market for securities backed by assets other than mortgages, he said.

Spreads on AAA commercial mortgage-backed securities today soared 71 basis points to a record 714.5 basis points more than the benchmark swap rate, according to Bank of America Corp. data. The bonds were trading at 582 basis points over the benchmark a week ago. A basis point is 0.01 percentage point. The Securities Industry and Financial Markets Association is "disappointed Treasury is choosing to de-emphasize the asset purchase portion of the TARP program," Tim Ryan, the New York- based group's chief executive officer, said in a statement today. "A key ingredient to a strong recovery is the creation of price discovery through some type of transparent purchase program."

Legislation is needed to restructure U.S. mortgage servicing contracts to make it easier for lenders to modify loans for homeowners struggling to avoid foreclosure, House Financial Services Committee Chairman Barney Frank said today said at a hearing in Washington. "Uncertainty in investors' minds" about what types of new loan-modification plans servicers will adopt have also been a drag on prices simply because it makes it harder to value the debt, said Scott Eichel, co-head of asset-backed and mortgage trading at RBS Greenwich Capital. Non-agency mortgage bonds lack guarantees from Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the U.S. in September, or federal agency Ginnie Mae.

So-called ABX and CMBX indexes have been suggesting higher prices than investors can get for actual bonds. Bonds similar to those tracked by ABX-HE-PENAAA 07-2 have been trading between 30 and 40 cents on the dollar, so declines in swap indexes after Paulson's announcement may not mean that drops will be as steep for bonds, said Eichel, who's based in Greenwich, Connecticut. "For the last couple of weeks I don't think a lot of people thought they were going to buy a lot of mortgage assets," he added in a telephone interview today.

Buying for the so-called Troubled Asset Relief Program had already appeared likely to focus mostly on mortgages rather than mortgage bonds because the U.S. could more easily use loan purchases to rework bad debt and stem sliding home prices, according to Thomas Hamilton, head of asset-, mortgage- and commercial-mortgage-backed securities at Barclays Capital Inc. Buying of unsecuritized loans "probably makes a lot more sense for this program, as much as that doesn't work for me," he said at conference in New York on Nov. 10. "I'd much rather have them purchase securities" and boost their prices.

While Paulson said today that buying mortgage-related assets is "not the most effective way to use TARP funds," he added that the new plan "may also be used to support new commercial and residential mortgage-backed securities lending" and the U.S. may make "targeted" asset purchase. "Paulson reminds me of a little kid pulling some half- chewed piece of gum out of his pocket to fix the house falling down around his parent's ears, and offering it to his Dad with great excitement," said Eric Boughton, a portfolio manager at Deschutes Investment Advisors in Portland, Oregon, which oversees $1 billion. "Then he gets tired of trying to fix the house, goes out to play for a little bit, and eventually comes back in with a ball of old string and asks if it'll help with the delinquent credit- card notice his Mom is poring over."

Unadulterated version of China’s growth
Chinese statistics and Chinese milk packaging have something in common. Do not believe what you read on the label. Just as state-owned companies allowed suppliers to boost the supposed protein content of infant milk powder with melamine, an industrial plastic, so state-controlled statisticians have sometimes doctored official figures to suit the Communist party’s needs.

The goal has been smooth growth. Thus state figures have sometimes underestimated true expansion. Likewise, in the previous slowdown, when electricity generation stalled, economic activity mysteriously rumbled on unaffected. Thus when we learn that China will, over two years, pump Rmb4,000bn ($586bn, €466bn) into an economy growing at “only” 9 per cent a year – a veritable comedown from the 10-12 per cent an octane-fuelled populace has come to expect – we should sniff the contents suspiciously. Equity and commodity markets initially cavorted in response to signs that China, the world’s only super-economy still going strong, was acting decisively to ensure things stayed that way.

But, as the subsequent market sag hinted, the stimulus package may not be all that it seems. Real growth rates may already be lower than official figures purport. Stephen Roach, chairman of Morgan Stanley Asia, says Beijing is acting as though it is “panicked”, suggesting that economic activity may have dipped below the 8 per cent Chinese observers, in their questionable wisdom, have determined as the level required to keep social unrest in check. Certainly, anecdotal evidence suggests that output sank alarmingly last month, far more quickly than anyone imagined was possible just weeks ago. Here, a big chemicals company reports that orders fell by half in October. There, a banker that thousands of labour-intensive factories in Guangdong, the engine-room of China’s export-led miracle, have disappeared almost overnight.

Export growth has slowed, but not yet stopped, suggesting there is worse to come. Without stimulus – if things go terribly wrong, perhaps even with it – economists are wondering whether growth could shrink to 6 per cent, at least for a quarter or two. The sudden slowdown was not made in Wall Street. It originated in decisions adopted last year to take the heat out of a boiling property market – partly because of fears, now evaporated, about inflation. Banks were told to curtail lending to the property sector. Property developers were obliged to build lower-income housing and buying a second home was made more difficult.

China’s policies contrasted with those in the US and Europe, where it was beyond the remit of independent central banks to try to tame asset prices. But bursting bubbles, even in a command economy, is not that easy. Instead of taking the froth off the property market, Beijing has drained it dry. “They thought they were fine tuning,” says Arthur Kroeber, managing director of Dragonomics. “But China remains a boom-and-bust 19th century economy.” If attempts to ease growth lower have misfired, efforts to ratchet it up again may not go so well either. Ben Simpfendorfer at Royal Bank of Scotland says he is wowed by the sheer amount of money Beijing is chucking at the problem – at least 3 per cent of gross domestic product a year, even if one discounts half the announced investments as money already pledged. But China’s “increasingly market driven economy” may sink more quickly than new funds can be deployed, he says.

Mr Simpfendorfer cites the housing market, worth about 7 per cent of GDP and now largely in private hands. Even if banks are instructed to lend, property developers cannot be obliged to borrow, putting the government at one stage removed from direct control over economic levers. Ten years ago, when most housing was public, turning the investment tap off and then on again was much easier. Western governments, with newly acquired control over their once private financial systems, can hardly fail to sympathise with China’s efforts to cajole banks into funnelling state money towards the real economy. Nor is Beijing alone in exaggerating the size and potential impact of stimulus efforts. Japan has turned double-counting into a comic art form. Yet, given the need to reassure shaken consumers, selling old money as new may not be bad policy.

China is a centrally planned system in a slow, uneven transition to a market economy. The US and Europe have, perforce, taken a step in the opposite direction. Neither can turn their economies on a dime. Certainly, China’s demographics, continuing mass urbanisation and the scope for improving productivity almost guarantee that fast growth will resume. But anyone who imagines that China possesses the immediate firepower to haul the world out of recession should run some lab tests. Like its dairy products, the China growth story is not quite as unadulterated as it seems.

Russia Debt Risk Jumps After 'Clumsy' Ruble Widening, Rate Rise
The cost of protecting against a default by Russia soared after the central bank increased the ruble's trading band and lifted its benchmark interest rate to stem record capital outflows. Credit-default swaps on Russian government bonds jumped to 7.82 percent of the amount insured from 6.14 percent yesterday, according to CMA Datavision prices. The yield on its 30-year dollar bonds increased to 10.47 percent from 9.1 percent, according to Bloomberg prices.

The central bank's widening of its ruble target against a basket of dollars and euros by 1 percent yesterday "achieved nothing" and cost almost $7 billion of the nation's foreign- currency reserves, according to analysts at Renaissance Capital. Russia joins Hungary, Iceland and Pakistan among a handful of central banks raising interest rates to stem currency losses, as the rest of the world cuts the benchmarks to spur lending.

"The current pressures have largely been provoked by the central bank itself, whose recent clumsy steps in the currency market triggered a new speculative attack on the ruble," analysts led by Alexei Moisseev at Renaissance in Moscow said in a report today. Russia has drained more than 20 percent of its currency reserves, the world's third largest, to stem a 15 percent slide in the ruble against the dollar since the start of August as investors withdrew about $147 billion, according to BNP Paribas SA data to Nov. 10.

Fitch Ratings and Standard & Poor's said they may downgrade the nation's debt because of the slide in reserves, which, at $484.6 billion on Oct. 31, are still more than double the combined total for eurozone nations. The ruble slid 1 percent yesterday, the most in two months, after the central bank indicated it would scale back its defense of the currency as officials grapple with the worst financial crisis since the 1998 devaluation. The ruble was 0.1 percent higher against the basket, comprised of about 55 percent dollars and 45 percent euros, at 30.6832 at 6:55 p.m. in Moscow.

Stock market regulators suspended the Micex Stock Exchange after the ruble-measured benchmark index plunged 13 percent yesterday, the biggest decline worldwide. The dollar-denominated RTS Index fell 13 percent today before trading was halted. The MSCI Emerging Markets Index fell 3.4 percent. "The central bank's decision to devalue yesterday badly undercut confidence in the currency," said Ronald Smith, head of research at Alfa Bank in Moscow. Investors are selling Russian assets as a 62 percent slump in the price of oil since July erodes the country's biggest source of export revenue. Urals crude, the country's main export blend of oil, fell 0.6 percent to $53.01 a barrel today, on evidence that a looming global recession is weakening demand.

Oil prices next year will probably average $50 a barrel, rising to $55 in 2010 and $60 in 2011, Russian Finance Minister Alexei Kudrin told lawmakers in the upper house of parliament today. A weaker ruble is "unavoidable" because lower oil prices mean the central bank will need to keep its reserves, Clemens Grafe, an emerging-market analyst at UBS AG, wrote in a research note today. Russia, the world's second-biggest oil exporter, will have to widen its currency target "fairly quickly" by about 10 percent to 15 percent and raise rates further "in order not to lose a lot more reserves," UBS said.

The central bank may be forced to devalue the ruble by as much as 20 percent as early as the beginning of 2009, analysts at RBC Capital Markets said in a research note today. "We see little prospect of deepening negative capital and current account trends reversing anytime soon," the analysts said. The average interest rate Russian banks charge to lend money to each other overnight rose to its highest level in 3 1/2 weeks today. The MosPrime rate almost doubled to 13 percent from 6.54 percent yesterday, the first increase in five days. The cost of protecting against a default by OAO Sberbank, Russia's largest lender, surged to 8 percent from 5.65 percent, while credit-default swaps on OAO Gazprom, the largest company, increased to 11.5 percent from 9 percent.

Credit-default swaps, conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality. Sberbank bonds plunged, sending the yield on five-year notes due 2013 up 210 basis points to 16.69 percent, Bloomberg prices show. "With yesterday's meaningless ruble devaluation, Bank Rossii has undermined the Russian authorities' recent efforts to prevent capital flight," Renaissance analysts said. "This has led speculators to expect further, similar mini-devaluation steps."

Iceland rescue deal held up after calls for guarantees
Demands by a group of nations, including Britain, that Iceland must compensate foreign depositors who lost money in last month's collapse of the country's banks have put a brake on a multibillion-dollar rescue package being set up by the International Monetary Fund. The Netherlands, Germany and Britain are believed to have demanded that any such rescue package must be conditional on guarantees to foreign depositors.

A shortfall of about $500 million (£332 million) in funding for the proposed deal remains unresolved while the parties argue about Iceland's commitment to reimburse depositors. A spokeswoman for the IMF confirmed that funding the package had become a problem. “The programme needs to be fully financed before we can take it to the IMF's executive board. We are still in the process of ensuring that we have the needed financing. We are making good progress and expect a board meeting soon,” she said. Wouter Bos, the Dutch Finance Minister, said yesterday that the IMF bailout should be conditional on Iceland reimbursing those who lost money in its banks.

“Iceland concluded agreements with several countries [to reimburse the losses of depositors] and we think that Iceland must honour those agreements before getting assistance from the IMF,” a spokesman for the minister said. After the collapse of Icesave, the foreign business of Landsbanki, in October, the Icelandic Government agreed to reimburse Dutch clients of the bank for sums up to €20,887 (£17,705) per depositor. Europe stepped into the breach last Friday, promising an unspecified amount of money.

