Friday, November 7, 2008

Debt Rattle, November 7 2008: Hocus Focus

National Photo Co. I dress in women’s clothing, just like my dear papa 1924
J. Edgar Hoover, age 29, director of Bureau of Investigation, Department of Justice, precursor to the FBI.

Ilargi: Looking at Obama's team of 17 "experts" on economic matters, and the acceptance of Proposition 8 in California, I get the feeling that America is bankrupt in more ways than one, that large swaths of the country and the population are morally bankrupt as well as just plain flat broke.

When I see that 70% of California’s black citizens, as they were being liberated through the election of a fellow black man to the highest post in the land, simultaneously voted to lock another minority group, gays and lesbians, in the shackles of apartheid, I'm torn between utter disbelief and a strong urge to vomit. What is it that you don't get?

When I see who Obama consults on the economy, I realize that he will make the crisis a lot worse, much more than it needs to be. These are all people who have made their names and fortunes in the financial system and climate as it functioned over the past few decades. Because of their success in that system, they will refuse to see that it is dying.

They will ignore the demise as long as they can, and try to repair what is broken beyond repair. In the process, trillions of additional dollars will be wasted which are badly needed to build a new system, one that actually works. It is as foolish to try and mend the old one as it is to try and take away a gay man or woman's right to feel whole and happy.

Obama's chief of staff is a former Freddie Mac board member and fervent supporter of the invasion of Iraq. Many of the "experts" are, or have been, Goldman and Citigroup execs. These people like the power and the money they have gathered while driving the economy into the ground. They're not going to give that up just to build a financial system that would better serve the people. They’ll build one that best serves them.

Sure, some loose ends will be tweaked, but mostly they'll spend the nation into a depression by attempting to salvage corporations that would have long since died if it were not for America's 21st century version of Mussolini's corporate fascism, and the unlimited access to the public trough it provides.

The broke man in the street will be broker, until he's broken, until he lives in the street, his last hard earned penny squeezed from his hands and dumped into banks, insurers and carmakers that have zero chance of ever turning a profit again.

The taxpayer will be taxed, and will be forced to pay until (s)he can pay no more, if need be at the barrel of a gun, until (s)he no longer has a job, a home, dignity or a future. And then the growth machine will spit her out. Whoever can't produce or consume is a write-off.

We’ve spent too much, and now we're broke. Let's spend more, and lots more, ‘cause then we will be whole again. Double or nothing, it's all we know.

The dice will come up nothing.

GM loses $2.5 billion in 3rd quarter, burns $6.9 billion of cash reserves
General Motors Corp. today said it lost $2.5 billion and burned through $6.9 billion in cash in the three-month period ended Sept. 30. The automaker blamed the global credit crunch and slumping U.S. auto sales for its dismal results and a faster-than-expected cash burn and said it is now in critical need of federal aid if it is to survive through 2009.

GM said it burned through $6.9 billion in cash in the quarter — more than double the second-quarter rate — lowering its cash on hand from to $21 billion at the end of June to $16.2 billion on Sept. 30. The automaker said in July that it needs a minimum of $11 billion to $14 billion to operate.

Due to the precipitous drop in U.S. sales in the last few months, GM has said the plan it announced in July to conserve and raise $15 billion in cash will no longer be enough for the automaker to survive through 2009.

Ford Posts $3 Billion Operating Loss, Burns $7.7 Billion Cash
Ford Motor Co., with U.S. sales shredded by the worst financial crisis since the Great Depression, posted a third-quarter operating loss of $2.98 billion. The company said it used up $7.7 billion in cash and would cut more salaried jobs. The per-share operating loss of $1.31 was wider than the 93-cent average of 10 analyst estimates compiled by Bloomberg. Those figures exclude a gain for shedding future retiree medical bills under a new union contract that enabled Ford to post a net loss of $129 million, or 6 cents.

Sales plunged 22 percent to $32.1 billion, draining Ford's cash as the second-largest U.S. automaker pared production and its workforce to match dwindling demand. Automotive gross cash totaled $18.9 billion on Sept. 30, compared with $26.6 billion on June 30. "Investors are focused on cash accrual and cash burn," Dan Poole, senior vice president of equity research at National City Bank in Cleveland, said before results were released. National City's $34 billion in assets include Ford shares.

Ford is among the automakers approaching European governments for 40 billion euros ($51.2 billion) in loans, Chief Financial Officer Lewis Booth told reporters. The aid request echoes the companies' appeal for U.S. financial assistance. Ford's operating loss may herald similar results for General Motors Corp., the biggest U.S. automaker, when it reports on its third-quarter performance later today. GM's adjusted net loss may be $2.99 billion, the average of 5 analyst estimates compiled by Bloomberg.

Ford disclosed steps to improve cash by as much as $17 billion through 2010, including a $500 million slash in annual capital spending to $1 billion. Salaried-personnel costs will be reduced by an additional 10 percent by the end of January, expanding on a 15 percent reduction this year, Ford said. Merit-pay increases for salaried personnel will be eliminated in 2009. The company also will suspend matching contributions for 401(k) retirement accounts for U.S. salaried employees starting Jan. 1. Ford previously suspended such payments from July 2005 until June 2007.

`We're comfortable with our liquidity," Booth said. "We are putting in place a lot of actions to make sure we stay comfortable with our liquidity situation." Booth said Ford's cash plans don't assume the automaker will receive low-interest loans from either U.S. or European governments. The year-earlier net loss for Dearborn, Michigan-based Ford was $380 million, or 19 cents a share, and with a $24 million loss excluding "special items."

Chief Executive Officer Alan Mulally is trying to steer Ford back to profit by diversifying the automaker's product lineup and cutting costs. Under Mulally, Ford is retooling three North American truck plants to produce small cars and moving to develop models that can be sold worldwide. Ford reported a gain of $2.3 billion for transferring the retiree health-care obligations to a so-called Voluntary Employee Beneficiary Association, or VEBA, trust set up under its 2007 contract with the United Auto Workers union.

U.S. auto sales for Ford tumbled 25 percent in the quarter, steeper than the 18 percent industrywide slide. Vehicles sold last month at an annual rate that was the weakest since 1985. Rising fuel prices and the credit crunch squeezed Ford in the third quarter. U.S. retail gasoline averaged $3.85 a gallon, 35 percent more than a year earlier, damping demand for the pickup trucks, sport-utility vehicles and vans that accounted for almost two-thirds of Ford's sales. While gasoline prices eased after peaking at more than $4 a gallon in July, Ford wasn't able to recover because the freeze in debt markets sapped consumer confidence and made it harder for buyers to find loans.

Ford dismissed 1,500 salaried employees in the quarter to help slash 15 percent of its costs for that workforce in North America. The automaker eliminated 200 salaried jobs in the second quarter. Buyouts for U.S. factory workers in the quarter totaled 2,600, as employees accepted offers of as much as $140,000 for them to depart. The gains from the health-care shift are the result of court approval for the VEBA trusts during the third quarter. United Auto Workers members at Ford agreed to a trust that will take on obligations Ford estimated in November 2007 at $23.7 billion. The company has said it would contribute $13.6 billion in notes and cash to the fund.

Chrysler cash drains away as crisis deepens
Chrysler LLC is rapidly burning through cash and being driven to prepare for a possible break-up if it can't clinch a merger with General Motors Corp or get government funding needed to ride out the economic crisis, people with knowledge of the situation said.

Without new funding or a wrenching restructuring, executives have raised concern about the automaker's ability to finance its operations from existing cash beyond the first half of 2009, said the sources, who were not authorized to discuss Chrysler's performance. Chrysler has had to pay out over $100 million a month to support strained suppliers on top of a total $200 million support to sales through dealers in August and September as it suspended vehicle lease financing, the sources said.

The $11.7 billion the struggling automaker said it had as of end-June has seen a substantial decline because of the company's deteriorating performance marked by a 35 percent slide in October sales and increasing cash incentives, they said. Cerberus and GM had agreed last month on the broad terms of a merger of Chrysler's loss-making auto operations and those of its crosstown rival but the deal foundered when the Bush administration rebuffed a request for some $10 billion to support it, sources have said. That setback has put the focus on winning support for a broader federal rescue package for GM, Chrysler, Ford Motor Co and their suppliers that the industry argues would save jobs and protect benefits for retirees.

But Chrysler has been forced to consider a more drastic set of backup plans that could include selling off key business lines -- including Jeep, considered its most valuable brand. It may also outsource its finance and human resources, sources said. As a step toward that hard-landing scenario, the automaker is moving to split up its replacement parts business based on brand so that its Chrysler, Jeep and Dodge operations could be completely separate, one source briefed on that plan said. That could make it easier to sell off an individual brand.

Chrysler Chief Executive Bob Nardelli joined GM CEO Rick Wagoner and Ford CEO Alan Mulally on Thursday in meetings with U.S. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid. The three automakers lobbied the Democratic lawmakers -- who increased their power in Tuesday's election that also saw Barack Obama elected president -- for up to $50 billion in federal aid, sources said. The push for aid has been accompanied by increasingly dire warnings from industry executives and their political allies about the cost of inaction and the risk of a failure that would cost tens of thousands of manufacturing jobs. Chrysler does not release financial information.

While executives, including Vice Chairman and President Tom LaSorda, once touted that lack of disclosure as a strength, the same lack of transparency could now complicate the automaker's efforts to seek aid under a federal rescue package. In addition, analysts have said Chrysler's ownership by Cerberus poses a political problem as a federal rescue could be criticized as a bailout for a secretive Wall Street firm known for its political contacts. Cerberus is chaired by former Bush administration Treasury Secretary John Snow and its board includes Dan Quayle, who was vice president under former president George H.W. Bush.

Both GM and Ford are expected to post deep quarterly losses on Friday and announce further urgent steps to cut costs and conserve cash in the face of a plunge in auto sales to their lowest in around a quarter of a century. GM's president for North America Troy Clarke said late on Wednesday the government and industry faced a critical "100-day" window to secure financing and restructure. The sharp decline in U.S. auto sales that began in the summer and has since accelerated has hit Chrysler particularly hard. A pending asset sale is unlikely to be enough to save the day. Though Chrysler is pushing to complete a sale of its Viper sports car line this year, that is likely to bring in $80 million or less, said a person familiar with the brand's valuation.

U.S. sales of the Chrysler, Jeep and Dodge brands were down almost 26 percent this year through October, and Chrysler's market share has slipped to just 11 percent in October, putting it in an almost dead-heat with Honda Motor Co for the No. 4 spot in the U.S. market. Under Cerberus, Chrysler's captive finance arm, Chrysler Financial, moved quickly to suspend lease financing in August when resale values of its SUV and truck-heavy line-up plunged and threatened deep losses. But Chrysler was forced to increase cash incentives by $2,000 per vehicle to offset the sudden move to drop leasing. That cost some $200 million in August and September, the automaker told dealers in late September.

"The lifeboat is coming. We just have to keep rowing," Chrysler Vice Chairman Jim Press said in a briefing for dealers that also discussed the automaker's lobbying for government support, according to a person who heard the remarks. Separately, LaSorda told dealers at the same late September event that Chrysler, which depends on the U.S. market for some 90 percent of its sales, was pressing ahead with alliances and believed it was close to a deal for the Russian market.

More Cuts in Store for Ford
Just how bleak are things in Detroit? And we’re not talking just about the winless Lions’ need to man-up in Sunday’s contest with Jacksonville. The third quarter out of Ford Motor proved to be even more dismal than previously expected, with a $3 billion quarterly loss that was accompanied by more lurid details about how desperate the straits it finds itself in have become.

When General Motors reveals its own third q later Friday, it’s expected to match Ford’s losses dollar-for-dollar with its own $3 billion sinkhole. And Chrysler may have to sell off its Jeep brand - about the lone attractive pony in the auto maker’s stable - if it can’t orchestrate a merger with GM or get bailed out by the government. The prospect of just that kind of a government hand-out has become of ever-increasing importance to the auto industry. And probably seemed a little more likely, now that the election has concluded. The Bush Administration backed away from financing an auto-maker bailout late last month because it didn’t want to be seen financing a Chrysler-for-GM merger that was guaranteed to result in another 40,000 of job losses, something that appeared politically unpalatable ahead of the presidential election.