Geir Haarde, the Prime Minister of Iceland, said that he had received a letter from José Manuel Barroso, the President of the European Commission, offering support.The Icelandic leader said that he had tried to accept the offer but had been told that “other matters had to be cleared”. These, he said, referred to the issue of British assets frozen in Icelandic banks. Iceland nationalised its three biggest banks — Kaupthing, Landsbanki and Glitnir — last month, when the country's institutions were unable to secure funds from other banks to meet their obligations. The Dutch Finance Ministry said that it was in talks with several other countries, including Germany and Britain, over reimbursing foreign customers of Icelandic banks.

In October, the IMF agreed provisionally to lend $2 billion to Iceland, but the country must find further lenders to complete a $6 billion rescue package needed to refinance the Icelandic Government. Denmark, Norway and Sweden have promised funds for their Scandanavian peer and Iceland has also been in in talks with Russia, Japan and America. Doubts about the rescue package weighed on the Icelandic currency yesterday and sent it falling 5 per cent against the euro to 205 crowns.

Unemployment will get much worse
Unemployment has risen to an 11-year high and economists warned that it will get much worse. The number of people out of work reached 1.82m, after a 140,000 rise in the three months to September, but is expected to rise further as a recession takes hold of the UK. "Much worse is to come," said Vicky Redwood, UK economist at Capital Economics. "The labour market is a lagging indicator and so does not fully reflect the slowdown in the economy seen so far. What's more, the downturn is set to worsen. We expect the worst recession in 25 years to push up unemployment to over 3m."

The figures from the Office for National Statistics also showed that the UK unemployment rate is now 5.8pc, and the number of people claiming unemployment benefit was 980,900 in October, an increase of 36,500 on the previous month. That is the first time since 2001 that the claimant count has been so high. John Cridland, the CBI's deputy director-general, said that the rise in unemployment was an "unwelcome but inevitable" consequence as the downturn hits every sector of the economy. "Earlier this week CBI figures showed small and medium-sized manufacturers cutting jobs for the first time during this crisis, and in the last few days we have seen major employers announcing job losses," he said.

"It is clear that the human cost of this downturn will unfortunately be higher than initially expected, with unemployment continuing to rise through the coming months." The ONS figures added to the raft of gloomy data in recent days and weeks showing that the crisis that started in the banking sector is now feeding through to the real economy. The Bank of England is widely expected to respond to the deteriorating economic picture with further hefty interest rate cuts.

The Treasury is likely to provide fiscal stimulus to support the effects of monetary policy loosening, details of which are expected in the Pre-Budget Report on November 24. "All eyes will now be on the fiscal stimulus proposed in the Pre-Budget Report with the Chancellor expected to focus on measures that will inject demand into the economy relatively quickly, as well as bringing forward expenditure on public works," said Ben Read, economist at the Centre for Economics and Business Research.

Obama weighing idea of "auto czar"
President-elect Barack Obama is considering naming a point person to lead efforts to help the distressed auto industry return to health, an Obama aide said on Thursday. General Motors Corp, Ford Motor Co and Chrysler LLC are seeking a federal bailout of up to $50 billion.

Automakers and Democratic congressional leaders have discussed a two-stage process in which government would provide $25 billion in direct loans to meet urgent needs. A second $25 billion would come later and could be applied to a United Auto Workers (UAW) retiree health care trust, freeing up more cash for operations. An Obama transition official said the president-elect was looking into "identifying someone in charge of the auto issue who would have the authority to bring about reforms that would lead to an economically viable auto industry."

Obama said at a news conference last week that he considered federal help for the industry a high priority for his transition and called the auto companies "the backbone of American manufacturing and a critical part of our attempt to reduce our dependence on foreign oil." He urged the Bush administration to accelerate disbursement of $25 billion in advanced technology loans approved by Congress in September.

Obama, a Democrat who had solid labor-union support during his presidential campaign, also pressed Republican President George W. Bush in a private meeting on Monday to back a federal bailout for the auto industry.

Federal Reserve Seeks Control of CDS Clearinghouse
The Federal Reserve is seeking to become the lead regulator for clearing trades in the $33 trillion credit-default swap market, according to people with knowledge of the proposal. The Fed, the U.S. Securities and Exchange Commission, the Treasury Department and the Commodity Futures Trading Commission are discussing a memorandum of understanding that lays out oversight of clearinghouses that would become the central counterparty to credit-default swap trades, said the people who asked not to be named because the discussions are private.

"The Fed is the natural place for it to go," said Craig Pirrong, a finance professor who studies futures markets at the University of Houston. "The main concern is systemic risk," Pirrong said, which the Fed is better equipped to control. The Fed has been pushing the industry to form a clearinghouse that would absorb losses should a market maker fail. Regulators stepped up their efforts after the failure of Lehman Brothers Holdings Inc. in September and the near-collapse of American International Group Inc. The New York Fed has been meeting with groups including CME Group Inc., Intercontinental Exchange Inc. and NYSE Euronext to press them to accelerate their progress.

New York Fed spokesman Andrew Williams declined to comment, as did CFTC spokesman David Gary and the SEC's John Nester. Treasury spokeswoman Michele Davis didn't immediately respond to requests for comment. The SEC and CFTC would also share trading information under the plan, the people said. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They were conceived to protect bondholders against default, and pay the buyer face value in exchange for the underlying securities or the cash equivalent should the company fail to adhere to its debt agreements.

An announcement of the regulatory structure could come by the end of the week when President George W. Bush hosts a gathering of world leaders in Washington to discuss ways to fix the financial crisis, said one of the people who has read a draft of the plan. "All the regulators want to push this forward," Pirrong said. "The credit crisis meeting on Friday is as good an excuse as any." Chicago-based CME Group is competing with Intercontinental Exchange of Atlanta and NYSE Euronext to create a system. CME Group Chief Executive Officer Craig Donohue said last week that he is open to Fed oversight for his clearing plan. CME Group is currently regulated by the CFTC.

Intercontinental Exchange Chief Executive Officer Jeff Sprecher has set up his clearing plan as a special purpose banking entity within the state of New York. Intercontinental agreed to buy Chicago-based Clearing Corp. last week to help it get participation in its plan from the nine major banks that own the Clearing Corp. and that make up the majority of the market.

CME Group, partnered with hedge fund Citadel Investment Group LLC, has said it is ready to begin clearing CDS contracts as soon as it receives regulatory approval. Sprecher said today his group may be ready before year end. "We're waiting for regulatory approval. I think positions will start moving in the next few weeks," he said at the Futures Industry Association conference in Chicago today.

'Detroit meltdown' worries Toyota, Honda
Japanese automakers Toyota Motor Corp. and Honda Motor Co. say they are "very concerned" about the potential failure of Detroit's three car companies as analysts warn a bankruptcy would throw the entire auto supply base into chaos and rattle the operations of even the most profitable manufacturers. The comments came as Canada's finance minister Jim Flaherty said Wednesday some residents in his riding of Whitby-Oshawa, home to the Canadian headquarters and main assembly factories of General Motors Corp., don't want the government to hand GM and other Detroit automakers a bailout.

"We're very concerned" about a Detroit meltdown, said Mike Goss, spokesman for Toyota Motor Engineering & Manufacturing North America Inc. "In the past couple of days I've been asked ‘Wouldn't it be great for Toyota if others fail?' We think the opposite is true." The vehicles Toyota builds in North America contain an average of 75% domestically-sourced parts and systems, and Toyota is reliant on many of the same suppliers used by GM, Ford Motor Co. or Chrysler LLC, Mr. Goss said. The Japanese automakers are working to identify which suppliers have the biggest exposure to the Detroit firms and developing emergency plans in the event they need to replace a company providing them with parts. "Everything's on the table about what we might have to do," Mr. Goss said.

Should one or more of the Detroit three go bankrupt next year, all U.S. automotive operations including those of the so-called new domestic manufacturers like Honda and Nissan Motor Co. will be paralyzed for at least one year because of the high likelihood many suppliers will run out of money, according to an analysis by the Center for Automotive Research, a think-tank based in Michigan. "We expect a major wave in supplier bankruptcies or a "supplier shock,'" the analysis said. North America's roughly 6,000 auto suppliers are already under severe pressure from a collapse in U.S. sales of cars and trucks to 25-year lows, which has forced the Detroit automakers to cut output in the face of lower demand. Ford said yesterday it will temporarily shut down nine of its plants continent-wide this quarter as it builds 211,000 fewer vehicles than a year-earlier, including Ontario assembly factories in Oakville and St.Thomas.

"We're very concerned" about maintaining the stability of the supply base, said Edward Miller, spokesman for American Honda Motor Co. "Obviously this is very disruptive." Mr. Flaherty said he expects U.S. lawmakers to craft a proposal for a rescue of the U.S. auto industry after GM warned last week it may not have enough cash to fund operations past this year amid a credit crisis. Discussions so far have centered around a bridge loan package worth US$25-billion, in addition to US$25-billion worth of separate loans already approved to build more fuel-efficient vehicles. "Economically, GM may prove too big to ignore simply because of the implications for not just employees, but also retirees and all the supplier companies if it was to collapse," said Nigel Gault, chief U.S. economist for economic-analysis firm IHS Global Insight Inc.

Investors bet yesterday a bailout would go ahead, pushing up shares of GM yesterday by as much as 23% and Ford Motor Co. stock by as much as 11%.
Many Canadians say the federal government should do something to help the auto sector, Mr. Flaherty acknowledged at an economic conference in Toronto. "[But] there are lots of people that say ‘Don't do anything. Don't use my tax money to bail out an enterprise that may not survive.'" He added the views are not coming from rich constituents but "people on the street."

Mr. Flaherty said any aid Canada would offer would be for "transformational" support. "If we are going to do something, [we need] to find a way to ensure the sustainability, survivability, a product mix that is going to have profit here in Canada." Henry Paulson, the U.S. treasury secretary, said yesterday automakers are a key part of America's manufacturing base but that any effort by government to rescue them "has got to be one that leads to viability." Mr. Paulson is resisting pressure by Democratic lawmakers in the United States to use the US$700-billion Trouble Asset Relief Program, a bailout fund aimed at banks, to help Detroit.

U.S. Jobless Claims Reach Seven-Year High of 516,000
First-time claims for U.S. unemployment insurance rose last week to the highest level since September 2001, when the economy was last in a recession, as weakening demand led companies to fire more workers. Initial jobless claims increased by 32,000 to a larger- than-forecast 516,000 in the week ended Nov. 8, from a revised 484,000 the prior week, the Labor Department said today in Washington. The total number of people on benefit rolls jumped to the highest level since 1983.

Restrictive credit and slumping demand are causing companies to retrench by trimming payrolls and investment. Rising joblessness will further squeeze consumer spending, which accounts for more than two-thirds of the economy, and threaten a protracted downturn, economists said. "The labor market is only reinforcing a very pessimistic picture," Linda Barrington, a labor economist at the Conference Board, said in a Bloomberg Television interview. "When you start to see the downward pressure on wages as well as the credit crunch, that's only going to make consumers much more nervous."

Another government report showed the U.S. trade deficit narrowed more than forecast in September as a record decline in the cost of foreign crude oil caused fuel imports to tumble. The gap shrank 4.4 percent to $56.5 billion, the smallest in almost a year, from $59.1 billion in August, the Commerce Department said today in Washington. Excluding petroleum, the deficit widened as overseas sales of American-made goods dropped by the most since 2001. Economists surveyed by Bloomberg had anticipated a reading of 480,000, based on the median of 40 projections in a Bloomberg News survey, from the originally reported 481,000 in the prior week. Estimates ranged from 465,000 to 500,000 initial claims.

The total number of Americans receiving jobless benefits rose to 3.897 million in the week ended Nov. 1, the highest level since January 1983. The four-week moving average of initial claims, a less volatile measure, rose to 491,000 last week, the highest since March 1991, from 477,750 a week earlier. So far this year, weekly claims have averaged 400,600, compared with an average of 321,000 for all of 2007, when the economy added a total of 1.1 million jobs. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at 2.9 percent. These data are reported with a one-week lag. Thirty-six states and territories reported an increase in new claims, while 17 reported a decrease.

The labor market is weakening as the economy appears to be in its first downturn since 2001. The jobless rate rose to 6.5 percent in October, the highest since 1994, the government said last week. Employers cut 240,000 jobs last month, for a total so far this year of 1.2 million jobs lost, while the total number of unemployed Americans jumped to 10.1 million, the highest level in a quarter century, according to last week's jobs report from the Labor Department. The monthly non-farm payrolls numbers reflect job growth and they tend to fall as the weekly initial jobless claims figures, which reflect firings, rise.

Companies are trimming staff as consumer spending is forecast to fall through at least March, according to economists surveyed by Bloomberg early this month. Banks, faced with mounting losses and writeoffs as the financial crisis spread over the past year, have been sacking thousands of workers. Citigroup Inc. and Goldman Sachs Group Inc., faced with a weakening economy and the prospect of mounting losses, began firing workers as part of the firms' plans to cut more than 12,000 jobs, people with knowledge of the matter said last week.

Goldman, which converted last month from the biggest U.S. securities firm into a commercial bank, on Nov. 5 began telling about 3,200 employees, or 10 percent of its workforce, they were out of a job, according to one of the people who declined to be identified because the decisions were confidential. Citigroup began notifying staff last week who are affected by the bank's plan to discard 9,100 positions over the next 12 months, or about 2.6 percent of its headcount, another person said. Both New York-based firms have already cut staff, and are among the banks and brokerages worldwide that have shed almost 150,000 jobs since the subprime mortgage market collapsed last year.

US Foreclosure Filings Rise 25% as Home Prices Fall
More than a quarter million U.S. households received a foreclosure filing in October even as state laws designed to protect property owners from losing their homes slowed the pace of defaults, RealtyTrac Inc. said. A total of 279,561 properties got a default notice, were warned of a pending auction or were foreclosed on, the Irvine, California-based seller of default data said today. Filings rose 25 percent from a year earlier, an improvement from average monthly gains of about 50 percent this year, after California passed a law delaying foreclosures for some borrowers.

Banks and states have moved to halt defaults as the economic outlook has worsened with climbing unemployment and a relentless fall in home prices. The U.S. jobless rate rose to 6.5 percent, the highest since 1994, and payrolls dropped for the 10th straight month in October, the Labor Department said last week. Home prices in 20 cities declined at the fastest pace on record in August and have fallen every month since January 2007, according to the S&P/Case-Shiller home-price index. "The apparent slowing of foreclosure activity understates the severity of the foreclosure problem," RealtyTrac Chief Executive Officer James Saccacio said in a statement. "The net effect may be merely delaying inevitable foreclosures" should banks and the government fail to adopt a unified approach on mortgage modifications, he said.

Filings rose 5 percent from September, RealtyTrac said. The biggest improvement came in California, the state with the most foreclosures of any in the U.S., where filings fell 44 percent in October from a year earlier after the new law required lenders to contact borrowers to discuss loan changes. President-elect Barack Obama said in his first news conference Nov. 7 that the U.S. Treasury and government agencies should "help families avoid foreclosures and stay in their homes." Fannie Mae and Freddie Mac, the largest U.S. mortgage- finance companies, said this week they would offer reduced interest rates and extend terms up to 40 years to borrowers whose loans are at least three months delinquent.

The loan modification effort is intended to be "a standard for the industry," said Neel Kashkari, the Treasury's interim assistant secretary. About 10,000 borrowers a month may qualify for the program. JPMorgan Chase & Co., the biggest U.S. bank, has said it would stop foreclosures on some loans and attempt to make payments easier on $110 billion of troubled mortgages. Bank of America Corp. has already modified 226,000 loans this year, and Citigroup has modified 370,000 since 2007 and will contact about 500,000 additional homeowners with $20 billion in mortgages in the next six months.

"The size of the problem is so huge that it will be difficult for any of these programs to make more than a dent," Sam Khater, a senior economist at First American CoreLogic, a seller of economic data, said in an interview. First American forecasts 3.2 million foreclosure filings this year, an 80 percent increase from 2007. A further 5 percent decline in home prices means that 9.6 million U.S. households will have negative equity, or owe more on their loans than their house is worth, First American said. "Negative equity hurts. It's a good predictor of default almost all the time," Robert Van Order, adjunct professor of finance at the University of Michigan in Ann Arbor and former chief economist at Freddie Mac, said in an interview.

In October, one in every 452 U.S. households received a foreclosure filing, RealtyTrac said. Nevada had the highest rate for the 22nd straight month with one in 74 housing units in some stage of foreclosure, more than six times the national average. Filings more than doubled from a year earlier to 14,483. Arizona had the second highest rate at one in 149 housing units, with filings up 176 percent to 17,507. Florida was third at one in 157 homes and had 54,324 filings, up 80 percent. California, Colorado, Georgia, Michigan, New Jersey, Illinois and Ohio also ranked among the 10 highest rates, RealtyTrac said.

California had the most total filings at 56,954, down from a peak of more than 100,000 in August. Filings rose 13 percent from a year earlier. Florida, Arizona and Nevada ranked second through fourth in total filings, followed by Ohio, Michigan, Georgia, Texas and New Jersey in the top 10. New Jersey had 8,473 filings and a foreclosure rate of one in 410 housing units. New York's rate was one in 2,102 units. The state had 3,761 filings, ranking 37th, said RealtyTrac, which collects property data from more than 2,200 U.S. counties that represent more than 90 percent of the population.

Las Vegas had the highest foreclosure rate among metropolitan areas with one in 62 housing units in a state of default, more than seven times the national average. Filings more than doubled from a year earlier to 12,155. Florida's Cape Coral-Fort Myers and Miami ranked second and third, among metropolitan areas. Fort Lauderdale was eighth and Orlando was tenth. California's Stockton was fourth, Merced was fifth, Riverside-San Bernardino was seventh and Modesto was ninth, according to RealtyTrac.

Cheque mate: How AIG got Uncle Sam over a barrel
Just how concerned should American taxpayers be about American International Group (AIG), the insurance company brought to its knees by its escapades in the credit-derivatives market? On November 10th a revised rescue package was announced, comprising $153 billion of capital injections and loans. That is the largest bail-out for any firm, anywhere, during the crisis. Is the government being, as AIG’s new chairman says, “very, very smart”, or has it been taken for one of the most expensive rides in corporate history?

Even on September 16th, when the state first intervened, AIG was a controversial candidate for assistance. Its insurance businesses are ring-fenced by local regulators and individually capitalised, precisely so they can survive a collapse of the holding company. A bankruptcy was avoided only because of the size of the holding company’s book of toxic credit derivatives, which senior executives barely understood. These left AIG so intertwined with other financial firms that its failure was judged by the Federal Reserve and Treasury to endanger the financial system.

Whether that judgment was right remains unknowable. But it is now clear that the original plan was flawed. That may be understandable: panic was in the air, AIG faced crippling collateral calls and Lehman Brothers had just folded. And the authorities lacked the wide powers granted by the Troubled Asset Relief Programme (TARP) approved by Congress in October. Unorthodox options, such as splitting the systemically threatening credit derivatives from AIG, were not under discussion. As a result, the original plan looked a lot like the traditional remedy for a liquidity crisis at a solvent bank. The Fed offered a two-year, $85 billion loan. AIG would pay a penal interest rate and cede to the state an equity stake of just under 80%. But as collateral calls mounted on the credit derivatives, and AIG admitted to new problems, it became plain that the loan was too small. It was also too expensive: in the first year it would have cost almost as much as AIG’s profits in 2006, its best year ever.

Meanwhile the chances of AIG being able to repay the loan also shrank. In the second quarter, it had only $59 billion of core equity capital (defined here as book equity less goodwill, tax assets and stock ceded to the state). By the third quarter, more losses had cut this to a meagre $23 billion. Worse, much if not all of AIG’s capital sits “stranded” in the ring-fenced insurance units. That makes it hard to funnel it up to a holding company that is otherwise almost certainly insolvent.

The original solution was to sell the insurance operations to raise cash, but with AIG’s competitors also reeling, this looked less and less realistic. The alternative, of AIG tapping credit markets to repay the state, became ridiculous by early November. AIG’s own credit spreads implied that the company was headed for default. Prospects of even rolling over the $64 billion of non-government borrowing due to mature by 2011 became increasingly bleak. That forced the hand of the authorities. In one sense the new package does what, with the benefit of hindsight, should have happened all along. The Fed will provide $53 billion of funding for two vehicles which will, in effect, assume AIG’s most toxic credit derivatives and mortgage-backed securities. These positions have been marked to fairly conservative levels.

In an alternative universe the government could then walk away, confident that it had dealt with the worst of the systemically important credit derivatives and that the insurance operations remained safely ring-fenced. But in the real world the state is now the biggest lender to AIG, which has drawn down the bulk of the original $85 billion facility. AIG has Uncle Sam in a bind. As a result, the Treasury, through the TARP, has been forced to recapitalise the insurer by purchasing $40 billion of preference shares. Despite this its economic stake in the firm will remain just below 80%. The Fed will also maintain a loan facility, on more generous terms, of $60 billion. And if AIG struggles to refinance its debts, it is quite possible that the state will provide a formal guarantee.

The Treasury has secured crowd-pleasing concessions; for example limits on executives’ bonus payments. But the real question is whether the preference shares are safe. AIG has a trillion-dollar balance-sheet. There is now a thin buffer of core equity between the taxpayer’s preference shares and any further losses. The hope is still that as markets recover, AIG can sell the crown jewels of its insurance business at a premium to book value. That may well take years. Plenty of time to reflect on how an offer of a temporary loan, to a company that barely made the list of systemically vital firms, spiralled into one of the biggest corporate bail-outs ever.

Should GE be an AAA company?
The latest news in bailouts involves GE Capital. Apparently, the company has gone begging to the FDIC for a bailout. In fact, the FDIC has offered to back $139 billion in GE Capital debt. I have serious reservations about this move by Sheila Bair. In fact, I am outraged.

First, as I understand it, the FDIC has much less than $139 billion in capital on hand. And they have hundreds of banks to watch that are busy going broke. So, how is it possible that they can guarantee GE Capital's debt? The answer is they cannot. American taxpayers are what is behind this move just as they were with Fannie and Freddie - not that we will get stuck with the bill as GE is not going under, but the FDIC certainly can't pay.

Second, how is GE a AAA company? As I understood it, AAA means bullet-proof, high quality, or excellent. If a company needs the support of the government, it is not possible to be considered AAA. Do you see Berkshire Hathaway going cap in hand to the government for a bailout? As a matter of fact, Berkshire assisted GE Capital by buying preferred shares at a steep price, which allowed the company to raise billions in capital. The difference is striking.

Third, GE Capital isn't even a bank. The FDIC only deals with depositary institutions. Are you kidding me? The US Government is obviously willing to do anything to bail out financial institutions at this point. Forget rules and reulations. Just give them the money. G.E.'s AAA rating is a sham.

General Electric said Wednesday that the federal government had agreed to insure as much as $139 billion in debt for its lending subsidiary, GE Capital. This is the second time in a month that G.E. has turned to a federal program aimed at helping companies during the global credit crisis. GE Capital is not a bank, but granting it access to a new program from the Federal Deposit Insurance Corporation may reassure investors and help the lender compete with banks that already have government-protected debt, a G.E. spokesman, Russell Wilkerson, told Bloomberg News.

“Inclusion in this program will allow us to source our debt competitively with other participating financial institutions,” Mr. Wilkerson said. The F.D.I.C. program covers about $139 billion of G.E.’s debt, or 125 percent of total senior unsecured debt outstanding as of Sept. 30 and maturing by June 30.