Now that the political concerns have been vanquished, auto industry management can talk more constructively with representatives of Congress and the incoming Obama Administration. Auto makers have also gone calling on European governments to explore their willingness to financially backstop a car-maker collapse. Ford Motor certainly seemed to be taking the kinds of steps that would suggest governments could feel the auto maker would act like a partner in its pain. It’s announced another round of job cuts aimed at lopping off another 10% of its work force, and cut compensation, saying it would eliminate performance bonuses for salaried employees, and wouldn’t continue to match employees retirement fund contributions.

Ford said it planned to cut capital spending by as much as $17 billion through 2010, and would lower advertising spending. It said it would find ways to divest non-core operations, and explore ways to raise new capital, including some debt-for-equity swaps, though it’s practically unimaginable to undertand who would be willing to take either Ford paper or common in return for an investment, given how auto industry junk has fared in the credit markets. The cost of insuring Ford paper against default has swelled to 64% upfront - meaning that it costs about $6.4 million to insure $10 million in Ford debt, even before the annual fees.

All of the planned intiatives are part of the auto maker’s plans to implement its transformation - a transformation akin to turning a tanker that’s already run aground, given the economic realities. Losses in the quarter easily outstripped the worst fears: the $3 billion loss translated into $1.31 on a per-share basis, some 40% worse than forecasts. Sales declined 22% in the period. Worse, it burned through $7.7 billion in cash, though it insisted that it continued to remain confident about its liquidity position.

Cash conditions may have proved even more tenuous at Chrysler - a heart-breaking development, inasmuch as its presumed cash holdings represented that which GM lusted after most about the ailing auto maker. A Reuters story Friday quoted sources saying Chrysler believed the nearly $12 billion in cash on hand it reported at the end of June had declined substantially. If it can’t clinch that merger with GM, or get government funding, it didn’t expect to be able to continue to finance its business through its operations - certainly not with sales sliding 35%, as they did in October.

The recourse to the more-attractive alternatives would be a breakup of the company - a breakup that, most likely, would include the sale of its Jeep division, the most attractive nameplate in the Chrysler portfolio. Of course, having the government provide the funding that, in essence, bails out the knuckleheaded investment of a vulture investment fund, Cerberus, can’t be the most politically adroit intiative out there. But at least we’re four years away from another national election.

Carmakers Seek $50 Billion in US Loans, $50 Billion More in Europe
General Motors Corp., Ford Motor Co. and Chrysler LLC, strapped for cash as sales plunge, are seeking $50 billion in federal loans to help them weather the worst auto market in 25 years, a person familiar with the matter said. The package would be $25 billion for health-care spending and $25 billion for general liquidity that could be delivered in different ways, including short-term borrowing from the Federal Reserve, said the person, who asked not to be identified because the plan isn't public. In return, the companies would be willing to take steps such as granting stock warrants, the person said.

The automakers should receive "additional help" from President George W. Bush's administration, Senate Majority Leader Harry Reid said after meeting with their chief executive officers in Washington yesterday. Congress approved a $25 billion loan program in September to help build fuel-efficient vehicles. The three companies, their unions and legislative allies are hunting for aid after a combined $28.6 billion in combined first- half losses. New vehicles sold at a seasonally adjusted annual rate of 10.6 million in October, the lowest since 1983.

Ford is also among automakers approaching European governments for 40 billion euros ($51.2 billion) in loans, Chief Financial Officer Lewis Booth told reporters today after the company said it used up $7.7 billion more cash from auto operations than it generated last quarter. In the U.S., the Bush administration should use its existing authority to provide the help, Reid said yesterday in a statement, without being specific as to the amount. Congress will also continue exploring ways to aid the automakers, the Nevada Democrat said.

Spokesmen for the automakers have declined to say how much assistance they're seeking. The UAW said Nov. 5 it backed $25 billion in loans for automakers' health-care costs and other aid for "immediate liquidity." Analysts estimate that GM also will report a third-quarter operating loss today, after Ford said its loss on that basis was $2.98 billion. The financial demands on the automakers include contributing to UAW-run trusts being created to take over responsibility for retirees' medical bills.

GM CEO Rick Wagoner, Ford's Alan Mulally, Chrysler's Robert Nardelli and United Auto Workers President Ronald Gettelfinger also met yesterday with House Speaker Nancy Pelosi, a California Democrat. The auto chiefs didn't take questions from reporters. GM will work with Reid and Pelosi "to ensure immediate and necessary funding to keep the auto industry viable," the Detroit-based automaker said in a statement. Nardelli said in a statement Chrysler was "encouraged" by the lawmakers' understanding of the importance of the auto industry. Mulally said "we applaud their efforts." The government wants to "ensure the viability of this industry," Pelosi told reporters before her meeting with the CEOs. U.S. officials also will be "looking out for taxpayers," she said.

The meeting with Pelosi was "very positive," according to House Majority Leader Steny Hoyer, a Maryland Democrat, who also attended. Hoyer, when asked whether the automakers mentioned bankruptcy, said, "No, but I'm not going to say anything further." Representative Sander Levin, a Michigan Democrat who also attended, said the meeting "went very well" and that the outcome would be "positive." President-elect Barack Obama said last week he plans to work with the industry to make it more competitive. Obama has called for a $175 billion stimulus package to follow the $168 billion package signed into law in February.

Automakers, the UAW and state political leaders have sought support from the Energy Department, the Fed, the Treasury Department and from Congress. The Energy Department said Nov. 5 it has moved ahead with one piece of automaker aid as it set the interim rules for the $25 billion low-interest loan program, which was crafted to help the companies retool plants to build more-efficient vehicles. The government needs to ensure that this money goes for the purposes Congress intended, said Public Citizen, a consumer- advocacy group in Washington. The Energy Department "should not provide loans to upgrade plants that produce performance vehicles," Joan Claybrook, Public Citizen's president, said in a statement.

Jobs lost in 2008: 1.2 million
The government reported more grim news about the economy Friday, saying employers cut 240,000 jobs in October - bringing the year's total job losses to nearly 1.2 million. According to the Labor Department's monthly jobs report, the unemployment rate rose to 6.5% from 6.1% in September and higher than economists' forecast of 6.3%. It was the highest unemployment rate since March 1994.

"There is so much bad in this report that it is hard to find any silver lining," said Morgan Keegan analyst Kevin Giddis. Economists surveyed by had forecast a loss of 200,000 jobs in the month. October's monthly job loss total was less than September's revised loss of 284,000. Payroll cuts in August were revised up to 127,000, which means more than half of this year's job losses have occurred in the last three months. September had the largest monthly job loss total since November 2001, the last month of the previous recession and just two months after the Sept. 11 terrorist attacks.

With 1,179,000 cuts, the economy has lost more than a million jobs in a year for the first time since 2001 - the last time the economy was in a recession. With most economic indicators signaling even more difficult times ahead, job losses will likely deepen and continue through at least the first half of 2009. "It's pretty clear that we're in a recession," said Robert Brusca, economist at FAO Economics. "There is reason for us to believe we'll see a drumbeat of heavy job losses for a while, and there's room for them to get even worse."

Brusca noted that separate readings on the manufacturing and auto industries indicated economic conditions are the worst in about 30 years. "We may be in a severe recession, in which case these job numbers are not even big yet," he said, suggesting monthly job loss totals could grow in excess of 300,000 an unemployment could rise to around 7%. Job losses were spread across a wide variety of industries. Manufacturing lost 90,000 jobs, the leisure and hospitality industries cut 16,000 jobs, and construction employment shrank further by 49,000 jobs.

Terence O'Sullivan, president of construction workers' Laborers' International Union of North America, noted the construction unemployment rate rose to 10.8% - double what it was a year ago. He called the report an "urgent alarm sounding the need to halt our nation's spiraling job loss." In an ominous sign for the upcoming holiday shopping season, retailers trimmed payrolls by 38,000 workers last month.

Professional and business services, a category seen by some economists as a proxy for overall economic activity, had a 45,000 drop in employment. "Job loss has a big impact on the economy," Brusca said. "When people have no income, they spend less, businesses make less money, and they cut more jobs." In another sign of weakness, a growing number of workers were unable to find jobs with the amount of hours they want to work. Those working part-time jobs - because they couldn't find full-time work, or their hours had been cut back due to slack conditions - jumped by 645,000 people to 6.7 million, the highest since July 1993.

The so-called under-employment rate, which counts those part-time workers, as well as those without jobs who have become discouraged and stopped looking for work, rose to 11.8% from from 11%, matching the all-time high for that measure since calculations for it began in January 1994. Temporary employment, including workers employed by temp agencies, fell by 50,800 jobs last month. That could mean even more full-time payroll reductions to come, as employers often cut temporary workers before they begin cutting permanent staff. But some industries were hiring last month. Government hiring has stayed strong throughout the downturn, adding another 23,000 jobs in October. Education and health services also grew payrolls, which grew by 21,000 employees.

In a somewhat encouraging sign, the average hourly work week did not fall last month, holding at 33.6 hours, in line with expectations. With a modest 4-cent gain in the average hourly salary, the average weekly paycheck rose by $1.35 to $611.86. Solutions are not simple. Support for a second stimulus package has grown in Congress, and President-elect Barack Obama has indicated that he would support such a measure. The prior stimulus package in the spring helped the economy grow in the second quarter, but it did little to stem the tide of job loss in the country. Many economists have also called on the Federal Reserve to cut rates to historic lows to encourage growth.

"These are all the right solutions, but the real question is are they enough to get the economy on the right path," said Anthony Chan, chief economist for JP Morgan private wealth management. "They're necessary, but we don't yet know if they're sufficient." President Bush said Friday the government's plans to address tight credit and housing markets are the solution to rising unemployment. "The Federal government has taken aggressive and decisive measures to address this situation," the President said. "It will take time for these measures to have their full impact on an economy in which many Americans are struggling." Chan said the programs will work, and that the government needs to continue to "slug it out," perhaps putting even more stimulus programs in place to encourage job growth. 

IMF urges radical action to fight global recession
The International Monetary Fund has slashed its forecast for the world economy next year, predicting outright contraction for the rich economies of North America, Europe, and Japan for the first time since the Second World War. "Prospects for global growth have deteriorated over the past month. The financial crisis remains virulent. Markets have entered a vicious cycle of asset deleveraging," said the fund yesterday.

Britain's economy will suffer and will see the steepest decline in G7 club of leading powers, shrinking 1.3pc as the crunch in the City of London leads to more job losses. Germany will decline by 0.8pc, The US and Spain by 0.7pc. Sending shivers through stockmarkets everwhere, the Fund cut its world outlook next year to just 2.2pc, down from 3pc just a month ago. This is a global recession under the IMF's 3pc rule-of-thumb.

"Financial stress is likely to be deeper and more protracted than envisaged in October. Markets are pricing in expectations of much higher corporate default rates, as well as higher losses on securities and loans," it said. "Activity is increasingly being held back by slumping confidence. As the financial crisis has become more entrenched, households and firms are increasingly anticipating a prolonged period of poor prospects for jobs and profits. As a result, they are cutting back."

Olivier Blanchard, the IMF's chief economist, called on authorities around the world to respond rapidly with combined monetary and fiscal stimulus, saying risk on an inflationary surge had subsided as commodities prices slump. "There is need for additional macroeconomic stimulus. Room to ease monetary policy should be exploited. The recent moderation of inflation risks has cleared the way for major central banks to cut their policy interest rates," said the report.

"Monetary policy may not be enough in the face of difficult financial conditions and deleveraging. In some cases room for further easing is limited as policy rates are already close to the zero bound. Broad-based fiscal stimulus is likely to be warranted". The IMF said there was an outside risk of "deflationary conditions", referring to the sort of persistent price falls seen in 1930s. This can be extremely hard for authorities to combat, since real debt burdens continue to grow even with zero interest rates.

No region will be spared the downturn, although China should grow at 8.5pc (down from 9.3pc). This may prove optimistic. A growing number of economists have begun to warn that China faces a hard-landing of its own as over-investment in manufacturing plant for exports comes back to haunt. The Fund slashed its 2009 oil forecast from $100 a barrel a month ago to $68, and warned that countries with an over-reliance on energy and resources could face a serious squeeze.

"The most affected are commodity exporters and countries with acute external financing and liquidity problems. Intense deleveraging could increase the risks of substantial capital flow reversals and disorderly exchange rate depreciations," it said. Stephen Pope, strategist at Cantor Fitzgerald, said the IMF had been behind the curve at every stage of this crisis, so this belated recognition that matters are serious may prove a turning point. "The IMF is a lagging indicator," he said.

Banks still "staring into the abyss" despite bail-outs
Efforts by British and European governments to shore up the banks may not have been enough to see them through the looming recession, analysts warned yesterday. Europe's lenders could need as much as €83bn (£66.7bn) more capital to cope with rapidly worsening bad debts, Morgan Stanley predicted, while Credit Suisse said falling house prices and deteriorating loan books would leave Britain's banks "staring into the abyss".

Morgan Stanley banking analyst Huw van Steemis said European lenders "on our recession scenario require a further €83bn capital" and warned of "balance sheet shrinkage" as banks unwind their overly indebted positions. "One of the biggest questions we ask ourselves is whether this 30-year debt super-cycle will unwind in 1930s-style debt deflation or whether the socialisation of bad debt will stabilise the system and lead to several lean but stable years," he said.

Credit Suisse banks analyst Jonathan Pierce said: "On balance, we think the sector has enough capital to withstand a severe downturn, but Lloyds Banking Group and Royal Bank of Scotland begin to look borderline in this scenario." Lloyds Banking Group – the combined Lloyds TSB and HBOS – is raising £17bn and RBS £20bn, with the taxpayer expected to pick up the vast majority of the bill. Mr Pierce has also revised his house price forecast to a fall of 35pc from peak to trough, from 25pc previously. "Things are getting worse, faster than we thought," he said.

He added that should losses from bad debts hit the same level as the last recession, in 1992, "the sector would lose money next year and... potentially reignite capital concerns at one or more of the banks". He did not rule out RBS posting a loss both this year and next. Credit Suisse cut its 2009 and 2010 earnings forecasts for UK banks by a further 40pc, while Morgan Stanley cut its European banks forecast by 34pc. Mr van Steemis added: "Deleveraging, funding stresses, weaker macro and regulation make us think it's still too early to buy the banks sector."

US unemployment rate hits 14-year high
The US unemployment rate climbed to the highest level since 1994 as payrolls tumbled, signaling that the economic slump inherited by Barack Obama will last well into his first year as president. The jobless rate rose to 6.5pc in October from 6.1pc the previous month, the Labor Department reported in Washington. Employers cut 240,000 workers after a loss of 284,000 in September, the biggest two-month slide since 2001.

Unemployment may only worsen by the time Mr Obama takes office in January, making it easier for congressional Democrats to push through another economic stimulus package. Mr Obama meets today with his transition economic advisers, including billionaire investor Warren Buffett and former Federal Reserve Chairman Paul Volcker. He’ll also hold his first post-election press conference. Job losses for August and September were revised up by 179,000. The economy has lost 1.18 million jobs so far this year.

Factory payrolls fell 90,000, the biggest monthly loss since July 2003, after decreasing 56,000 in September. A strike by 27,000 machinists at Boeing, which was resolved earlier this month, contributed to the drop, the Labor Department said. Economists had forecast a drop of 65,000 manufacturing jobs. The decrease included a loss of 9,100 jobs in auto manufacturing and parts industries. Today’s report also reflected the housing slump and credit crunch. Payrolls at builders dropped 49,000 after decreasing 35,000. Financial firms reduced payrolls by 24,000, after a 16,000 decline the prior month.

Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 108,000 workers after dropping 201,000 in the previous month. Retail payrolls decreased by 38,100, led by a loss of 20,300 jobs at auto dealerships, after a decline of 44,800. Government payrolls increased by 23,000 after a loss of 41,000.

GMAC Leaves 'Mom and Pop Investors' With $15 Billion of Auto Lender's Junk
GMAC LLC may leave thousands of individuals on the hook for about $15 billion of junk-rated debt unless the auto and home lender finds a way to pay its bills. GMAC, the largest lender to car dealers of General Motors Corp., issued more than $25 billion of debt called SmartNotes over the past decade to retail investors. While GMAC has paid off the debts as they matured, five straight unprofitable quarters raised doubt about GMAC's survival, and SmartNotes due in July 2020 have lost about two-thirds of their value.

"An investment like this is totally unsuitable for the retail investor," said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, who rates GMAC bonds junk, or below investment grade. "You're selling it to the widows and orphans who think of GMAC as being this strong, long- standing corporation when the reality is far from that." GMAC's losses since mid-2007 total $7.9 billion, driven by record home foreclosures and auto sales that GM has called the worst since 1945. Stomaching some of Detroit-based GMAC's deficit are individuals who purchased SmartNotes through brokers at firms including Merrill Lynch & Co., Fidelity Investments and Citigroup Inc.'s Smith Barney unit.

Chuck Woodall, 66, who lives with his wife in Columbus, Ohio, amassed $200,000 of SmartNotes starting eight years ago, and they now equal about 25 percent of his investments. At the time, the securities were rated investment-grade and they paid more interest than government bonds or certificates of deposit. They also were backed by Detroit-based GM, the biggest U.S. automaker. Woodall, a former owner of apparel stores and a pet-supply business, holds SmartNotes due in 2018 that he says have lost about 80 percent of their value. He said his Merrill broker told him that in more than 20 years, no client had lost money on bonds.

"He assured me they were safe," Woodall said. "I just wasn't aware enough and didn't have my hand on the pulse." GMAC said Nov. 5 its mortgage unit may fail and analysts have questioned the viability of the entire company, which is now 51 percent-owned by New York-based Cerberus Capital Management LP. GM controls the rest. Of GMAC's $64 billion in debt outstanding at the end of June, about $15 billion was in SmartNotes. They rank equal to senior unsecured debt, which recovers an average of about 40 cents on the dollar in bankruptcy cases, according to Mariarosa Verde, an analyst at Fitch Ratings in New York. GMAC spokeswoman Gina Proia said the company "has honored its commitments and intends to continue honoring its commitments to investors." She declined to elaborate.

Brokers traditionally handle the task of determining whether an investment is suitable for a particular investor, depending on factors such as assets, sophistication and tolerance for losses. Merrill spokesman Mark Herr, Steve Austin from Fidelity and Citigroup's Alex Samuelson declined to comment. SmartNotes were introduced in 1996 by ABN Amro Holding NV's Chicago-based LaSalle Bank, which is now part of Bank of America Corp. in Charlotte, North Carolina. The notes include features designed to appeal to investors seeking interest income -- a concern for older people and retirees. The notes were sold in denominations of $1,000 and offered a "survivor's option," allowing spouses to sell the bonds back to the issuer if the owner dies. The SmartNotes program opened to European investors in 2004.

GMAC and LaSalle said in statements from 1998 through 2003 that the notes were intended for individual investors. Patrick Kelly, a LaSalle managing director, described the buyers in a 2003 interview as "mom-and-pop investors." "If Wal-Mart sold bonds, these would be the bonds they would sell," Kelly said. Back then, SmartNotes may have been safer bets. GMAC debt was rated BBB by Standard & Poor's, GM and GMAC were profitable, and the lender was still a wholly owned unit of the automaker. Sales of GMAC SmartNotes reached $1 billion in 1998, doubled the following year and exceeded $25 billion in 2003, when GMAC was on its way to earning $2.8 billion for the year.

"GM was considered a can't-miss company," said Thomas Smicklas, a retired high school principal and now a homebuilder in Wadsworth, Ohio, who started buying SmartNotes in 2003. Smicklas said he owns about $75,000 of short-term SmartNotes and hasn't lost any money. "When the GM name is on something, many investors assumed it's gold-plated." By 2005, GMAC's debt was reduced to junk -- Moody's Investors Service now rates the firm seven levels below investment grade -- and GMAC continued offering SmartNotes as late as 2007. This year, analysts also raised concerns about the survival of GM, which they predict is headed for a fourth straight annual deficit, according to a survey by Bloomberg.

Tom Ricketts helped create SmartNotes at ABN Amro before leaving in 1999 to start Chicago-based Incapital LLC, which earlier this year bought LaSalle's retail bond unit. Ricketts said his firm doesn't issue GMAC notes and sticks with investment-grade bonds. He recommends that individuals who buy them own a wide variety of assets. "When you don't diversify in any portfolio, you expose yourself to risk that you're not getting paid for," Ricketts, 43, said in an interview. "Typically, investment-grade corporate bonds are very good investments." GMAC and underwriters of its debt were sued in a 2005 class action that claimed the lender misrepresented SmartNotes in financial statements. A federal judge in eastern Michigan dismissed the case in February 2007, and the plaintiffs are appealing.

"In corporate bonds, time has shown that volatility, credit ratings and potential deterioration in credit means you may own something very different than what you thought you owned," said Michael W. Boone, founder of MWBoone & Associates, an investment advisory and money management firm in Bellevue, Washington. Boone said individuals should hold corporate debt only in mutual funds, "where they have instant diversification and management."

UK house prices fall over $1500 a week
Nearly £1,000 is being wiped off the value of the average house each week, leaving homes now worth no more than they were three years ago. Nearly £1,000 is being wiped off the value of the average house each week, leaving homes worth no more than they were three years ago. The latest house price survey has confirmed that the property market crash is gathering pace, with values falling at their fastest since the 1930s.

According to the Halifax, the country's biggest lender, the average house is worth £168,176 – £33,000 less than the peak in August last year, when they averaged £201,081. Property prices have fallen back to levels last seen in October 2005. The average home lost £4,000 in value in the past month – £923 a week. Prices are falling far faster than in the early 1990s, when the crash was relatively steady, spread over nearly three years. Economists say house prices have not fallen as sharply as the current 15 per cent a year since at least 1931.

Most economists, however, believe they will fall for many months to come. Seema Shah, a property economist at Capital Economics, said: "Worryingly, the economic downturn has only just got going. We think that the recession will be deep and last at least two years, triggering a sharp rise in unemployment.

"This will only serve to intensify the downward pressure on house prices as demand weakens and forced sales rise." Some 45,000 homes are expected to be repossessed this year, but this number is expected to rise, forcing prices still lower and pushing thousands into negative equity.

Big Oil: Big Profits, Big Pension Fund Holes
While few corporate pensions have been immune to the dramatic downturn in the equity markets this year, it appears that plans at energy companies are in the worst shape. According to a new analysis of S&P 500 companies from Citi Investment Research, companies in the energy sector had defined-benefit plans that were only slightly more than 80% funded at the beginning of this year—the lowest funding level among any of the ten industries examined by Citi.

Given the major declines in the equity markets through the end of October, Citi calculates that funding levels have dropped off by another 20%, at a minimum, which would leave energy companies’ pension funds hovering just above 60% funded. “This could result in a need for energy firms to meaningfully contribute to their plans in 2009,” writes Citi analyst Tobias Levkovich in a report released today. “This would come at a time when earnings revisions for energy companies already are sliding sharply alongside plummeting oil prices…and could add another headwind for energy earnings and stock prices.”

Energy profits, according to forecasts from Citi’s economists, are projected to drop by 45% in 2009, compared with a 21% gain this year. The report noted that a substantial chunk of the funding shortfall in the energy industry belonged to just a handful of companies. That included Exxon Mobil, ConocoPhillips and Chevron, which have been reporting huge profits but still had three of the ten most underfunded pension plans in the S&P 500 at the beginning of this year.

Indeed, Exxon Mobil had the most underfunded plan of any company in the S&P 500, according to Citi. The energy giant had $27.8 billion in pension plan assets to cover $34.5 billion in pension liabilities, for a $6.7 billion deficit. ConocoPhillips, with a $1.6 billion shortfall, had the fifth most underfunded plan, while Chevron’s $1.2 billion pension deficit was the eight largest of any company in the S&P 500.

What's really burning down the financial house
The most pressing business for the presidential transition team? Forget the customary interlude measuring the White House for drapes. Make it flights to Washington to meet with Treasury and Federal Reserve leadership, to begin restoring confidence in the financial system.

This can't wait. It begins with the recognition that, behind all of the explanations and recriminations, what ultimately brought down the financial house were volatile investments known as "derivatives" – idiosyncratic and inscrutable securities "derived" from other securities, such as bundles of home mortgages. If we fail to regulate them, we will continue to invite the financial equivalent of arson. The value of these financial abstractions has grown fivefold since 2002, to at least $531 trillion today. That's nearly 10 times the total output of all of the goods and services the entire world produced last year.