New York Governor Paterson Calls for $5.2 Billion in Budget Savings
State aid to schools and hospitals would be cut sharply in the next four months and thousands of state workers would be asked to defer five days of pay under an emergency deficit reduction plan unveiled by Gov. David A. Paterson on Wednesday. The plan calls for reducing state spending, with some revenue increases, to save $2 billion by April, and $5.2 billion over the next 16 months. Health care and education, the two largest pieces of the $121 billion budget, would bear the brunt of the reductions as the state tries to contain a deepening fiscal crisis.

Even if the Legislature were to approve Mr. Paterson’s plan at a special session next week, the state would still face an $8.8 billion shortfall for the fiscal year that begins on April 1. And support for the cuts in the Legislature is far from certain, particularly among Republicans who lead the Senate and staunchly defend state aid to education. Little was spared as Mr. Paterson, a Democrat, proposed the first midyear cuts in public school aid since the early 1990s. He said he would ask labor unions to reopen previously negotiated contracts and agree to forgo 3-percent raises next year for state workers — the kind of drastic step New York City took in the fiscal crisis of the 1970s.

He also said he would seek tuition increases at state universities, starting with a $300 rise in the spring semester. And he proposed reducing Medicaid reimbursements sharply and closing half a dozen juvenile detention centers around the state, which he said were underused. While he avoided proposing across-the-board tax increases, the governor said he wanted to raise taxes on health insurers, a cost likely to be passed on to the public, and to extend the 5-cent deposit now charged for soda and beer to bottled water.

“This is the worst economic crisis in this country since the Great Depression,” he said at a news conference in New York City on Wednesday morning. “That’s not an alarming statement, as it may have been when I said it in July. It’s now real.” The Senate Republicans have struck close alliances with labor unions and promised to ward off cuts to education — but at the same time they say they will not accept tax increases. Suburban school aid is particularly important to Senator Dean G. Skelos, the majority leader and a Long Island Republican. “Education aid cuts, midyear, are unfair,” Mr. Skelos said Wednesday night, adding: “I don’t see anything creative in this budget. It’s just hack away, hack away.”

He did not offer any alternative cuts, instead calling on the governor to release his plan for next year’s budget now, even though Mr. Paterson already plans to release it on Dec. 16, more than a month ahead of schedule. “These important decisions about New York’s future cannot be made in a vacuum,” Mr. Skelos said. Senator Thomas W. Libous, a Binghamton Republican and the deputy majority leader, said in an interview that taking “money away that’s already been given to people, already been put in their budgets” was “not fair.”

Last week’s election results are likely to complicate the budget negotiations. Democrats captured 32 of 62 seats in the Senate, winning a majority for the first time in more than four decades. Three Democrats, however, have refused to back the current minority leader, Malcolm A. Smith, to become the new majority leader, leaving the Democratic caucus in disarray. The Legislature must come up with something, because the state faces a $1.5 billion deficit in the budget for the 2009 fiscal year, which ends on March 31, and a $12.5 billion deficit for the 2010 fiscal year. State law requires that the budget be balanced.

While the catalyst for the current crisis has been the collapse of the financial industry, the state’s main source of tax revenue, Mr. Paterson said that years of excessive spending had left the state’s budget in need of drastic streamlining. Wall Street has “bailed us out for a number of years,” the governor said, but “now the well has run dry.” The governor said he would not seek layoffs, but labor leaders have expressed reluctance to agree to reopen contracts negotiated on behalf of the state’s roughly 200,000 workers. Mr. Paterson could resort to job cuts if the unions do not back down, and he would say only that he was not seeking layoffs right now.

The governor is also proposing to require state retirees to pay far more for health insurance. The state now pays 90 percent of their premiums; that could fall as low as 50 percent under the plan. In the pay deferral plan, state employees would work five days without pay this fiscal year; they would get the money when they retire, at their future pay levels. Almost every interest group touched by the cuts weighed in with outrage. “Governor Paterson’s proposal is an assault on services at every level and will unnecessarily cause great harm,” said Danny Donohue, the president of the state’s Civil Service Employees Association. Billy Easton, the executive director of the Alliance for Quality Education, an advocacy group, said, “This is money that is going into classrooms today that the governor wants to take out tomorrow.”

And Daniel Sisto, the president of the Healthcare Association of New York State, a statewide trade group for hospitals, said in an interview that he was “stunned by the magnitude of what they’re trying to do.” “This will be the third time they’ve cut health care this year and we have another budget round coming in December,” Mr. Sisto said. “We’re doing a budget, it seems, for every season.” The governor argued that New York’s spending was still high in many areas. Many cuts would reduce growth in spending, rather than actually reduce spending from last year. But many wealthier school districts would see actual cuts in state aid, while most poorer districts would get smaller increases than anticipated.

“We think many of the advocates may not like these cuts, but they can’t say these are beyond the parameters of what would be reasonable to cut at this time, with this deficit,” Mr. Paterson said. Assembly Speaker Sheldon Silver of New York, the Legislature’s top Democrat, said in a statement that Mr. Paterson had put forward “a bold plan” that “recognizes the painful reality that this crisis is unlike any we have faced in our adult lives and will require deep cuts.” Under the governor’s plan, $585 million would be cut from school aid in the current fiscal year and another $844 million next year. The plan would reduce aid to school districts across the state and also reduce spending on math and science grants, libraries, arts grants and special teacher mentoring programs.

Students at the State University and the City University of New York would see tuition increase $300 in the spring session and $600 next year. Those increases would largely offset cuts of $348 million in state aid to the universities over this and next year. Medicaid and other health care programs would be cut by $572 million this year and $1.2 billion next year under the governor’s plan. He is proposing to reduce the amount the state reimburses health care providers for various procedures, and also to eliminate the annual inflation adjustment to Medicaid reimbursements.

Aid to New York City would also be cut by $41 million this year, to $205 million. That cut comes as the city is already dealing with its own budget crisis. “We have already taken cuts in education, compared to other counties,” Mayor Michael R. Bloomberg told reporters at an event in Queens. “I want to make sure we’re not penalized for having done the right thing.” The governor’s plan did get some good reviews. Kenneth Adams, chief executive of the Business Council of New York State, said Mr. Paterson “presented a plan that makes difficult but necessary choices to reduce state spending to close an unprecedented budget gap that gets worse by the day.” He added, “The state simply cannot tax its way out of this crisis.”

California budget deficit balloons to $28 billion over next 20 months
The state's independent Legislative Analyst's Office reports the woeful budget picture painted by Gov. Arnold Schwarzenegger isn't woeful enough. It's worse. The state's budget deficit over the next 20 months will be nearly $28 billion, not the measly $22 billion the governor projected, according to the analyst's review released Tuesday. Then it will be $22 billion a year for each of the next four years. The immediate deficit alone amounts to nearly $800 for every man, woman and child in California – that's $800 more than every man, woman and child already has paid. Nevertheless, the legislative analyst concludes taxpayers must pay more.

It's sadly ironic that one of Analyst Mac Taylor's suggestions is to increase the motor vehicle license fee. Gov. Schwarzenegger was elected in 2003 partly because of his opposition to that recently raised fee. Have we come full circle with the governor who promised to blow up the boxes, but under whom the budget has ballooned as never before? At least the analyst acknowledged the governor's desire to increase sales taxes another penny and a half on the dollar and expand the tax to service industries would damage the already faltering economy by driving buyers to tax-free Internet venues, and will "worsen the impacts on durable goods spending (particularly cars)" by raising California's already high combined state and local sales tax rate to 9.5 percent, the nation's highest rate.

The governor's proposal to require one-day-a-month unpaid furloughs for state employees amounts to a 4.62 percent pay cut, the analyst noted. Why, when the budget shortfall exceeds 10 percent, are government employees asked to take only a 4 percent pay cut? Why are taxpayers, who aren't responsible for this fiscal disaster, asked to pay more than a 10-percent increase in sales taxes and more than 50 percent increase in car fees, to say nothing of proposing to double unemployment insurance taxes for employers?

Maybe most offensive is the legislative analyst's suggestion that the state "should continue to press the federal government for economic stimulus measures … it could provide several billions of dollars in budgetary solutions." It's bad enough that insurance, mortgage and banking industries bellied up to the federal trough for bailouts. Now the badly mismanaged, overspending state government is about to beg for bailout from Washington too. The analyst is wrong that the state must "impose major increases in revenues," but right that "major ongoing reductions to current service levels" are necessary. The analyst concluded that "early action is critical," including immediate deep cuts in public school funding for the coming year. That's entirely right. But we aren't holding our breath.

Calpers Confronts Huge Housing Losses
The nation's largest public pension fund, known as Calpers, is paying dearly for its ill-fated decision to become one of the most aggressive real-estate investors among public pensions. Amid the rapid decline in the housing market, the value of Calpers's investments in land and housing projects across the country had fallen 35%, to about $6 billion, as of June 30, according to recent performance results released Wednesday by the California Public Employees' Retirement System.

The losses are likely to be larger now because the values were based on appraisals completed at the end of March. Since then, land values have cratered nationwide, as evidenced by the bankruptcy-protection filing of one high-profile Calpers undertaking, the LandSource land venture in California. An investment vehicle funded by Calpers sank $970 million in that venture, which holds 15,000 acres outside Los Angeles. For the quarter ended June 30, Calpers says it expects a loss even greater than 100% for its once high-yielding land and housing investments, thanks to its use of borrowed money on deals. The losses also dragged into negative territory the quarterly returns on its overall $22 billion real-estate portfolio, typically one of the pension fund's most profitable.

Amid the big losses on land and housing, Calpers officials are requiring more scrutiny and oversight of real-estate deals, according to a report prepared by the pension-fund staff. The report on Calpers's soured land investments, which was released ahead of the fund's investment committee meeting Monday, comes as the giant fund struggles with large losses in the stock market and has signaled that employer members may in coming years need to increase their contributions to the fund if overall returns don't improve. Calpers has been operating with interim officials in its two highest positions, as former Chief Executive Fred Buenrostro and former Chief Investment Officer Russell Read left midyear. Including them, seven of Calpers's 50 senior officials have left or intend to leave by year-end.

"It's highly unusual to have an exodus of that magnitude in such a short period," says Stephen Davis, a corporate-governance specialist. Calpers spokeswoman Patricia Macht disagreed, noting that the organization's management turnover often increases after a CEO leaves and that several executives are taking planned retirements. Calpers says it has restructured many of its deals and expects to hold on to most of its land. As a long-term investor, "we have size and capacity to hold assets for the long term," Theodore Eliopoulos, the senior investment officer who oversees real estate, said.

In some cases, Calpers may have little choice but to hold on to the land because a sizable portion of the debt on the projects -- about $1.7 billion -- was recourse to the pension fund. That means that in the event of a foreclosure, Calpers would likely still be on the hook to pay back the debt, making it costly to walk away from its investments. After starting as relatively modest investments in land in California in the wake of the real-estate collapse of the 1990s, Calpers's land investments ballooned across the nation and today total 288,000 house lots in 20 states. Undeveloped land is arguably the riskiest real-estate investment because values can drop significantly when home building slows.

Dim Prospects for Financial Reform Summit
When world leaders come together this weekend to discuss possible reforms to the global financial system, few expect many changes. Europe and the US have different visions for the future of finance.

The faucets dripped, the windows couldn't be opened and rain and snow came in through the roof and dripped down the walls. The Mount Washington Hotel in the small New Hampshire town of Bretton Woods was not in great shape when it served as the site of a conference on a new world economic order for 700 international financial experts shortly before the end of World War II. The 1944 meeting went on for three weeks in what one guest dubbed the "madhouse." Still, despite the sub-optimal conditions, by the time it had ended, the conference had agreed on the rules and institutions that would shape the international financial system for decades to come.