Think of derivatives as computer-generated casino wagers. Upper-class slot machines, video games played by Wall Street's Masters of the Universe, they amount to bets placed on the future direction of interest rates, stocks, commodities – any asset or investment. Their aim is to cover losses, or reap gains from the bad bets of others. In the case of housing, that meant shaky mortgages bundled up and priced based on guesstimated odds of being repaid, at exorbitant interest rates and dismal (or fictitious) credit ratings.

At best, derivatives can insulate against investment risk. But because they're entirely unregulated and trade on no public exchanges, their originators can deliberately hide their vulnerabilities. So anyone buying them risks burning down the house. The most explosive derivatives? Credit default swaps – contracts sold to banks eager to insure themselves against default on the bad debt they knew they were issuing. These fake insurance policies sever the link between bank risk and borrower responsibility. Investment bankers lined up to bet on mortgage bankers' not being paid back – wagering teetering piles of borrowed money on capital bases only 1/20th to 1/30th the size of the bets they'd placed.

Follow the dollars, and the housing boom wasn't a creature of Main Street. It was demand for these derivatives, including "securitized" mortgages, which led to loose lending and pumped up home prices. So when the banks' exposure (first at Bear Stearns, and fatally at Lehman Brothers) finally became obvious, their stocks cratered, and what meager capital coverage they had was burned up. And there is still $62 trillion in these bets on the balance sheets of banks and insurers. Wall Street's high finance has amounted to magical, money-for-nothing thinking. No wonder taxpayers are infuriated by the idea of paying the people who got us into this mess to get us out of it.

This was more than a matter of low rates, loose credit, and lax regulation, as former Federal Reserve Chairman Alan Greenspan almost alluded to last month. We got into this mess through a deliberate obstruction of regulation – a dogmatic dereliction of duty on the part of the Fed. Arguing to strip the Commodity Futures Trading Commission of any regulatory authority over derivatives in 2000, then Chairman Greenspan asserted his confidence in "markets in which many of the larger risks are dramatically – I should say, fully – hedged." Regulators and members of Congress were cowed into compliance.

Mr. Greenspan still defends his obstruction of oversight for derivatives through four administrations – arguing that banks should self-regulate to protect their own reputations. He contends that stability in our financial markets should rely on banks' "counterparty surveillance" (Fed-speak for knowing whether somebody on the other end of a deal is good for the money). That would sound reassuring, except it's impossible with complex and unregulated derivatives such as credit default swaps. Worse, it seems derivatives denial is still driving Treasury Secretary Paulson's apparent determination to spend public money to rid bank balance sheets of this toxic waste, rather than focusing on a fair and rational refinancing of the underlying home mortgages themselves.

The good news? Paulson's widely lambasted decision to let Lehman Brothers fail will look, in hindsight, like exactly the right kind of needed discipline – as painful as it is right now. Rather than suspending disbelief and denial, the way Japan did, it forced a reckoning. But if Mr. Paulson and Fed Chairman Ben Bernanke really hope to secure a more positive legacy than Greenspan, and fight this financial fire, they'll support a 30-year fixed 6 percent refinancing option for the majority of subprime homeowners who are still keeping up with their payments, before adjustable rates escalate (and precipitate more defaults). And they'll force the early recognition of derivative losses, rather than allowing executives to mask them.

The only way to keep Wall Street from doing further damage is to demand regulation of the derivatives still circulating in the financial system – particularly the $62 trillion in the market for credit default swaps. Whatever remains of investment banking should never again be allowed to borrow and bet $25 for every dollar that's theirs. Hedge funds need basic oversight. Then, after putting derivatives on a regulated exchange, it will be time to rework our present Rubik's Cube of financial authorities into a more coherent framework.

While rumors of the end of capitalism as we know it are greatly exaggerated, the need to install a few regulatory smoke alarms is now excruciatingly obvious. For the rest of us, if nothing else comes of this disaster, may it force us to refocus on savings over consumption. Not bigger valuations – better values. What made this country were simple ideals – hard work, patience, thrift, and integrity – not the sophistry of financial abstractions that fire up Wall Street and burn Main Street. The sooner we get back to real business, the better.

Zero Rate World May Lie Ahead as King, Trichet Cut
The age of free money may be at hand. As major central banks slash interest rates with unexpected speed, benchmark borrowing costs are now below core inflation for the first time since the early 1980s, and policy makers are signaling they will go deeper. Yesterday's cuts by the Bank of England and European Central Bank, which came with the Federal Reserve and Bank of Japan on the cusp of zero rates, are a bid to shock life back into their recessionary economies and strained money markets. It may be an uphill battle as consumers and businesses show greater interest in saving than spending, and banks hoard capital rather than lend it.

"It's the race to zero," said Stewart Robertson, an economist at Aviva Investors Ltd. in London, which manages about $230 billion. "There's no obstacle to more rate cuts." The U.K. central bank led by Governor Mervyn King yesterday axed its benchmark rate to 3 percent, the lowest level since 1955. The reduction of 1.5 percentage points was the biggest in 16 years. The ECB followed with its second half-point cut in a month, to 3.25 percent, and President Jean-Claude Trichet declined to rule out further moves south.

The action in Europe, which extended to reductions in the Czech Republic, Switzerland and Denmark, followed decisions last week by the Fed to drop its key rate to 1 percent, matching the lowest in a half-century, and the Bank of Japan to cut to 0.3 percent in its first paring in seven years. The central bank of South Korea today cut its benchmark for a third time in a month. Monetary policy is being eased because the 15-month credit crisis is inflicting harsher blows to growth and inflation than central bankers anticipated just two months ago. Yesterday the International Monetary Fund cut its month-old forecast for next year's global expansion to 2.2 percent from 3 percent, and predicted the first contraction in advanced economies since it was created in 1945. It estimated prices would rise just 1.4 percent in rich nations, less than half of this year's pace.

The conundrum for central banks is their rate cuts may still not be packing a punch, even on top of record injections of cash and a willingness to accept lower-rated collateral for their loans. One reason: credit markets remain fragile, indicating financial institutions are still conserving cash after recording losses and writedowns of about $691 billion. The London interbank offered rate for three-month loans fell to 2.29 percent today from 4.82 percent on Oct. 10. The record drop still leaves Libor 129 basis points above the Fed's benchmark, compared with an average of 22 basis points in the five years before the global credit crisis began in August 2007.

"The problems in money markets are still quite severe," said Dario Perkins, an economist at ABN Amro Holding NV in London. "Market rates are above where central banks have their rates, and that's alarming them." At the same time, companies and consumers are retrenching in the face of slowing growth and tighter credit. In the U.S., Cisco Systems Inc., the top maker of networking equipment, is forecasting the first revenue drop in five years because of the financial crisis. Across the Atlantic, Luxembourg-based ArcelorMittal, the world's biggest steelmaker, this week said diminished demand is forcing it to double production cuts.

Automakers and retailers are among the companies being battered by a collapse in consumer demand. In Japan, Toyota Motor Corp., the world's second-largest, yesterday forecast the biggest drop in profit in at least 18 years. Macy's Inc., Target Corp. and Gap Inc. all posted October sales declines in the U.S. Another complication for central banks is that some financial institutions are proving averse to passing on lower rates to borrowers. HSBC Holdings Plc, Barclays Plc and HBOS Plc are among U.K. mortgage lenders that have still to decide whether to follow the Bank of England's rate cut by paring their own standard variable rates. In the euro-area, banks yesterday deposited a record 297.4 billion euros overnight with the ECB rather than lend it elsewhere.

"We expect the banking sector to make its contribution to restore confidence," Trichet said yesterday. The combination of cautious banks and reluctant spenders is forcing central banks to cut interest rates below inflation. JPMorgan Chase & Co. calculates borrowing costs adjusted for underlying inflation in developed markets fell below zero last month for the first time since the early 1980s and are still declining. Central banks are betting that negative real interest rates will induce people to spend rather than save money that is declining in value, economists said. The strategy also aims to jolt investors and banks into seeking higher yields by making riskier long-term loans.

"It's clear you need to have interest rates that are lower than inflation going forward," said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. "Central banks are rushing to get interest rates down." Still, it's "far too early" to talk about zero interest rates throughout the industrial world, given inflation expectations remain positive, says Jim O'Neill, chief economist at Goldman Sachs Group Inc. in London. "People should be wary of rushing to shift the debate from inflation to deflation," he said. Rapid rate cuts are intended to avoid the fate of Japan, which endured a decade-long slump after its asset bubble burst in 1990 in part because its central bank was "initially too timid and too slow to react," economists at Deutsche Bank AG said in a report yesterday.

As rates fall further, central banks will have to consider less conventional steps to cushion their economies. Among them: making a public commitment to keep rates low, and lowering long- term borrowing by pumping large amounts of cash into banks with direct purchases of government securities. The debate over what comes next could begin at the Fed as soon as Dec. 16, when policy makers next meet amid expectations for another quarter-point cut. "We've got a global deflationary environment now and central banks will have to respond," said Stuart Thomson, who helps oversee $46 billion in bonds at Resolution Investment Management.

U.S. Unemployment Rate Climbs to 14-Year High of 6.5%
The U.S. unemployment rate climbed to the highest level since 1994 as payrolls tumbled, signaling that the economic slump inherited by Barack Obama will last well into his first year as president. The jobless rate rose to 6.5 percent in October from 6.1 percent the previous month, the Labor Department reported today in Washington. Employers cut 240,000 workers after a loss of 284,000 in September, the biggest two-month slide since 2001.

Unemployment may only worsen by the time Obama takes office in January, making it easier for congressional Democrats to push through another economic stimulus package. Obama meets today with his transition economic advisers, including billionaire investor Warren Buffett and former Federal Reserve Chairman Paul Volcker. He’ll also hold his first post-election press conference.

“The U.S. economy is in a very deep recession,’’ John Herrmann, president of Hermann Forecasting LLC in Summit, New Jersey, wrote in a note to clients after the release. “We look for a $500 billion fiscal stimulus from President-elect Obama.’’ Stock futures dropped immediately after the report’s publication, then recouped losses.

Payrolls were forecast to drop by 200,000 after declining by a previously estimated 159,000 in September, according to the median of 78 economists surveyed by Bloomberg News. Estimates ranged from declines of 85,000 to 300,000. October’s unemployment rate compared with a projected 6.3 percent and was the highest since March 1994. Job losses for August and September were revised up by 179,000. The economy has lost 1.18 million jobs so far this year.

Factory payrolls fell 90,000, the biggest monthly loss since July 2003, after decreasing 56,000 in September. A strike by 27,000 machinists at Boeing Co., which was resolved earlier this month, contributed to the drop, the Labor Department said. Economists had forecast a drop of 65,000 manufacturing jobs. The decrease included a loss of 9,100 jobs in auto manufacturing and parts industries. Today’s report also reflected the housing slump and credit crunch. Payrolls at builders dropped 49,000 after decreasing 35,000. Financial firms reduced payrolls by 24,000, after a 16,000 decline the prior month.

Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 108,000 workers after dropping 201,000 in the previous month. Retail payrolls decreased by 38,100, led by a loss of 20,300 jobs at auto dealerships, after a decline of 44,800. Government payrolls increased by 23,000 after a loss of 41,000. American Express Co., the largest U.S. credit-card company by purchases, said Oct. 30 it would eliminate 10 percent of its workforce, or about 7,000 people, to cut costs amid rising defaults as consumers fail to repay their debts.

The job cuts “will help us to manage through one of the most challenging economic environments we’ve seen in many decades,” Chief Executive Officer Kenneth Chenault said in a statement. “Broad-based sector weakness in payroll numbers is consistent with past recessions,” John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said before the report. “Layoff announcements suggest further weakness in the pipeline.” The average work week was unchanged at 33.6 hours, today’s report showed. Average weekly hours worked by production workers were also unchanged at 40.6 and average overtime hours remained at 3.6.

Workers’ average hourly wages rose 4 cents from the prior month, or 0.2 percent, to $18.21. Hourly earnings were 3.5 percent higher than in October 2007. The loss of jobs, plunging home prices, and a record tightening of bank lending may cause consumers and businesses to keep retrenching. Gross domestic product shrank at a 0.3 percent annual pace in the third quartet and consumer spending fell at a 3.1 percent pace, the most since 1980. Economists surveyed by Bloomberg project the economic slump will deepen this quarter.

The faltering economy and imploding financial markets helped push Obama ahead of Republican rival John McCain, a senator from Arizona, particularly in hard-fought states like Ohio and Florida where unemployment rates have jumped. Americans also gave Democrats larger majorities in the House and Senate as voters blamed Republicans for the economic malaise. House Speaker Nancy Pelosi said this week Democrats may seek two stimulus packages if President George W. Bush limits the size of a plan to be considered during the post-election session later this month.

UK corporate bankruptcies up 26%
The number of companies going bust soared by 26.3 per cent between July and September this year as the worsening economy took its toll on UK businesses. The Insolvency Service said that 4,001 companies fell into liquidation during the third quarter — a 10.5 per cent rise on the previous three months and a 26.3 per cent increase on the same period last year.

The steep rise in company collapses was blamed on a “toxic combination of markedly slowing demand, elevated input costs and very tight credit conditions”. Despite yesterday's surprise 1.5 per cent cut to the UK interest rate, the Insolvency Service expects that more businesses will go under in the coming months. It said: “Although lower energy and commodity prices are easing the pressure on input costs, company liquidations seem certain to surge over the coming months, given the likely depth and length of the recession.”

At the same time, the number of people in England and Wales declaring themselves insolvent also rose to 27,087 over the period, which is a 8.8 per cent rise on the second quarter of this year and an increase of 4.4 per cent compared with a year ago. Howard Archer, chief UK and European economist at IHS Global Insight, said: "There can be little doubt that the marked rise in the number of individual insolvencies in the third quarter is only the beginning of the storm as recession, faster rising unemployment, higher debt levels, and more and more people being trapped in negative equity will exact an increasing toll over the coming months."

Last month, Britain entered first the stage of recession when it emerged that UK GDP had shrunk by 0.5 per cent in the third quarter, the first quarterly contraction in 16 years. The technical definition of a recession is two consecutive quarters of negative growth. The Insolvency Service said: “We expect the UK economy to contract up to, and including, the third quarter of 2009 resulting in an overall GDP decline of 1.5 per cent. Furthermore, we expect the eventual recovery to be only gradual.

Spain to Guarantee Banks' Bond Sales for Up to Five Years
Spain will guarantee bond sales by its banks for as long as five years under a 200 billion-euro ($256 billion) program to encourage lending, said three people with knowledge of the plan. Spain will back banks' new senior unsecured debt for as many as three years under normal circumstances and five years in exceptional cases, said the people, who declined to be identified before the plan is made public. The government will announce the details of the program as early as next week, the people said.

Spanish Treasury officials held a conference call with primary dealers of government bonds on Nov. 5 to explain the program, some details of which are still under discussion, the people said. Spain will guarantee as much as 100 billion euros of debt this year and 100 billion euros in 2009, said a Finance Ministry spokeswoman in Madrid. She declined to comment on the terms of the bonds.

Prime Minister Jose Luis Rodriguez Zapatero said in October that the plan was a "precautionary" measure to shore up the country's banking system, and that no Spanish lenders needed recapitalizing. Spain is also spending as much as 50 billion euros to buy assets from financial companies to encourage lending after the economy contracted in the third quarter and as the European Central Bank cut interest rates yesterday.

Banks using the government guarantee may be charged a fee of 50 basis points plus the cost of five-year credit-default swaps between January 2007 and August 2008 on the lenders or similarly rated European banks, said the people. That cost will be on top of the fees charged by underwriters to sell debt and the interest paid to investors. A basis point is 0.01 percentage point. Spain is proposing that the government guarantee only kicks in 90 days after a bank defaults on a bond it has sold, although potential issuers are asking for the backing to take immediate effect, said the people.

The U.K. set up a similar bank-bond guarantee program with fees linked to credit-default swaps, contracts which 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. Royal Bank of Scotland Group Plc, Barclays Plc and HBOS Plc have raised a total 8.4 billion pounds ($13.3 billion) of U.K. government-backed notes since the program was started last month.

German production sees sharp fall
Germany factory output fell sharply in September as the global slowdown hit demand for products from the world's top exporter. September industrial output fell 3.6% compared with August, according to official figures. The fall has raised fears that Germany, which is Europe's biggest economy, may already be in recession.

The economics ministry said as a result of continued weak demand "perspectives for production are gloomy". The fall in September's production figures was steeper than many economists had forecast. Most observers had expected a 2% monthly fall. On a less volatile two-month basis, output actually rose 0.5% in August and September, compared with June and July. However, it fell by 1.3% in the third quarter compared with the April-June quarter, the ministry said.

"The tendency of the last few months" said the ministry in a statement, "is that production is clearly pointing downwards". The German economy contracted in the second quarter and figures due on 13 November are expected to confirm that it shrank in the third quarter too - which would mean Germany is officially in recession.

Further evidence of slowing sales and production came from two of the country's biggest carmakers on Friday. BMW said it no longer expected to report record sales for 2008 because of consumers' growing reluctance to spend on new cars amid fears of a recession. "Faced with extremely challenging conditions in the automotive markets, we no longer expect to exceed last year's record sales for the full year," said Ian Robertson, who oversees BMW's sales and marketing.

BMW's October sales fell by more than 8%, with just 113,005 vehicles sold compared with 123,304 in October 2007. Meanwhile its competitor, Daimler, said that its sales in October fell 18% compared with the year before. The Stuttgart-based maker of Mercedes-Benz, Smart and the luxury Maybach brand, sold 93,800 cars worldwide last month, compared with 114,600 a year ago. The decline was particularly evident in the US market, where sales slumped 24.5%.

Argentina's Lower House Approves Pension Takeover
Argentina's lower house voted to support President Cristina Fernandez de Kirchner's plan to nationalize about $26 billion in private pensions, a proposal that raised concern of a default. Legislators voted 162 to 75 to back the plan after a session that began yesterday afternoon and ended after midnight. The proposal will be sent to two senate committees for consideration next week. A full senate vote on the measure may take place Nov. 20, the senate's Work and Social Security Committee said.

"We've achieved a real consensus on this measure, convincing enough people in the opposition that the current pension system failed," ruling party lawmaker Jose Maria Diaz Bancalari told reporters. "The state has an obligation and a responsibility to oversee these funds." Concern about Fernandez's plan was reflected in the benchmark Merval stock index, which fell 27 percent in the days after details were first reported on Oct. 20. Lawmakers aligned with Fernandez say the global financial crisis is making private pension plans less attractive, giving momentum to their efforts.

"The way these decisions are being made is disastrous for those looking for stability in the Argentine economy," said Felipe Sola, a member of the ruling party who opposed the bill, during the debate. On Nov. 5, supporters and opponents of Fernandez's plan rallied in front of the Congress building waving flags and beating drums. Protests have been sporadic and smaller than the nationwide demonstrations earlier this year against a plan to raise agricultural taxes. That plan was eventually defeated in the senate.

"There may be 9.5 million members in the pension funds, but you can only get 7,000 to protest, so it would seem that this is unstoppable," said Federico Thomsen, a political and economic analyst at the E.F. Thomsen research firm in Buenos Aires. Nationalizing the funds would give the government a surge of continuing revenue at a time of slowing economic growth, offering $4.5 billion in new contributions next year, said Javier Kulesz, an economist at UBS Pactual in Buenos Aires. Argentina's growth rate may slow to 1 percent in 2009 from 6.8 percent this year, JPMorgan forecasts.

Last week, the government's attempt to force pension funds to repatriate cash from investments in the U.S. was temporarily thwarted by holders of outstanding debt tied to the country's 2001 default on $95 billion of bonds. U.S. District Judge Thomas Griesa granted a request by bondholders including Aurelius Capital Partners LP and Blue Angel Capital, to freeze Argentine pension fund assets in the U.S. A hearing is scheduled in Manhattan federal court Nov. 14 on whether to extend the order.

S&P Cuts Ratings on $34.1 Billion in Alt-A RMBS
Standard & Poor’s Ratings Services said late Wednesday that it had cut its ratings on 1,078 classes from 86 U.S. RMBS Alt-A deals issued in 2006 and 2007 — the latest blow to investors in an already battered mortgage market, and evidence that the nation’s mortgage crisis is moving up the proverbial value chain. In aggregate, the classes with lowered ratings had an original par amount of approximately $34.1 billion, which has been paid down to approximately $28 billion, S&P said.

The cuts should hardly be a surprise — S&P had warned in mid-October that it may cut ratings on as much as $351.7 billion of Alt-A securities. A review of affected securities by HousingWire shows that the vast majority of ratings downgrades were previously rated AAA by the rating agency. But perhaps most interesting in the downgrades is this: most of the affected Alt-A transactions are collateralized by fixed-rate and long-reset hybrid mortgages, meaning rated are fixed for five or more years. (2006 and 2007 originations with a long reset would not begin to hit resets until 2011 or so.)

S&P said its rating cuts reflect an increased estimate of loss severity of 2006 and 2006 Alt-A hybrids to 40 percent, from a previous 35 percent loss estimate; the bump in expected loss severity reflects S&P’s belief that “further declines in home sales will depress prices further and push loss severities higher than we had previously assumed,” the agency said in a press statement. S&P’s analysts said that as of the Sept. 2008 distribution period, severely delinquent loans for affected transactions average a little over 13 percent of current pool balances — an increase of almost 30 percent in just one quarter.

For anyone familiar with Alt-A deals, those should be stunning numbers, worth repeating: more than 13 percent of remaining loans are 90+ delinquent, in foreclosure, or held in REO. This number is so damaging, in particular, because Alt-A transactions were comparatively thin on credit enhancement relative to their subprime counterparts: a weighted average FICO of 700+ had a way of convincing everyone these deals would perform. In addition to the downgrades, S&P said that it did affirm 578 ratings among 89 differeing RMBS deals; a good number of affirmations were on AAA-rated securities, as well.

The price of false economies
What is efficiency? What makes a cost an unnecessary cost that should be cut? Should this extend to opportunity costs? These are questions that will become increasingly important in tough economic times for many kinds of business and there will be many arguments about what can happen if the drive for cost efficiency is pushed too far.

Two recent pieces of evidence illustrate the dangers of running a business engine at its fullest throttle. When HBoS announced this week its plan to raise £11.5bn ($18.2bn) of new capital it also said it had taken extra writedowns in the third quarter that almost doubled its write downs for the year so far. Most of this increase came from a doubling of the losses taken in its Treasury operations – from £1.9bn to £3.8bn.These losses come from using the money in the part of its operations meant to manage a bank’s liquidity and liabilities to invest in higher yielding assets than traditionally was the case. In recent years this increasingly meant buying highly-rated structured products such as mortgage backed bonds and collateralised debt obligations.

HBoS was not alone. The Bank of England’s “Financial Stability Report” published earlier this month illustrated the extent to which “banks sought to reduce the opportunity cost of holding liquid assets by substituting traditional liquid assets such as highly-rated government bonds with highly rated structured credit products” during the credit boom .

The report points out that this has been part of a longer term decline in banks holding of cash, government bonds and other very-near-cash instruments, which has been mimicked in other countries. A chart in the report shows how, in the UK, banks have cut their holdings of the broad group of these traditional instruments as a proportion of total assets from more than 30 per cent at the end of the 1960s, to less than 5 per cent throughout the 1980s and 1990s and then quickly down to almost zero in the early years of this decade. These assets have to be “liquid” to allow quick access to funds to be used elsewhere in the business in the event of difficulties.

Hyman Minsky – whose rediscovered description of bubble mechanics so illuminated the US housing market collapse – was also concerned with liquidity. An expert on Minsky, Anastasia Nesvetailova of City University, highlighted to me at a seminar this week his ideas about the “progressive illiquidity” that was a characteristic of the development and expansion of financial markets from the mid-1970s – and the warning it contained on a macroeconomic level. In Ms Nesvetailova’s words*, every innovation that leads to both new ways to finance business and new substitutes for cash, decreases the volume of liquidity available to redeem the debts incurred.