Now, more than six decades later, another world financial summit is set to take place this weekend. The world's 20 most important government leaders will meet on Friday in Washington D.C. to discuss a new fundamental reform of the financial system. In the wake of the crash in the credit markets, the billions in bailout packages put in place around the world and last week's warnings of a global recession, many governments have high hopes for sharper regulations in the global financial markets.

German Chancellor Angela Merkel called for "more transparency" and a "better set of rules." French President Nicolas Sarkozy proposed a significantly stronger role for the International Monetary Fund (IMF), currently headed by French politician Dominique Strauss-Kahn. A "new Bretton Woods," the French president said, must "lead to a new founding of capitalism." These expectations, though, are unlikely to come to fruition. More than eight weeks after the collapse of the US investment bank Lehman Brothers, it is clear that prospects for profound and global financial reform are quite limited.

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In order to defend Wall Street's supremacy, the United States wants to remain the dominant force on the capital markets. The Europeans are deeply divided, once again. And even rapidly developing countries like China and India are only moderately interested in extensive restructuring efforts. Indeed, it already seems clear that the new financial order will end up looking suspiciously like the existing one. A wave of new government interventions will be just as unlikely as the formation of additional international super-agencies in the mold of a global central bank. Furthermore, US President-elect Barack Obama will not be at the meeting, making it impossible to gauge the extent to which he might support reforms. It seems clear, however, that he will do what he can to defend the interests of the American financial industry.

The list of reform ideas that might be capable of receiving broad support, in any case, is quite short -- a reality that became clear as the meeting was being prepared. And it is the US which has done much of the preparing, having seized the reins in the run-up to the summit. Indeed, Brazil, which is the current holder of the Group of 20 (G-20) Finance Ministers, could easily have organized the conference. But the US assumed control anyway. Japan too, in its capacity as current head of the G-8, expressed interest in hosting the meeting -- but was ignored. Finally, Washington has benefited from European disunity, with the EU spending recent weeks embroiled in its usual debates over principles and ideals.

While some of the countries in the European Union support the US argument for relatively unfettered capital markets, French President Sarkozy, in particular, favored stronger government intervention. But the Europeans showed little interest in toeing the Paris line. There has been resistance to almost every idea that Sarkozy, the current holder of the rotating EU presidency, has come up with. The British and the Swedes, for example, found the specifications for individual financial products or markets far too detailed and the proposed rules to achieve better control of bank activities far too strict. Czech Finance Minister Miroslav Kalousek complained that it was "a revolution, not evolution" of the financial system.

The Dutch torpedoed the French proposals with their own internal document. The Germans interpreted some of the wording in the French proposals as another attempt by Sarkozy to bring himself a step closer to achieving his fervent wish of gaining more political control over global -- or at least European -- finance markets. In the end, it became clear that France would have to thoroughly revise the document outlining a common European position. In response, Sarkozy served the 27 EU heads of state and government, who had come to the Justus Lipsius Building in Brussels for a meal of chicken and scallops last Friday afternoon, a slimmed-down version of his previously lofty plans.

The document that the four EU representatives, from Germany, France, Great Britain and Italy, will present in Washington is more of a series of well-intentioned headings than a list of precise proposals. Under the EU document:
  • a code of behavior would protect the financial industry from excessive risks and, for example, would outlaw executive bonus payments that are based on short-term returns;
  • a minimum level of regulation and rules would be introduced, not just for hedge funds, but for all markets and territories, including tax havens;
  • an internationally networked system of monitoring major global financial institutions and an early warning system for detecting undesirable developments would help avoid future financial crises;
  • the role of the IMF as a global financial overseer would be strengthened.

The Brussels document represented an initial success for the US government, and yet even this most recent, watered-down concept still goes too far for Washington. In lock step with its global financial industry, the US government is trying to structure the planned capital market reforms in accordance with the principles of cosmetic surgery. In other words, it wants everything to look new, while keeping everything the same beneath the surface.

The heads of Wall Street's major banks, like Goldman Sachs CEO Lloyd Blankfein, share the government's view. The financial crisis is "a once-in-a-century credit tsunami" says Blankfein. But for someone like him, the crisis is also little more than an uncomfortable accident that does not call the overall system into question. Laws are ineffective against accidents, and it just so happens that "risk taking," according to Blankfein, is the business model of banks. Anyone who rules out risk is destroying that business model. Such is the worldview of Lloyd Blankfein, a man who earned $68.5 million (€53.5 million) in 2007.

It is only too convenient that Blankfein's predecessor at Goldman Sachs now works in Washington, as treasury secretary, which puts him only one garden gate away from the president's White House. Treasury Secretary Henry Paulson sees the world through the same lens as Blankfein. Anxious not to dry up business on Wall Street, Paulson is not only bailing out the banks with taxpayer money, but is also not doing taxpayers a favor by imposing adequate rules. The US government has known for years that the country's financial system rests on shaky ground, with its banking regulatory system scattered across five government agencies, as well as its highly risky hedge fund industry, which has made an art out of turning debt into profit.

For this reason the IMF, which, since the Asian crisis, now carefully examines countries to assess the stability of their financial systems, has been begging for years to be allowed to do its work at home in the United States. IMF special investigators are itching to interview bank executives, pay a visit the Federal Reserve Bank and subject the financial industry to a so-called stress test. Treasury Secretary Henry Paulson finally agreed, but under one condition: The final report could not be presented until 2009, after the Bush administration has left office.

The financial crisis has now accelerated the stress test and taken it from the drawing board to the real economy. But conclusions should not be drawn, if possible. Why? Because the financial industry contributed about 30 percent of total corporate earnings in the United States in 2007. None of the current political leaders wants to jeopardize this profitability -- despite a disaster that has cost billions, despite the nationalization of entire financial institutions and despite the millions in bad mortgage loans and an imploding Wall Street. If the Germans had their way, high profit margins would become a thing of the past. The US financial industry would see itself thrown back to the level of a local mortgage bank.

Under these circumstances, the US authorities are not enthusiastic about proposals put forward by individual European governments to raise the equity ratio for all credit transactions. This would restrict borrowing to those who could provide significant savings as collateral. And it would put an end to the business model of many Wall Street banks -- issuing loans on debt. Hedge funds, which generally have little savings, would be practically dried up by equity regulations. Given these considerations, American experts advise against such a de facto liquidation of this part of the financial industry. "Hedge funds are part of the worldwide brain industry," says Sebastian Mallaby, the son of the former British ambassador to Germany and director of the Greenberg Center for Geoeconomic Studies in Washington. Eliminating them, according to Mallaby, will only slow down growth and reduce prosperity.

Washington is even less enthusiastic about European plans for the IMF. The Washington-based organization has 2,500 employees from around the world who spend much of their time monitoring the financial condition of nations. When financial shortfalls arise, the IMF comes to the rescue with loans. Germany and other countries would like to assign the organization a leading role in supervision of the banking world. An early warning system could be installed that would monitor all major transnational transactions and all so-called financial innovations. The system would enable anyone to determine what is happening in individual markets.

Mallaby calls it a risky idea. More transparency, he says, would strengthen the herd instinct, because it wouldn't just illuminate the relatively unprofitable transactions, but would also shine the spotlight on the lucrative ones. "Most people who demand transparency don't know what they are talking about," he says. Thus, Washington is sufficiently vague in its draft version of the final communiqué. There is no mention of increased regulation or more attentive oversight. On the contrary. The Americans are unwilling to transfer their competencies to supranational entities. At best, they could be persuaded to support a call for heightened cooperation among central bankers, like European Central Bank President Jean-Claude Trichet, and the heads of international agencies like IMF Managing Director Strauss-Kahn.

The organizations, according to the draft document, should "strengthen their cooperation and undertake significant joint efforts to combine improved macroeconomic analysis with smart oversight." This is the sort of thing people say when they have no desire to say very much at all. Similarly noncommittal language continues throughout the document. The draft communiqué supports "common principals for reforms in the financial markets" and demands an "acknowledgment of an open, global economy." It is seen as unlikely that Europeans will manage to achieve significant corrections at the upcoming summit meeting. The group will initially focus on the causes of the financial crisis. Individual working groups will then form to develop reform concepts for later meetings.

But the longer the discussion lasts the more uncertain do the chances of comprehensive reform become. Experts predict that once the worldwide financial industry has pulled itself together again, support for major government intervention will decline even further. The Europeans cannot even count on the support of the big emerging economies, which will be represented at the summit. China, for instance, as America's biggest creditor, has a direct interest in the well being of the American banking sector. The Chinese hold a large share of their foreign currency reserves in US dollars. And other governments are also pursuing policies that are only partially compatible with the European plans.

A few days ago, Russian President Dmitry Medvedev wrote a letter to the German chancellor to inform her that he fundamentally supports the European line. At the same time, he also made it clear that Russia is also pursuing other goals. The Russians want the ruble to become a "regional lead currency" for the greater Eurasian region in a new global financial system -- and Moscow to become "one of the leading world financial centers."

Japan to offer $100 billion to the IMF
Japan is preparing to tap its foreign exchange reserves to the tune of $100 billion (£76.2 billion) in an offer to the International Monetary Fund (IMF), government sources have told The Times. The Japanese offer, which will be unveiled tomorrow in Washington, will dramatically increase the IMF's ability to lend to emerging economies savaged by the global financial crisis.

Countries in Eastern Europe have already been forced to accept loans from the IMF, but economists are warning that the risk of meltdown could soon emerge in Asia. Japan is already the second-largest donor to the IMF, and has the world's second-largest stash of foreign reserves - some $980 billion. According to media reports, Japan's prime minister, Taro Aso, will announce the offer at Friday's meeting of the Group of 20 industrialised and emerging nations.

One ruling party MP confirmed that Mr Aso was "preparing to demonstrate Japan's commitment to global financial stability through its foreign reserve strength," and that "the ability of the IMF to lend aggressively through this crisis must be a priority." Although details of the plan have not been widely disclosed throughout the government, it is understood that the reserves - already mostly held in the form of US Treasuries - would be offered as collateral for the IMF as it attempted to raise funds as emergency needs arise.

Japan is proposing to lend about 10 per cent of its reserves to ensure that the IMF is itself able to meet its funding demands. But the loan will need to be structured carefully, said Japanese government sources, so that the facility does not actually lead to a sell-off of US Treasuries in an already unstable market. The Japanese government privately hopes that its actions will prompt other nations with hefty foreign reserves to make similar offers to the IMF, though it is likely to stop short of making an explicit demand that others follow suit. China, with even larger reserves than Japan, is viewed as a likely candidate to provide collateral, as well as Middle Eastern oil-producers.

The IMF has about $200 billion in surplus funds but it is scrambling to bolster its finances because it is expected to make several large loans to countries such as Iceland, Serbia and Ukraine. Japan's large foreign exchange reserves are the result of years of currency intervention by the government to keep the yen down against the dollar and help exporters stay competitive. The reserves grew enormously in 2004 when Japan bought tens of billions of dollars in what eventually became a desperate effort to fight the prevailing market direction.

Although Japan's monetary authorities have not intervened since March 2004, recent comments from the Finance Ministry suggest that the Japan may be preparing to step into the markets again if the yen surges back towards Y90 against the dollar - a level that destroys the profits of the country's major exporters.

European Commission urges tough rules on credit rating agencies
The European Commission proposed a legally binding central register and surveillance system in Europe for credit rating agencies on Wednesday in the wake of a financial crisis whose origins they failed to spot. EU Internal Market Commissioner Charlie McCreevy said agencies such as Moody's, Standard & Poor's and Fitch had led a 'charmed existence' until now and predicted the new rules would be in place within the next 12 months.

Credit rating agencies have received widespread criticism for giving investment-grade ratings to complex products that saw their value implode as U.S. house prices dropped, causing banks to lose billions of dollars and contributing to the current global financial crisis. Days before EU officials head for Washington for a global summit on reforms of the world financial order, McCreevy called for the Commission proposals to form the basis of similar moves to regulate their activities outside Europe as well.