In Minsky’s own words: “Even though the amount of money does not change, the liquidity of the community decreases when government debt is replaced by private debt in the portfolios of commercial banks.” The distinction between traditional liquid assets and other securities disappears during a boom but crashes to the fore in times of stress. The Bank’s FSR talks about a need for tougher liquidity regulations, while part of its proposed new money market operations is designed to give early warnings when banks are running out of traditional liquid assets.

But for banks and business more broadly, the quest for efficiency and growth in profits should more often lead owners and other stakeholders to question the costs. Some European credit analysts are already concerned that many companies are running at their most lean, leaving them little room for error and few if any assets to sell if they need to raise funds. Private equity firms meanwhile need to prove that they can improve the management and performance from portfolio companies rather than just generate fees and gains from churning takeovers and exits – adding pressure to slim down and rev up these businesses.

When efficiency is the drive to squeeze every last possible penny of profit out of every single pound available, that can be a false economy.

Another food crisis year looms, says FAO
The world might face a repeat of this year’s food crisis as the credit crunch encroaches on the agricultural market, leading farmers to cut their planting because of falling prices and lack of finance to buy fertilisers, the United Nations warned on Thursday.
“Riots and instability could again capture the headlines,” the Food and Agriculture Organisation said.

The warning was made despite a fall in the price of most agricultural commodities as farmers harvest bumper crops. The price of corn, wheat and rice has tumbled between 60 and 40 per cent from all-time highs earlier this year, but in its biennial Food Outlook report the FAO warned against a “false sense of security”. “Under the current gloomy prospects for agricultural prices, high input costs and more difficult access to credit, farmers may cut their plantings, which might again result in a tightening of world food supplies,” the FAO said in the report.

This year saw agricultural commodity prices jump to a record high, triggering food riots from Haiti to Egypt to Bangladesh, and prompting appeals for food aid for more than 30 countries in sub-Saharan Africa. Concepción Calpe, a senior economist at the FAO in Rome, said a price surge might take place in the 2009-10 harvesting season, “unleashing even more severe food crises than those experienced recently”. Lower production and higher prices next year could add to developing countries’ problems in obtaining sufficient credit and foreign exchange to buy agricultural commodities.

“Export finance is becoming more difficult to obtain, with banks tightening up the conditions for issuance of letters of credit,” the FAO said. Thailand and Iran agreed last month to barter rice for oil, the clearest example yet of how the financial crisis, high fuel price and scarcity of food are reshaping global trade. In spite of the continuing fall in food prices, the world’s food imports’ bill is set to surge above $1,000bn (€785bn, £633bn) for the first time ever, up 23 per cent from last year and 64 per cent higher than in 2006, the FAO said.

Developing countries will spend $343bn this year on food imports, up a record 35 per cent from last year’s $254bn. Some poor countries, the organisation said, were curtailing food imports in an effort to lower their bills.

The New Trough

On October 13th, when the U.S. Treasury Department announced the team of "seasoned financial veterans" that will be handling the $700 billion bailout of Wall Street, one name jumped out: Reuben Jeffery III, who was initially tapped to serve as chief investment officer for the massive new program. On the surface, Jeffery looks like a classic Bush appointment. Like Treasury Secretary Henry Paulson, he's an alum of Goldman Sachs, having worked on Wall Street for 18 years. And as chairman of the Commodity Futures Trading Commission from 2005 to 2007, he proudly advocated "flexibility" in regulation — a laissez-faire approach that failed to rein in the high-risk trading at the heart of the meltdown.

Bankers watching bankers, regulators who don't believe in regulating — that's all standard fare for the Bush crew. What's most striking about Jeffery's résumé, however, is an item omitted when his new job was announced: He served as executive director of Paul Bremer's infamous Coalition Provisional Authority in Baghdad, during the early days of the Iraq War. Part of his job was to hire civilian staff, which made him an integral part of the partisan machine that filled the Green Zone with Young Republicans, investment bankers and Dick Cheney interns. Qualifications weren't a big issue back then, because the staff's main function was to hand over stacks of taxpayer money to private contractors, who were the ones actually running the occupation. It was this nonstop cash conveyor belt that earned the Green Zone a reputation, in the words of one CPA official, as "a free-fraud zone." During Senate hearings last year, when Jeffery was asked what he had learned from his experience at the CPA, he said he thought that contracts should be handed out with more "speed and flexibility" — the same philosophy he cited back when he was in charge of regulating Wall Street traders.

The Bush Administration has since reversed the Jeffery appointment, perhaps thinking better of giving a CPA alum such a central role in the Wall Street bailout. Still the original impulse underscores the many worrying parallels between the administration's approach to the financial crisis and its approach to the Iraq War. Under cover of an emergency, Treasury is rapidly turning into an economic Green Zone, overrun with private companies collecting lucrative contracts. Fittingly, one of the first to line up at the new trough was none other than the law firm of Bracewell & Giuliani — yes, that Giuliani. The firm's chairman, Patrick Oxford, could scarcely conceal his glee over the prospect of cashing in on the bailout. "This one," he told reporters, "is very, very big." At least four times bigger, in fact, than the post-9/11 homeland-security bubble, from which Giuliani and his various outfits have profited so extravagantly. Even bigger, potentially, than the price tag for the Iraq War itself.

In Iraq, the contractors were tasked with reconstructing the country from the mess made by U.S. missiles. After years of corruption born of no-bid contracts and paltry oversight, many Iraqis are still waiting for the lights to come back on. Today, a new team of contractors is lining up to reconstruct the U.S. economy — reconstruct it from the mess made by the very banks, brokers and law firms that are now applying for contracts. And it's not at all clear that America can survive their assistance. See if any of this sounds familiar: As soon as the bailout was announced, it became clear that Treasury officials would hire outsiders to perform their jobs for them — at a profit. Private companies wanting to help manage the bailout were given just two days to apply for massive, multiyear contracts. Since it was such a mad rush — after all, the entire economy was about to implode — there was no time for an open bidding process. Nor was there time to draft rigorous rules to make sure that those applying don't have serious conflicts of interest. Instead, applicants were asked to disclose their conflicts and to explain — and this is not a joke — their "philosophy in fulfilling your duty to the Treasury and the U.S. taxpayer in light of your proprietary interests and those of other clients." In other words, an open invitation to bullshit about how much they love their country and how they can be trusted to regulate themselves.

The first major contract to be awarded in the bailout was for legal advice — and the choice Treasury made was Halliburton-esque in its audacity. Six law firms were invited to bid, but four declined, either because they didn't want the contract or because they had too many conflicts of interest. Rep. Barney Frank, chairman of the House Financial Services Committee, said the fact that so many law firms chose not to bid "shows that the guidelines are sufficiently rigorous."

Or it may just show that the bidder who won the contract — Simpson Thacher & Bartlett — takes a more relaxed approach to conflicts than its colleagues. The law firm is a Wall Street heavy hitter, having brokered some of the biggest bank mergers in recent years. It also provided legal support to companies trading mortgage-backed securities — the "financial weapons of mass destruction," as Warren Buffett called them, that detonated the banking industry. More to the point, it was hired to provide legal services to the Treasury in its negotiations to spend $250 billion of the bailout money purchasing equity in America's banks. The first stage of the plan involves buying stakes in nine of the country's top banks. Incredibly, Simpson Thacher has represented seven of the nine: JPMorgan, Bank of New York Mellon, Bank of America, Citigroup, Morgan Stanley, Goldman Sachs and Merrill Lynch.

According to its contract, Simpson Thacher has agreed not to represent any of the banks "against the U.S." when they negotiate with Treasury for the equity money. However, the firm has retained the right to represent banks when they apply for other parts of the $700 billion bailout not covered by its contract. (It has promised to erect a "firewall" to stem the flow of "confidential information" to those clients.) The firm will also continue to work for the banks on a range of other lucrative deals — and that's where the problem lies. Take Lee Meyerson, Simpson Thacher's lead lawyer on the bailout negotiations, who is specifically named in the contract as "essential" to the project. As the company's hotshot attorney, Meyerson has personally represented three of the nine banks that were bailed out in the first round, in addition to many others that will surely apply for cash injections. One of the bailed-out banks is Bank of New York Mellon, whose $29 billion merger Meyerson helped negotiate. Mergers like that can bill in the millions. Is Simpson Thacher able to put aside its loyalties to its biggest clients and negotiate deals for the taxpayer that could exact real costs from those very clients?

It might be possible to set aside concerns about divided loyalties if it were clear that Simpson Thacher is helping Treasury to wrangle the best deals possible for U.S. taxpayers. But the firm's first test — the deal to give $125 billion to the nine big banks to ease the "credit crunch" that is crippling the economy — wasn't exactly reassuring. Secretary Paulson promised that the banks won't just "hoard" the money — they will quickly "deploy it" through the economy in the form of badly needed loans. There is just one hitch: Neither Paulson nor Simpson Thacher got that "deploy" part in writing — nor did they put in place any mechanism to require the banks to spend their taxpayer billions. Apparently, the part about lending the money to homeowners and small businesses was sort of implied. "There is no obligation for banks to lend the money one way or the other," Jennifer Zuccarelli, a Treasury spokeswoman, tells Rolling Stone. "But the banks have the understanding" that the money is intended for loans. "We're not looking to control their operations."

Unfortunately, many of the banks appear to have no intention of wasting the money on loans. "At least for the next quarter, it's just going to be a cushion," said John Thain, the chief executive of Merrill Lynch. Gary Crittenden, chief financial officer of Citigroup, had an even better idea: He hinted that his company would use its share of the cash — $25 billion — to buy up competitors and swell even bigger. The handout, he told analysts, "does present the possibility of taking advantage of opportunities that might otherwise be closed to us." And the folks at Morgan Stanley? They're planning to pay themselves $10.7 billion this year, much of it in bonuses — almost exactly the amount they are receiving in the first phase of the bailout. "You can imagine the devilish grins on the faces of Morgan Stanley employees," writes Bloomberg columnist Jonathan Weil. "Not only did we, the taxpayers, save their company...we funded their 2008 bonus pool."

It didn't have to be this way. Five days before Paulson struck his deal with the banks, British Prime Minister Gordon Brown negotiated a similar bailout — only he extracted meaningful guarantees for taxpayers: voting rights at the banks, seats on their boards, 12 percent in annual dividend payments to the government, a suspension of dividend payments to shareholders, restrictions on executive bonuses, and a legal requirement that the banks lend money to homeowners and small businesses. In sharp contrast, this is what U.S. taxpayers received: no controlling interest, no voting rights, no seats on the bank boards and just five percent in dividend payouts to the government, while shareholders continue to collect billions in dividends every quarter. What's more, golden parachutes and bonuses already promised by the banks will still be paid out to executives — all before taxpayers are paid back. No wonder it took just one hour for Paulson to convince all nine CEOs to accept his offer — less than seven minutes per bank. Not even the firms' own lawyers could have drafted a sweeter deal.

The day after it met with the nation's top banks, Treasury announced that it had selected the firm that would receive the juiciest contract of all: that of "master custodian." The winning company will be to the bailout what Halliburton is to the military: the contractor of contractors. It will purchase toxic debts from Wall Street, service them and auction them off in the future — a so-called "end-to-end process." The contract is for a minimum of three years. Seventy firms applied for the gig; the winner was Bank of New York Mellon. Describing the scope of the megacontract, bank president Gerald Hassell said, "It's the ultimate outsourcing — because the Federal Reserve and the Treasury do not have the mechanics to run the entire program, and we're essentially the general contractor across the entire program. It's going to cross our entire company."

This raises an interesting point: Has the Treasury partially nationalized the private banks, as we have been told? Or is it the other way around? Is it Treasury that has been partially privatized by Wall Street, its massive rescue plan now entirely in the hands of a private bank it is directly subsidizing? Shortly after receiving the contract, Hassell told investors that his institution is now well-positioned to profit from the market meltdown. "There's a lot of new business that's going on even in this chaotic marketplace," he said, "and so some of those things have been very positive to us." Just how positive, we don't know, because Treasury has blacked out the 10 lines of the "master custodian" contract that reveal how much Bank of New York Mellon will be paid. Though Treasury says it will release the information eventually, the secrecy goes beyond anything the Bush administration attempted in Iraq. Even Halliburton's dodgy contracts came with price tags attached.

Still, when the terms of the contract do become public, they may turn out to be surprisingly modest. Goldman Sachs has apparently offered to fulfill at least one bailout contract for free. Altruism may not be their only motivation. The real money at stake in the bailout lies not in payment for the work but in how the work is done. Think about it: If you're the one selling your debts to the government, wouldn't you also want to help decide which debts are eligible and how much they're worth? "The financial firms with assets to sell are in many instances the same firms the Treasury will rely on to value and manage the assets it is buying," The New York Times observed. "That is an invitation for these firms to set the price too high or to indulge in other mischief at the taxpayers' expense."

Bank of New York Mellon has a bad record for mischief. It is embroiled in a $22.5 billion money-laundering lawsuit in Moscow and has been forced to pay out a $14 million settlement in a related case. Though the bank's "master custodian" contract with Treasury prohibits unethical conduct, the arrangement seems rife with opportunities for abuse. According to its most recent earnings report, Bank of New York Mellon holds $1.2 billion in subprime mortgage securities. That means that in addition to the $3 billion it will receive as part of the equity program, it will also be eligible to apply for taxpayer money from the program it is being paid to administer. Neither the bank nor Treasury would comment on this direct conflict of interest.

On the same day that he allocated the first $125 billion to the banks, Secretary Paulson announced the largest federal budget deficit in U.S. history. Buried in his statement was a preview of the next phase of the financial disaster. The deficit numbers, he declared, reinforce the need to "pursue policies that promote economic growth and fiscal responsibility, and address entitlement reform." He was referring to Americans who feel entitled to receive Social Security in their old age and Medicaid when they are sick. Those programs, Paulson implied, might not be able to survive the budget crisis he is currently creating for the next administration. This is why the stakes of the bailout are so high: Unless we get a good deal, there will be nothing left over after the banks are done feeding to pay for the meager services now provided in exchange for taxation, let alone for the more ambitious initiatives promised on the campaign trail. The spiraling cost of saving Wall Street from its bad bets is already being used as an excuse for why we can't solve our many other crises, from health care to climate change.

There is a better way to fix a broken financial system. Treasury's plan to buy up the toxic debts never made sense and should be immediately scrapped — a move that would also handily get rid of most of the crony contractors. As for purchasing equity in banks, the next round of deals — and there will be more — has to start from the premise that the banks are bankrupt and will therefore accept whatever terms we choose to impose, including real regulatory oversight. The possibilities of what could be done if a chunk of the banking system were genuinely under public control — from a moratorium on home foreclosures to mandatory investment in green community redevelopment — are limitless. Because here is what George Bush and Henry Paulson are hoping we won't figure out: When a society no longer has enough money to pay for its most pressing needs, there are worse things than discovering you own the banks.


Anonymous said...

I've just watched an hour's discussion
Naomi Klein and Joseph Stiglitz on Economic Power

Excellent stuff. Why is it in this age of 'information technology' and 'knowledge economies' that nobody knows exactly who owns all the toxic debt?

Most everywhere in the world is mapped and documented, but strangely not the debt mountain,


Dan said...

How about that Obama press conference. I sure do feel better now! What a sham.

Anonymous said...

I have not finished reading but I wanted to say,"The capitalist system, (GM, FORD), is going to ask the Socialist structures to bail them out.
Shouldn't that job be for the Capitalist banks to lend them money?"

Bigelow said...

Any speculation on a surprise US currency devaluation?

Bigelow said...

I ment $ devaluation, with all the extra Treasuries they will be selling well into the future that is.

Anonymous said...


I understand your frustration but try to understand that converting a flying plane to a helicopter enroute is only doable if you're animating a feature for Pixar. It doesn't work in the real world. Politics is aptly defined as the art of the possible.

Bringing in the Monday morning quarterbacks and backseat drivers to "fix" the financial problem is scarier in prospect that letting the bums who broke it try to fix it. It's easy make catcalls from the sidelines but the fact is that Peter Schiff would be a nincumpoop when it comes to finding remedies. He only knows how to criticize, not fix. Same for Roubini. He's been accurate in his predictions but remember that accurate prediction is far easier that accurate prescription.

The world economic system is a tinker's construct - that's characteristic of all emergent properties. It's not going to be fixed because the underlying connectedness was never designed - it just happened. Individuals know the particular part of the elephant they lay hands on each day but no one knows the elephant.

So it's even worse than trying to convert a plane into a helicopter mid-flight. We don't even know what we are converting is a plane and we haven't the foggiest idea of what it should become (though I'm sure you'll disagree with that).

One thing is for sure. We don't understand how money works.

You say we should let GM, Chrysler and Ford fail because the world is awash with car production. This is short-sighted. Perhaps they should be making something other than cars and trucks. It would be a tragic waste of capital to throw all the investment in factories, automated equipment and manufacturing staff into the trash. The consequences to the economy would be terrifying.

I'm fairly convinced that this moment is comparable to the minutes following the attack on the World Trade Towers when they remained standing in disfigured grandeur. We are not prepared for what is to come in the next year as the unplanned, undesigned economic system suffers from a collapse of human faith - the equivalent of those steel girders being softened by the hidden flames within.

Obama is not just about change. Obama is about power - he is the consummate politician. I am happy he was elected over the alternative and I think he'll be one of the best presidents we can expect. But let's not pretend that he's Jesus Christ incarnate. OK? What I hope is that he retains a cool and considered control over those he appoints. What you are overlooking is that he needs an insider's view if he is to form an opinion of what needs to be done. I have a high regard for Obama's intellect. If he appoints Larry for SOT I don't think he'll blindly follow Summer's advice.

Obama has a good brain and he appears to be picking people who will be able to get things done. To dump on Emanuel because he has associations with Freddie Mac seems petty to me. He's being chosen as Chief of Staff, not Secretary of Treasury.

Your advice would be to pull a Jimmy Carter and end up in an alienated and powerless executive branch.

Pull up a chair and let's watch this black guy work. I think we may be in for a few pleasant surprises. He's nothing if not an intelligent pragmatist.

Ilargi said...

Yes, anon e723567e952175267952167

It all sounds so reasonable, don't it?

Until you realize that there is no time to sit back, that Obama has listened to the likes of Buffett and Rubin for a long time now already, that there is not one dissenting voice in that group, that it's more foolish than is good for you to think that Wall Street insiders will dump their own golf buddies, that a fair amount of them should be dragged before a judge, if you respect the law, that it's cheap, dumb and easy to call Roubini a backseat driver, that the world economy didn't 'just happen', it was very much constructed, that some of us do indeed understand how money works, that saying at this moment in time that the Detroit Three should do "something else" sounds hollow as a barrel to the point of being a religious creed, that keeping them alive making stuff no-one wants is a truly tragic waste of capital, that it is fully true that we are not prepared, that Obama doesn't do anything substantial to change that, but instead continues on the same old stale wrong fork in the road, that Emanuel is a right wing deal maker no different from what is in the White House now, and finally, once again, that there is no time to wait for Obama to wake up. Millions of people are being kicked out of their homes, and millions more out of their jobs. If a president elect has no plan to deal with that, and Obama very obviously does not, he will hinder, not help, in finding the way out. Obama is just another guy who will tell you about all the things that could not have been foreseen, just like all the Wall Street brass. And who keeps the ones who did foresee it, and there's many of them, away from the table. You are the back seat driver here.

Anonymous said...

Ron Paul Warns Of Great Shift Toward Global Government Under Obama

Cyndy said...

I look forward to your commentary everyday, knowing you are spot on. Since the election I find myself not wanting to know what you're saying, preferring to bask just a bit in the relief of 'change'.

I too WANT to think, as anonymous has written, that Obama's choices are because of the expediency of familiarity.
Anonymous' metaphor of the plane is good.
I think Obama is capable of evaluating all input and coming away with a mindful decision, but I worry if surrounding himself too much with the old players will taint his intuitive and intellectual process.

The main reason I am commenting is to respond to what the automakers SHOULD be doing. Quite simply they need to be gearing up for rail.
The leap from cars and trucks to rail cannot be that damn difficult. Either tool up for railcars of go under.

Anonymous said...

He's a Lumberjack and he's OK....

Ilargi said...

"Ron Paul Warns Of Great Shift"

While I see Paul primarily as an old douche, and Jones as not really worthy of comment, I do agree that Obama's membership in the Council on Foreign Relations, and his connection with Brzezinski, are deeply troubling.

Ilargi said...


"Quite simply they need to be gearing up for rail. The leap from cars and trucks to rail cannot be that damn difficult. Either tool up for railcars or go under."

There is no money for such projects. AIG needs it all. And Citigroup'll soon come begging. And Ambac, and Ford, and Goldman, and all of their friends. They will get access to lots of your money, just look at Obama's team of experts.

The state of the economy is far worse than people realize. The US manufacturing sector has been written off as a going concern. What do you think comes after that? This economy cannot be revived, and that's why nobody's even trying. It's all liquidation from here on in.

Anonymous said...

Head up for from now til the end of the year. Hedge Funds are facing a run in terms of redemptions. What this means is a massive liquidation of assets including equities to cover redemptions. It's going to result in many suspending/freezing redemptions and the rest engaging in a fire sale to meet redemptions. We are talking UGLY.


Anonymous said...

Cindy, if they were to produce railcars the could immediately get rid of 80-90% of their employees (and suppliers). Cars have gotten incredibly complex - therefore the customers had to get lured into buying, errr financing them. We are so stuck in preserving the old, US is bailing out their manufacturers, Europe is bailing out theirs - who shall be buying that crap. Given the 12 year average life expectancy of the cars built now, they will be the ones to run out of gas. We need breathing space but govts seem to be destined to fail by converting into a socialist / facist system. The lack of dictatorial history in the US was exploited in the last years to hollow democratic institutions out and it will be very difficult to turn things around again. No easy solutions here, venturing into the unknown, burdened with debt.

Anonymous said...

I always feared that somehow they would find a way to cheat their way our of this "grand reconciliation" that we have entered.

It seems that is what everyone wants. Just somehow to stop the process, stop the purge that needs to happen to return to a state of economic health.

Now I know we have passed the event horizon and NOTHING can stop the meltdown.

So what does it matter who Obama picks as his economic team.

They could have God on their team and it wouldn't make a bit of difference.

We need to focus on abating the coming suffering.

Obama's Idea of a new New Deal has promise.

We can't avoid suffering, but we can ameliorate it.

Anonymous said...

"When I see that 70% of California’s black citizens, as they were being liberated through the election of a fellow black man to the highest post in the land, simultaneously voted to lock another minority group, gays and lesbians, in the shackles of apartheid, I'm torn between utter disbelief and a strong urge to vomit. What is it that you don't get?"


Ilargi, you're either drinking too much or not drinking enough. I don't know which, but its got to be one or the other. I think I recognize hyperbole when I read it, but that is really over the top even for hyperbole! I guess in Britain they would call it a real howler!

To start with...I don't get how the election of Obama liberates
blacks in California or anywhere else. I guess my perspective is vastly different than yours. The blacks I know think they were liberated long ago and would be happy to tell you! And, a few from the gym where I still work out would probably be happy to punch you or anyone else right in the mouth if you dared to tell them that they needed to be liberated...and only now have they been! Well, who you ask, do they say liberated them? -- the old folks will still mention Lincoln (I kid you not) and 100% of the old and young will cite Dr. King. (And, of course, that's not to say they aren't overwhelmed with joy, at least at the moment, with Obama's election...but they know he didn't liberate any one of them.)

I was born in the deep south and have lived here for most of my life so my perspective is obviously different than someone that hasn't got that background. My county and the surrounding counties are probably 40 percent black on average...and some much more than that. I've gone to school with blacks, played ball with and against blacks, and worked for and with blacks for over 40 years. (BTW, they still mostly refer to themselves as blacks rather than as Afican-Americans.) So, FWIW, my comments above are based on my direct experience.

Now, as far as gays living "in the shackles of apartheid"'ve got to be kidding me...or is that just straight Canadian Club talking?! Somehow you've managed to insult black South Africans and gay Americans in the same sentence! I obviously don't know the gay folks you do and you probably know more of them than I do, just like I probably know more black folks than you do.... but, I'd really like you tell the gay couple that live next door to my parents that they are living "in the shackles of apartheid"! That would be something to see! They're very polite, but I do believe they wouldn't be able to keep from laughing right in your face!