'I repeatedly said that it will be unjust to think that the credit rating agencies are the single cause (of the crisis),' McCreevy told a news conference unveiling the measures. 'But on the other hand, they are one of the many actors ... I think CRAs have led a charmed existence,' he said of proposals which the European Parliament and current EU president France have pledged to treat as a priority. Other proposals in the package include a requirement on CRAs to disclose publicly the methodologies and key assumptions for their ratings, a news release showed.

Other rules include the following:
-- Credit rating agencies may not provide advisory services
-- They will not be allowed to rate financial instruments if they lack sufficient quality information
-- They will be obliged to publish an annual transparency report
-- They will have to create an internal function to review the quality of their ratings
-- They should have at least three independent directors on their boards whose remuneration cannot depend on the business performance of the rating agency
-- The proposals also require the use of a different rating category for the complex so-called 'structured' securities which some say exacerbated the impact of the U.S. subprime crisis.

ING Posts Its First Loss Ever
ING, the Dutch financial services company, reported its first quarterly loss on Wednesday as it wrote down the value of investments hurt by the tight credit markets. ING posted a third-quarter net loss of 478 million euros, or $602 million, in contrast to a year-earlier profit of 1.1 billion euros, as it took 1.5 billion euros in pretax impairments on equities and debt securities, including subprime residential mortgage-backed securities and so-called Alt-A mortgage securities.

The July-September period was one of the worst quarters for global markets since the 1930s, as the insurance giant American International Group and the investment bank Lehman Brothers foundered, stocks plunged and credit markets froze. Banks worldwide have posted losses and write-downs of more than $900 billion since the start of the credit crisis last year. In a statement, Michel Tilmant, the ING chief executive, said the third quarter was “extremely challenging,” for financial institutions, but that the bank’s underlying commercial performance was sound. He also warned that continuing market turbulence would probably hurt the bank’s fourth-quarter results, “while weakening economic conditions will put pressure on results into 2009.”

ING became the first business to tap the Dutch government last month for a capital infusion, taking 10 billion euros to increase its financial strength. It argued that the capital injection had become necessary to reassure customers after a wave of government bailouts began to shore up weaker rivals in the United States and Europe. The bank said that on a pro-forma, or unofficial, basis, the government cash injection would raise its core Tier 1 capital ratio to 8.04 percent. Tier 1 capital, a measure of banks’ financial strength, has become the de facto standard by which institutions are being judged.

The Dutch bank said it would not pay a final dividend for the year. Its results were slightly better than it had forecast last month. UniCredit, the Italian bank, also reported results Wednesday. The bank said in Milan that its third-quarter profit fell 54 percent from a year earlier, to 551 million euros, as it wrote down another 693 million euros on soured investments. The bank is planning to raise 6.6 billion euros in new capital to bolster its finances.

Soros, Falcone Defend Hedge-Fund Industry Before House Panel
Hedge-fund managers defended their practices and profits in testimony to a congressional committee while splitting over whether more industry regulation is needed. "This is not a case where management takes huge bonuses or stock options while the company is failing," Philip Falcone, senior managing director of New York-based Harbinger Capital Partners said in written testimony to the House Committee on Oversight and Government Reform.

Still, Falcone urged Congress to regulate the industry and require more transparency, while George Soros, founder of Soros Fund Management LLC in New York, cautioned Congress against "ill-considered" regulations. Soros, Falcone, Paulson & Co.'s John Paulson, James Simons of Renaissance Technologies LLC and Kenneth Griffin of Citadel Investment Group LLC in Chicago, who are among the world's richest hedge-fund managers, were called to testify today as part of a congressional investigation into the credit crunch that has slowed the global economy.

Committee Chairman Henry Waxman is to question the men this morning about their bets against subprime mortgages and whether their industry is a risk to the financial system. Falcone said he supported more public disclosure and transparency. Investors, he said, "have a right to know what assets companies have an interest in -- whether on or off their balance sheets -- and what those assets are really worth." In their written statements delivered to the committee, the hedge-fund managers also defended their multimillion-dollar salaries, saying they earned money only when their investors did.

"In our business, one of the most fundamental principles is alignment of our interests with those of our clients," Paulson said. His fund shares profits with its investors, taking 20 percent. "All of our funds have a 'high water mark', which means that if we lose money for our investors, we have to earn it back before we share in future profits." Waxman, who last month grilled Richard Fuld, chief executive officer of Lehman Brothers Holdings Inc., about the bank's demise, doesn't have jurisdiction over securities-industry legislation. Even so, his interest suggests the $1.7 trillion industry faces increased scrutiny and regulation next year after President-elect Barack Obama takes office.

"In an attempt to respond to public outcry and political demand, the industry expects lawmakers to implement new rules that will limit leverage, restrict the ability to short securities and increase taxes on the wealthy," said Ron Geffner, a lawyer at New York-based Sadis & Goldberg LLP, which represents hedge funds. Regulators have already taken some steps. In September, the U.S. Securities and Exchange Commission temporarily banned the short sale of some stocks. The agency now requires funds to disclose the shares they are wagering will tumble, though those reports won't be made public. In a short sale, a trader borrows shares and then sells them immediately in the hopes they can be bought back later at a cheaper price.

The witnesses, all longtime fund managers, earned more than $1 billion last year according to a list compiled by Institutional Investor's Alpha Magazine. Waxman asked the managers to provide documents, including e- mails, that discussed the likelihood that their own, or other, hedge funds would collapse and the risk to the financial system if they did. He also asked for their levels of borrowing and their investments in mortgage-backed securities, collateralized debt obligations and credit-default swaps going back to the beginning of 2005. Some managers used these securities to wager on subprime mortgages and on the credit-worthiness of investment banks. Waxman also ask for compensation data of the two highest- paid officers at each firm, the formula used to arrive at that amount and the tax treatment of their pay.

Soros, 78, is the chairman of a $19 billion. He has called credit-default swaps the next crisis area because the market is unregulated, and he has recommended the creation of an exchange where these contracts could be traded. Paulson, 52, runs a fund that manages about $36 billion. His Credit Opportunities Fund soared almost sixfold in 2007, primarily on wagers that subprime mortgages would tumble. Paulson's Advantage Plus fund has climbed 29 percent this year through October while many managers are enduring the worst year of their careers. Hedge funds lost an average of 15.5 percent this year through Oct. 31, according to data compiled by Chicago-based Hedge Fund Research Inc.

Falcone, 46, also profited from a drop in subprime mortgages last year, when his fund, now about $20 billion, doubled. This year the fund was up 42 percent at the end of June and has since tumbled to a loss of about 13 percent. Simons, 70, runs his $29 billion fund out of East Setauket, New York. The former academic makes money by using computer models to trade. His Medallion Fund, made up of his own money and that of his employees, is up more than 50 percent this year. Griffin, 40, runs the $16 billion Citadel Investment Group LLC in Chicago, and has faced the toughest year out of the five billionaire managers. His funds dropped 38 percent this year through Nov. 4.

Munich Musings
OlympiaPark, built for the 1972 Summer Olympics here in Munchen, looks a little tired and dog-eared these days, not a lot different from the state of the gold and silver markets – equities and physicals. But scratch beneath the pallid paint and weather-stained concrete a tad, as we did at Frank and Jan's excellent adventure, the just-concluded 2008 Edelmetall & Rohstoffmesse precious metals and resource show, and all hell is breaking loose.
The Edelmetall & Rohstoffmesse precious and resource metals show is an annual must-attend for European precious metals investors, and we're surprised more U.S. and Canadian resource companies don't take some of the money they waste on shows in New York and Vegas every year and jump across the pond to meet these folks. Attendance of 4,000 this year was ahead of last year's, sure evidence that the Europeans are paying closer attention to the slow-motion nuclear explosion going on in the financial markets than are their Pablum-fed American counterparts who, now that the presidential election is over, are happy to go back out to their pasture and their ignorance of the feedlot and slaughterhouse awaiting them when the NFL football season is over.
Because it's coming, this financial slaughter, and there is something in the European genetic code that senses it – a scent that coddled Yanks of this generation just aren't wired to whiff. Perhaps it is because the verdant fields, the pleasant undulating hills and the polite forests stretching from Rorschach to the Normandie highlands are fertilized with human blood from two world wars commanded by world banksters and their puppet kings and parliaments, whereas in America we have forgotten our own Civil War.
Which may explain why there were mob scenes in Munich around the three bullion dealers with booths at the Edelmetall & Rohstoffmesse as we walked in mid-morning last Friday, the show's opening day. At first, we didn't know what the fuss was about; maybe someone was scalping tickets to the World Cup.  The crowd was so thick it looked like carrion birds swarming a dead desert coyote.
The going rate for generic 1-ounce Austrian Philharmonic or Mexico Libertad silver coins at Munich?  €11.50 Euros or about $14.56 USD for a “commodity” that is supposed to cost under $10. We were told that at an earlier-that-week mining gathering in London, the same silver rounds were fetching ?10 pounds, or some $15.62 USD. (Everything is more expensive in London than in anywhere else in the world because one of these days they're going to paint the place, but still . . . ???)
Prices don't improve much as one moves up the quantity scale, where scarcity looms an equally large factor and amortized fabricating costs ought to go down. One-kilo coins were bearing a huge premium. And silver bars cost a hell of a lot less to pour or re-pour than a mint's cost to stamp out presentable rounds, though not so you'd know by the premiums they command.
So what gives? Is a vast (fill in the word)-wing conspiracy of coin dealers manipulating the retail silver price? Hardly. Those guys are scrambling so hard to get product (and guarding the identities of their sources when they're successful) they don't have time to talk to each other, much less plot and scheme together. Someone who could find a cheaper source of quality silver rounds would do so, and offering said rounds at a lower price, would make a killing. But nobody can.
Silver supplies from the mines continue to fall. Coeur and Apex can't even find daylight above the darkness of the ditches they've dug themselves into in Bolivia. The newly reopened Sunshine silver mine in our neck of the woods promptly shut down – not due to price or mining issues so much as inept management, but who cares? That's 5 million fewer annual ounces coming to market in the next decade than imagined. Rochester's done. Base-metal producers, the sources of 70 percent of the world's newly-mined silver, are throttling back because of the commodity recession. Miners of all those fancy new projects in Mexico and elsewhere are finding their per-ounce costs to be several dollars above the current phony paper price.
Our friend Sean Rakhimov proposed a thought-provoking concept. (Sean is publisher of the on-line website, a mine analyst and a contributor to and other quality web journals, and is an Eastern European survivor of the Soviet Union's implosion to boot, so he knows whereof he speaks.) What is going on, right now, opines Rakhimov, is nothing less than a legal black market in silver, the last vestige of real money for us common folk. This is worth considering:
A black market occurs when the State mandates a price for a commodity that cannot be produced, bought, sold or had for that price – usually a ploy to make state-reported economic figures look better. The inexorable result is that the price of the commodity will rise beyond the official price to the point where producer and consumer are willing to do business in the shade. (Ask any Venezuelan about the posted price and the real price of a gallon of milk.)  Reverse black markets also occur: cigarette and booze taxes are prime examples. Indian tribes in Idaho do a land-office business selling cigarettes to Washington State residents at a discount to Washington's Draconian tobacco taxes.
Markets, just like non-Potomac water, seek the path of resistance. As any kindergarten-level Austrian understands, black markets exist only courtesy of artificial social policy. Chavez can claim he's got the world's lowest price for milk, on paper, even as Venezuelans pay as much or more as anybody else. The Peoples Republic of Washington State can claim its reducing smoking thanks to its high tariffs on tobacco, when in fact all it's done is send the tobacco buyers to Idaho.
(The downside for human flesh in all of this, of course, is that in having created black markets, the State now feels morally compelled to execute those who participate in them.) But I digress. In the case of silver, what we have is what's shaping up to be a State-set price of $10 USD for 1 troy ounce of triple-fine. This price, like Hugo Chavez's milk price, tells the cattle that the U$ dollar is OK. The reality is a pile of Munichers and Londoners swarming around to buy whatever silver they can at $15 an ounce while they still can. Sean Rakhimov is right: this is a black market right out in the open.
What is to the empiricist quite absurd is why anyone would want to buy (and hassle with) overpriced physical gold and silver when he could participate in paper spot-price action on the ETFs. We have heard it suggested that a smart guy would sell his physical silver or gold at the current premiums, bank the profits, and then leverage back in to the physicals, at paper price, by way of the ETFs. 
Why indeed? This temptation has crossed our own tiny mind. Why not sell what we've got at the 50-percent premium, then buy it back on paper for the published spot price? And the answer keeps coming back in the form of another question: Would we rather own a $600 Winchester rifle than $600 worth of Winchester stock, even if we knew we could sell the Winchester shares tomorrow for $900? And another answer keeps coming back, in the form of yet another question: Which instrument better controls the bullet? And which feels nicer to hold?

The Worst Is Not Behind Us
Nouriel Roubini

It is useful, at this juncture, to stand back and survey the economic landscape--both as it is now, and as it has been in recent months. So here is a summary of many of the points that I have made for the last few months on the outlook for the U.S. and global economy, as well as for financial markets:

--The U.S. will experience its most severe recession since World War II, much worse and longer and deeper than even the 1974-1975 and 1980-1982 recessions. The recession will continue until at least the end of 2009 for a cumulative gross domestic product drop of over 4%; the unemployment rate will likely reach 9%. The U.S. consumer is shopped-out, saving less and debt-burdened: This will be the worst consumer recession in decades.

--The prospect of a short and shallow six- to eight-month V-shaped recession is out of the window; a U-shaped 18- to 24-month recession is now a certainty, and the probability of a worse, multi-year L-shaped recession (as in Japan in the 1990s) is still small but rising. Even if the economy were to exit a recession by the end of 2009, the recovery could be so weak because of the impairment of the financial system and the credit mechanism that it may feel like a recession even if the economy is technically out of the recession.

--Obama will inherit an economic and financial mess worse than anything the U.S. has faced in decades: the most severe recession in 50 years; the worst financial and banking crisis since the Great Depression; a ballooning fiscal deficit that may be as high as a trillion dollars in 2009 and 2010; a huge current account deficit; a financial system that is in a severe crisis and where deleveraging is still occurring at a very rapid pace, thus causing a worsening of the credit crunch; a household sector where millions of households are insolvent, into negative equity territory and on the verge of losing their homes; a serious risk of deflation as the slack in goods, labor and commodity markets becomes deeper; the risk that we will end in a deflationary liquidity trap as the Fed is fast approaching the zero-bound constraint for the Fed funds rate; the risk of a severe debt deflation as the real value of nominal liabilities will rise, given price deflation, while the value of financial assets is still plunging.

--The world economy will experience a severe recession: Output will sharply contract in the Eurozone, the U.K. and the rest of Europe, as well as in Canada, Japan and Australia/New Zealand. There is also a risk of a hard landing in emerging market economies. Expect global growth--at market prices--to be close to zero in Q3 and negative by Q4. Leaving aside the effects of the fiscal stimulus, China could face a hard landing growth rate of 6% in 2009. The global recession will continue through most of 2009.

--The advanced economies will face stag-deflation (stagnation/recession and deflation) rather than stagflation, as the slack in goods, labor and commodity markets will lead advanced economies' inflation rates to become below 1% by 2009.

--Expect a few advanced economies (certainly the U.S. and Japan and possibly others) to reach the zero-bound constraint for policy rates by early 2009. With deflation on the horizon, zero-bound on interest rates implies the risk of a liquidity trap where money and bonds become perfectly substitutable, where real interest rates become high and rising, thus further pushing down aggregate demand, and where money market fund returns cannot even cover their management costs.

Deflation also implies a debt deflation where the real value of nominal debts is rising, thus increasing the real burden of such debts. Monetary policy easing will become more aggressive in other advanced economies even if the European Central Bank cuts too little too late. But monetary policy easing will be scarcely effective, as it will be pushing on a string, given the glut of global aggregate supply relative to demand--and given a very severe credit crunch.

--For 2009, the consensus estimates for earnings are delusional: Current consensus estimates are that S&P 500 earnings per share (EPS) will be $90 in 2009, up 15% from 2008. Such estimates are outright silly. If EPS falls--as is most likely--to a level of $60, then with a price-to-earnings (P/E) ratio of 12, the S&P 500 index could fall to 720 (i.e. about 20% below current levels). If the P/E falls to 10--as is possible in a severe recession--the S&P could be down to 600, or 35% below current levels.

And in a very severe recession, one cannot exclude that EPS could fall as low as $50 in 2009, dragging the S&P 500 index to as low as 500. So, even based on fundamentals and valuations, there are significant downside risks to U.S. equities (20% to 40%). Similar arguments can be made for global equities: A severe global recession implies further downside risks to global equities in the order of 20% to 30%.Thus, the recent rally in U.S. and global equities was only a bear-market sucker's rally that is already fizzling out--buried under a mountain of worse-than-expected macro, earnings and financial news.

--Credit losses will be well above $1 trillion and closer to $2 trillion, as such losses will spread from subprime to near-prime and prime mortgages and home equity loans (and the related securitized products); to commercial real estate, to credit cards, auto loans and student loans; to leveraged loans and LBOs, to muni bonds, corporate bonds, industrial and commercial loans and credit default swaps. These credit losses will lead to a severe credit crunch, absent a rapid and aggressive recapitalization of financial institutions.

--Almost all of the $700 billion in the TARP program will be used to recapitalize U.S. financial institutions (banks, broker dealers, insurance companies, finance companies) as rising credit losses (close to $2 trillion) will imply that the initial $250 billion allocated to recap these institutions will not be enough. Sooner rather than later, a TARP-2 will become necessary, as the recapitalization needs of U.S. financial institutions will likely be well above $1 trillion.

--Current spreads on speculative-grade bonds may widen further as a tsunami of defaults will hit the corporate sector; investment-grade bond spreads have widened excessively relative to financial fundamentals, but further spread-widening is possible, driven by market dynamics, deleveraging and the fact that many AAA-rated firms (say, GE) are not really AAA, and should be downgraded by the rating agencies.

--Expect a U.S. fiscal deficit of almost $1 trillion in 2009 and 2010. The outlook for the U.S. current account deficit is mixed: The recession, a rise in private savings and a fall in investment, and a further fall in commodity prices will tend to shrink it, but a stronger dollar, global demand weakness and a larger U.S. fiscal deficit will tend to worsen it. On net, we will observe still-large U.S. twin fiscal and current account deficits--and less willingness and ability in the rest of the world to finance it unless the interest rate on such debt rises.

--In this economic and financial environment, it is wise to stay away from most risky assets for the next 12 months: There are downside risks to U.S. and global equities; credit spreads--especially for the speculative grade--may widen further; commodity prices will fall another 20% from current levels; gold will also fall as deflation sets in; the U.S. dollar may weaken further in the next six to 12 months as the factors behind the recent rally weather off, while medium-term bearish fundamentals for the dollar set in again; government bond yields in the U.S. and advanced economies may fall further as recession and deflation emerge but, over time, the surge in fiscal deficits in the U.S. and globally will reduce the supply of global savings and lead to higher long-term interest rates unless the fall in global real investment outpaces the fall in global savings.

Expect further downside risks to emerging-markets assets (in particular, equities and local and foreign currency debt), especially in economies with significant macro, policy and financial vulnerabilities. Cash and cash-like instruments (short-term dated government bonds and inflation-indexed bonds that do well both in inflation and deflation times) will dominate most risky assets. So, serious risks and vulnerabilities remain, and the downside risks to financial markets (worse than expected macro news, earnings news and developments in systemically important parts of the global financial system) will, over the next few months, overshadow the positive news (G-7 policies to avoid a systemic meltdown, and other policies that--in due time--may reduce interbank spreads and credit spreads).

Beware, therefore, of those who tell you that we have reached a bottom for risky financial assets. The same optimists told you that we reached a bottom and the worst was behind us after the rescue of the creditors of Bear Stearns in March; after the announcement of the possible bailout of Fannie and Freddie in July; after the actual bailout of Fannie and Freddie in September; after the bailout of AIG in mid-September; after the TARP legislation was presented; and after the latest G-7 and E.U. action.

In each case, the optimists argued that the latest crisis and rescue policy response was the cathartic event that signaled the bottom of the crisis and the recovery of markets. They were wrong literally at least six times in a row as the crisis--as I have consistently predicted over the last year--became worse and worse. So enough of the excessive optimism that has been proved wrong at least six times in the last eight months alone.

A reality check is needed to assess risks--and to take appropriate action. And reality tells us that we barely avoided, only a week ago, a total systemic financial meltdown; that the policy actions are now finally more aggressive and systematic, and more appropriate; that it will take a long while for interbank and credit markets to mend; that further important policy actions are needed to avoid the meltdown and an even more severe recession; that central banks, instead of being the lenders of last resort, will be, for now, the lenders of first and only resort; that even if we avoid a meltdown, we will experience a severe U.S., advanced economy and, most likely, global recession, the worst in decades; that we are in the middle of a severe global financial and banking crisis, the worst since the Great Depression; and that the flow of macro, earnings and financial news will significantly surprise (as during the last few weeks) on the downside with significant further risks to financial markets.

I'll stop now.


Anonymous said...

"...And without trust, there will be no easing in credit markets. Which means no car loans, and no mortgages. Seen from that angle, TARP2 can't help but achieving the opposite of its stated intent. Want to bet that that is precisely the real intent?..."

Ilargi, I'm not quite sure what you mean here? Is it that The Paulson has purposefully tried to keep lending at a stand still? If so, why? One I guess could argue that he too knows that DEBT is the problem, and that lending further exacerbates that problem. But then that would cast The Paulson as a good guy. I am loathe to consider that.

Would a better reason be that he doesn't "want" the banks to lend the money because he wants them to hoard it so that his cronies remain wealthy?

But then I might argue that The Paulson really doesn't care how much debt the public rings up because the Titanic is taking on water and it's just a matter of time before she goes down to the dark depths.

ps---thanks as usual for all of your hard work!

Anonymous said...

I've been following Roubini's comments for some time and find a good degree of accuracy. Meanwhile, Paulson jumps from plan to plan in an effort to put out whatever fire catches his attention at the moment. Every now and then, I watch the mass media news to watch the perky, smiling faces mention economic catastropy in a five second blurb which means, of course, they're saying nothing. Interesting times but then I'm in as secure a position as I can be as I've watched this coming on for years.

Anonymous said...

By the by...

I have come more and more to believe that quite possibly the #1 issue in precipitating this Kaboom! is that accounting standards are simply not employed anymore...or more clearly, ethical and mathematically accurate accounting methods are not employed. If you can cook-the-books, and if you're not held to account (haha), reality has no teeth.

Tyr said...

Don't know if this was already liked here or not, but here's a very well written piece I stumbled on written by the guy who wrote "Liar's Poker".

It sort of explains how and why we got here from a more non-technical perspective.

The End

Anonymous said...

Did you see this?

WASHINGTON – "...Some of the nation's largest banks sharing in the $700 billion government bailout of the financial industry tried to assure lawmakers Thursday they are using the money to make more loans and help financially strapped homeowners avoid foreclosure..."

Guile. That sums it up for me. "Here Sam, you loan me $50 and I'll loan Don $100. Now we're loaning the money. Give Henry a call...oh ya, and tell Barney Frank. We're loaning the shit out of the TARP!!"

The Lizard said...

A leap of 11% in three hours or so is not real, right?

Or is it the New Real?

Unknown said...

I got a dumb question. Since the fed lends money directly to real companies that actually make something, what do we need banks for?

Anonymous said...

Anonymous said:

"Meanwhile, Paulson jumps from plan to plan in an effort to put out whatever fire catches his attention at the moment."

Well, what we have to remember here is that Paulson, just like the rest of the Bush Administration, is now more or less a "short timer." And I'm sure most of us have seen what happens when many folks are in that position - their only concerns are getting out in one piece and taking as many goodies with them as they can when they go.

Bigelow said...


The new real is S&P @1050 then 700 or maybe 500 or what was the question?

Ilargi said...

"A leap of 11% in three hours or so is not real, right?"

The big winners are in oil and commercial real estate. Real growth industries... The CRE crowd went up because they borrowed billions to pay off debt?!

But when reading this, I think of the PPT:

"Declines in midday trading today pushed the S&P 500 to 35 percent below its average for the past 200 days, only the second time that's happened since the Great Depression. The last time was a day before the index rose 12 percent on Oct. 13, the biggest rally since 1939."

Anonymous said...


"The CRE crowd went up because they borrowed billions to pay off debt?!"

Crazy, man, crazy. But I bet we wouldn't have to google far to find a well-paid analyst who's making that very case. :-/

But seriously, yeah, gotta think a 10% intra-day turnaround happens only with good reason. And if no plausible reason presents itself, well, the PPT exists for its own reason...

Of course, the feds would dearly love to pump up residential and commercial property values in order to reflate all the toxic assets associated with those properties. I guess a CRE stock bull would therefore be one part of a highly desirable cycle:

1. Bullflate the CRE stocks, thereby
2. replenishing CRE capital, thereby
3. enabling CREs to go on a buying spree, thereby
4. propping up property prices.

I reckon. (Correct me if it doesn't work that way.)

So a related feasibility question:
What would it take, at this point, to manufacture a rally in CRE stocks through the end of the year? I mean, if the feds were to fashion the rally out of monetized whole cloth. Would a crisp trillion dollars, spread out among PPT investment firms and their media helpers, be enough to inflate that particular bubble? Or would the deflationary pressure be too strong to resist, even then? I'm guessing the latter; but curious to hear Team TAE's thoughts.

Reluctant Poseidon Hamster

John W. Warnock said...

Hi all:
Thanks to I&S for your work. I have been reading TAE for a few months now when I can find the time. There is so much b.s. around all the time it makes you think you are the one who is crazy.

I was disappointed that I was not chosen to be one of the 17 who were chosen to advise Obama on the economic situation. I am certainly old enough (74). But I have not had any law experience or courses since I was at Georgetown many years ago. I was a low level operative in the first years of the JFK administration, in the economics division in the Department of State. But I fled that operation.

All of this reminds me of Bertram Gross’ book, Friendly Fascism. In recent years when crossing the border to go to the USA, where I was born and raised, I have experienced a rough time at the border. Two years ago when crossing from Vancouver to Seattle they did and extensive search my old truck, even going through everything in my cooler for food. I was interrogated for an hour by a Mexican American immigration official who wanted to know why I was going to the University of Washington, what research I was doing, and what I was going to publish and where. Of course they scanned my Canadian passport and had it up there on the screen. They were giving me a clear message.

As Ilargi notes, we are facing “faith based economics.” In Canada some years ago the professional economists decided they did not want to be associated with other social scientists and broke away to set up their own meetings at a different place, different time. At the University of Regina, where I taught before retiring, the economists had their book section in the bookstore moved away from the social science section. The books were placed next to the section of books for the school of religion. Very appropriate for what is in those big, fat, expensive tomes.

Cheers to all from the flatlands, John W. Warnock, Ph.D in political economy - not economics.

Anonymous said...

How's this for a paranoid thought--at 1 PM word came down that the attack on Iran had been green-lighted. Oil stocks surge!

Ilargi said...

Yesterday, EconDirectory published a list of most-visited economy sites. Mike Panzner posted it at Financial Armageddon. He also has a list of the 25 sites that he gets most referrals from. The Automatic Earth is at the -alphabetic- top. Panzner is one of the few finance sites that has TAE on its blogroll, and if we're that high on his referrals list we must also be on many sites that ignore us. So be it. Note: Mike's book Financial Armageddon is no.1 in our Amazon list at the bottom of each post.

The EconDirectory has one major flaw: it only lists sites with publicly accessible hit counters. I have one, but I see no reason to open it to everyone. However, TAE is not even in their looong list of sites with closed counters.

So I thought I'd give you an impression.

TAE would have almost taken the number 13 spot on the list of pageviews, the one Panzner posted.

On the visits list, which is here. we'd be comfortably in the top ten. Not bad for what is essentially a one man operation that has only been around, in its present shape, for 9 months. I bet everyone above us is way older.

It's kind of funny, without gloating, that we beat out the people who publish the list, but have apparently never heard of a site that would easily be in their top 10 if they had. We also beat out Panzner himself by a wide margin. But then, we would have knocked him out of the top 20, and he would not have written the piece that alerted me to the list. So it's all good.

That said, we will have some temporary changes here soon. I have to go see my mother and other family In Europe, and internet access, if available, will be expensive. I work this site 12 hours day, after all, paying access by the hour is a lousy prospect. Therefore, I am first of all trying to come up with an idea for a real good fundraising drive in the next week.

And second, I'm talking to some people who, on days when I really can't do it, could do the daily grind of reading through all the material. If there are among you who would like to try and help, let us know: the email address is under the contact and support button.

I can do with some breathing space, it's really pretty crazy these days, and I desperately need to go see my mother, but I also want this joint to roll on 24/7.

Anonymous said...

saw something rather interesting today: S&P rallied 11% to close @911.29

9+1+1=11 and 2+9=11

thus 11.11

this video says there is something universal about 11.


Anonymous said...

Congrats on your success. I had no idea how you were doing. If you asked all your readers to contribute a suggested amount to help cover expenses during your trip, you might be surprised. Also, if you'd make it clear where to send articles while you're gone, I for one, would help.

Also, have been noticing some overlap in the unusual language you use, like now "zombies" is appearing here and there. Today it was in a reader letter to the WSJ. I'm waiting for kabuki theater to show up somewhere soon.


Anonymous said...

Re "Japan to offer $100 billion to the IMF": Is this a desperation move forced by the state of the Yen as suggested by the article, or is this an improvised method for sovereign banks to clear out their US holdings, kind of like a TARP on an international level? Or is there some other possibility?

team10tim said...

Hey hey Ilargi,

I think this might be a good story for tomorrow's post.

Colombians riot over pyramid scam

Do you think Paulson will leave a taunting note on the door of the Treasury?

Bigelow said...

A Credit Crisis or a Collapsing Ponzi Scheme?
The Two Trillion Dollar Black Hole CounterPunch

Anonymous said...

Anon of Florida said...
November 13, 2008 10:50 PM
"Japan to offer $100 billion to the IMF":
Here is more info.,

There is more than what we can see.
November 13, 2008
Tempus analysis: Japan's offer to the IMF
Leo Lewis, Asia Business Correspondent

The first message is that Japan is not being purely opportunist in the global crisis. Its banks may have swooped hungrily on distressed Wall Street assets - notably Lehman and Morgan Stanley - and its corporations have been quick to unleash their cash on other grossly undervalued assets around the world: but the government, at least is keen to look like a giver, rather than a taker.
The second message is to other foreign reserve-rich nations around the world. Japan, unlike China, Singapore and many Middle Eastern oil producers, has not diverted large portions of its reserves into an actively managed Sovereign Wealth Fund, but has nearly $1 trillion waiting for useful deployment.
But the loan will need to be structured carefully, said Japanese government sources, so that the facility does not actually lead to a sell-off of US Treasuries in an already unstable market.

Anonymous said...

This quote may have been posted before,as it is trenchant and pithy; I just came across it, and had to pass it on: "Prophesying catastrophe is incredibly banal. The more original move is to assume that it has already happened."

Jean Baudrillard

Anonymous said...

Its actually in the process of happening...we have a front row seat because of our hosts efforts

I will see what I can scrape out of the piggy bank...this site is one of those that keeps me "motivated"i.e.scared enough to continue working my ass off to deal with whats coming down the pike...


rachel said...

Glad to hear that more people are finding your site, better late than never. I want to thank Iowa Boy for leading me here from another blog, and hopefully I in turn have led folks here. As snuffy said, I too can scrap some coins from the jar.
Also willing to help with searches.
I will email you.
Thank you for today's post. Listening to the thieves and liars today got me thinknig about heading into the streets again, but I have resolved to focus my energies in other ways.

Stoneleigh said...

Anyone who would like to send articles while Ilargi is away can send them to me at theautomaticearth(at)gmail(dot)com. Unfortunately, I can't take over doing the site research myself, as I've done before, since I work full-time these days, but I'm hoping to have enough time to compile posts from what people can send me. I'll try to offer my opinions in the comments as well when I can.

Stoneleigh said...

John Warnock,

I've read your work on Canadian energy before, and used to quote it regularly when I was running TOD:Canada. In fact I remember asking you once (a couple of years ago) if you'd like to be a TOD:Canada contributor ;)

One piece from your site that still sticks in my mind from back then was asking how people will heat their homes in Saskatchewan as access to energy becomes progressively more difficult. That is indeed a huge problem, whether it results from a shortage of energy, a shortage of money or both.

Stoneleigh said...

I wouldn't read too much into the large percentage rise yesterday. Bear markets are times of great volatility. Some of the largest percentage increases on record happened during the market crash of 1929-1932, and that pattern is simply repeating itself. That kind of move is no bullish portent.

My current thinking (based on the ever-shifting balance of probabilities) is that we're close to finishing a sideways consolidation of sorts from the October 10th intraday low. That interpretation implies that we'll see a break of that low in the not too distant future, leading to a break of the October 2002 lows before a longer rally would begin. Such a move down could be quite short and sharp, and my guess is that it would take the DJIA into the 6000s.

Following that, I would expect a rally lasting perhaps a couple of months. Depending on how the timing works out, President Obama could have a short honeymoon period after his inauguration, as the same burst of optimism that gives rise to market rallies will also affect people's perception of their leaders. Once the rally is over, a mixture of pessimism and fear will take hold again, and that's when the real challenge will begin for leaders in both political and financial spheres. Anything they do will be against a significant headwind.

Bigelow said...

“In 2009 alone, U.S. taxpayers will spend $103.5 billion on military resources used to secure access to petroleum, while investing only $1.26 billion in renewable energy sources. Including Iraq War-related costs doubles this figure to $215.4 billion dollars.”
The Hidden Cost of Petroleum: The National Picture Cryptogon

Brad said...

I don't really know much about the stock market, so I've got a question about the Google chart of the DJIA.

If you zoom out to max, the line seems to make a sharp turn upward around 1995. And after that everything looks very volatile. Why is that?

There's also another apparent rise in the slope of the line between 1984 and 1994. Am I interpreting the chart correctly, or does it just look that way because of the scale.

Does it have anything to do with the exponential growth of population?

Anonymous said...


Who will finance America ’s deficit?
A Credit Crisis or a Collapsing Ponzi Scheme?
The Two Trillion Dollar Black Hole
Crisis Is Beyond The Reach of Traditional Solutions
U.S. Military Fails To Learn An Ancient Military Lesson: No Industrial Economy Equals No Army

Anonymous said...

Members of my family have most of their savings invested in shares and ETFs in Germany (with exposure to Wall Street, Germany, and Asian markets). All have done very badly of course. They have been advised by their bank to stay put (as all recessions ultimately go away, and now is not a good time to sell, etc etc). I told them I think it's the wrong advice and they should get out of the stock markets, but then again timing is important.

You have written here and before that a rally is coming. Would you advise waiting for it to cash out? Would the rally brings us higher than we are today?

With this unrelenting torrent of bad news, is a rally and a burst of optimism at all possible?

Many thanks. Your advice is much appreciated.