Just my .02


Ilargi said...

GSJ, this whole hyperbole thing you try to bring up is but a bubble, of course, and has nothing to do with how many gays or blacks or black gays you think you know.

Yes, there are many black people who have grown up with the notion that they could never be the president, as there are gays who never thought they''d be allowed to openly simply be what they are.

"I don't get how the election of Obama liberates
blacks in California or anywhere else."

That's too bad. Look around you.

"as far as gays living "in the shackles of apartheid"'ve got to be kidding me."

And again, look.

Your reaction is way more hyper over the top bolic than what I wrote.

Until everybody's free, nobody is.

For those of us who are neither gay nor black, it takes an effort to understand that.

Anonymous said...

Ilargi said...

The state of the economy is far worse than people realize. The US manufacturing sector has been written off as a going concern. What do you think comes after that? This economy cannot be revived, and that's why nobody's even trying. It's all liquidation from here on in.

I was curious on where you got your numbers/calculations on the 90% drop in housing prices?


Anonymous said...

"When I see that 70% of California’s black citizens, as they were being liberated through the election of a fellow black man to the highest post in the land, simultaneously voted to lock another minority group, gays and lesbians, in the shackles of apartheid, I'm torn between utter disbelief and a strong urge to vomit. What is it that you don't get?"

I'll turn that question around - what is it you don't get, Ilargi?

It is clear from your writing that you grasp concepts, and see the associated problems very easily. Intuitively so I think. What you miss however is that ability is very VERY rare. I suspect that while, given the subject and perspective, there are likely other commenters around here that have similar ability, when talking or interacting with society in general (and very much including those in power) for all intents are purposes, you may as well be unique.

And therein lies the rub. Others do NOT get it. They don't see the contractions, the flaws and the suffering. People are simply not aware of the bigger picture, unable to to comprehend, let alone begin to manage it (and that frustrates you immensely). To borrow the old parable: give a man a fish and you feed him for a day, teach a man to fish, and you feed him for a lifetime. The problem is that he doesn't want to learn. Or more accurately, isn't aware that it is even possible! And you can't teach someone like that by pointing out reality all the time, they will at best simply ignore you, and at worst attempt to kill you. You teach by gentle prodding, the occasional helping hand, and very often by pointing out the 'least worst' option simply because the best option is beyond unacceptable, it is unthinkable (often quite literally).

Now, if Obama understands this (even intuitively) then you certainly won't see radical changes, no matter how badly they are needed. And any improvements will likely only be obvious in hindsight, if at all, because the least worst is difficult to separate from the worst even it is of relative benefit for many, many people.

Anonymous said...

Ilargi - You are one guilt-ridden individual! Put down the bottle -- it'll kill you way before the economy does.


Ilargi said...

"Ilargi - You are one guilt-ridden individual!"

Ehh, thanks for letting me know. I had no idea.

And I'm sure someone in due time will let me know what it is I'm guilty of.

Unknown said...

Ilargi, maybe I can distract you from the douchebags.

Do you have any insight into Canada lagging behind other western countries in the debt crisis? I don't buy that we are somehow special, we have the same fundamental banking system as everyone else, but we're clearly lagging... negative symptoms have begun to appear and I can see us just starting to tilt over the cliff, but I was wondering if you can put your finger on the reason behind our lag.

Stoneleigh said...


The commodity boom kept us going for a long time.

EBrown said...

My understanding of S and I's prediction of a 90% decline in house prices is a ballpark figure. Some areas will hold up a bit better, dropping "only" 75% or 80% from peak while others will fare worse, i.e. 95-100%. There are some developments in CA that I believe will soon be in the latter catagory. They are so dependent on distant sources of energy and water to remain habitable that in the coming crunch years they will be not only worth less but totally worthless.

One need only look at the parts of the US that are at the leading edge of the currently economic turmoil. There are houses in parts of Michigan around Detroit that have already lost 90+% of their value because the jobs are gone and not coming back. Since most people's purchasing power is dependent on their access to credit, especially for big ticket items like houses, a reduction in credit equals a reduction in the pool of potential buyers and ultimately a reduction in the prices paid for houses.

We are going to continue to see rising unemployment in the coming years and this will undercut the value of houses dramatically. Japan's housing units fell in value from 1990 to 2006, during a period of relative global economic strength. I don't have current numbers but I bet they're declining again now... Unemployment is set to go through the roof. I bet there are some markets that will not see such huge drops in prices. The town I live in now never saw the run-up in prices that so much of the rest of the nation experienced over the last decade (upstate NY). There are few jobs left, and those that are here don't pay particularly well. I wouldn't be surprise if house prices here fall 50-75%. On a $50,000 dollar house that's a big percentage, but not a big gross amount.

Anonymous said...

"And I'm sure someone in due time will let me know what it is I'm guilty of."


They'll tell you in your next anger-management class. You've missed a few I suspect.


Anonymous said...

Mr> Schiff's new entry...
The Reagan Counterrevolution

Anonymous said...


on Wednesday morning you stated:
"It is beginning to look, on the balance of probability, like we may not see the fall to new lows that I would have expected this year prior to a substantial counter-trend rally. In other words, a lasting rally may have begun in October, and could last into the first quarter of next year. This would be an ideal time to take advantage of higher prices to position for the next leg down (ie to cash out).

(This could still be a smaller scale rally, with new lows ahead sooner rather than later, and a larger rally in the new year, but that possibility is now less likely. In either case, prices are presently favourable for cashing out, and trying to chase upside momentum too far is a dangerous game.)"

after the hard fall in the last two days, what's your take on the over all picture now?


Anonymous said...

Bobe said ...

Thank you for the link to "Naomi Klein and Joseph Stiglitz on Economic Power."



Anonymous said...

For all the Americans who've been neglecting their daily dose of understanding here at AE, NPR spelled it out in excruciating detail in a very good explanation on All Things Considered today(especially the connection between bonds, municipalities, and foreign banks)-of course, I&S, Supkis, and others were raising the call long ago. While listening to the piece, I was imagining the looks of astonishment on so many faces as the realization dawned as to how @#*&%ed we are...check it out at

Unknown said...


V22 Osprey

Which in fact transitions from vertical to horizontal flight.

Anonymous said...

I have said it many times before and I will say it again here, that within 2 years, new north american money, new tax code, but this will come at a great price because obamaman is relying on old conservative financial viewpoints which will not work....consequently, a more protracted deflation....

Anonymous said...

Would you please comment on the future of our military, bases, etc. and also national defense against terrorism, etc?

knutty knitter said...

We're stuffed! The stupid public thought we needed a change so they all voted for a right wing ex investment banker! I hate media owned by idiot corporations.

I'm starting to think that perhaps humanity should be made extinct by mother nature. We certainly haven't improved the planet in any way.

The only consolation is that the greens gained a couple of extra seats so they are now the third biggest party out there.

viv in nz

el gallinazo said...

From the NY Times today:

"That discouraged attitude has prompted many investors to simply take their money out of stocks and hold off placing bets until the waters have calmed. The result is a market with fewer players — trading volume on the New York Stock Exchange on Friday was unusually low — which means a handful of big moves can sway the overall direction of stocks."

Now, as I understand it, barring IPO's which are in very short supply right now, and bankruptcies - not as short supply - for every stock that is sold - that stock is also bought. If that is true, then this statement would be complete idiocy. Are we being taken for idiots by the Gray Lady?

Anonymous said...

EBrown said...

" Greg,
My understanding of S and I's prediction of a 90% decline in house prices is a ballpark figure. Some areas will hold up a bit better, dropping "only" 75% or 80% from peak while others will fare worse, i.e. 95-100%. There are some developments in CA that I believe will soon be in the latter catagory. They are so dependent on distant sources of energy and water to remain habitable that in the coming crunch years they will be not only worth less but totally worthless. "

True, I do not see land prices dropping much yet. The demand has dropped off but people still want too much for it. I wold guess land would hold up since one can farm it and produce an income however small it may be. Land prices around were I live near DC have not gone down. I guess give it time...

bluebird said...

Peter, I found the NPR link over at the PlanetMoney blog as a 21 minute audio comprising the 3 segments that were heard on the program 'All Things Considered'. Very Interesting!

Check the November PlanetMoney blog for additional audio on the Wisconsin school district

and hear audio from the October link for more finance issues

Anonymous said...

Ilargi wrote:

While I see Paul primarily as an old douche, (...) I do agree that Obama's membership in the Council on Foreign Relations, and his connection with Brzezinski, are deeply troubling.

Not nice about Dr. Paul. But I'm puzzled--you don't see the CFR as the American vehicle for conveyance to a global currency and non-representative regulatory body (ie. world government)?

Did you not see this article from Foreign Affairs, May 2007?

"Global financial instability has sparked a surge in "monetary nationalism" -- the idea that countries must make and control their own currencies. But globalization and monetary nationalism are a dangerous combination, a cause of financial crises and geopolitical tension. The world needs to abandon unwanted currencies, replacing them with dollars, euros, and multinational currencies as yet unborn."

As yet unborn...almost Yeatsian, rough beasts slouching, and all that.

Frankly (odd word, that), I think this whole crisis has been engineered to push us towards a non-representative global governance authority. And Obama is the puppet chosen by the grey eminences to be their noble factotum.

No simple fool could have strung up as many disasters as the Bushites have. That, too, was engineered. Bankrupting the economies, destroying the currencies, traducing the ancient rights in both England and the U.S.--all intelligently designed to achieve a crisis situation.
Go back and read Chris Floyd, Pilger, Silber, Greenwald, etc. for the past 6 years--every day a new litany of madness. It was indeed Raimondo's Bizarro world, but it was all scripted, just like the comic book. Nothing left to chance.

And now, like a Phoenix from the ashes of Western civilization, the goals of Cecil Rhodes and Milner and Rockefeller and Col. House and all the rest will be realized.

I'm reading Nicholas Baker's 'Human Smoke: The Beginnings of WWII, the End of Civilization' The subtitle says it all. 60 years after those luciferic (light bringer, eh?) flashes over Alamagordo and Hiroshima and Nagasaki, we have the denouement.

Anonymous said...

Sorry, URL for the Foreign Affairs article on the End of National Currencies got swallowed. Try this

Anonymous said...

NPR Saturday morning. Some WSJ economist said we've gotta save the auto industry, and he's psyched about the coming stimulus package. Utterly astounding. Who are these economists?? Did they all stay at a fucking Holiday Inn Express or someting?

Bigelow said...

“Please tell me you see Obama immediately coming to a number of realizations about our global situation and he, having been imbued with a truly humanitarian spirit and superior intellect will thus choose, against all odds, to steer the nation in manner as libertarian, constitutional and compassionate as possible. Even if that means defying the controllers of the Fed, Zbig, Zbig’s sons, the Trilaterals and whoever else.

Because this requires me to believe that these people who move smoothly between academia, politics and business and who have spent more money on luxuries than I’ll ever see in my life, are now resigned to give up the controls on the machine.

I hope this is what you’re looking ahead to because it cannot be that you’ve missed the facts of Obama’s campaign being managed for several years, funded by the global elite and suspiciously anti-Bush just when that’s exactly what we needed. What the left needed to get back on the boat, so to speak.

This requires me to accept that the same brand of men who manufactured the Fed and bombed millions of human beings in the name of empire and progress are now okay with turning things over to the “barbarian hordes” who they so loathed for so long such that they risked everything in their silent coups.”

Bigelow said...

“Obama's first moves as president-elect have underscored some basic political facts. First, there is a fundamental contradiction between the hopes and aspirations of the vast majority of people who voted for him out of anger and disgust with the Bush administration and the Republicans, and the class character of the Democratic Party and the social and economic interests it defends.

Second, these moves underscore the cynical and fundamentally anti-democratic character of the electoral process itself, in which promises are made by candidates who know full well that, once in office, their polices will be determined not by election promises but by the demands of the ruling elite and the exigencies of American imperialism.”
Obama's Change Leaves By The Back Door

Anonymous said...

Top 50 CDS holders by gross notional total, 10/31/2008


Anonymous said...

Regulators Seize Bank Founded by Mortgage-Backed Securities Pioneer

"Federal regulators last night seized a Texas bank founded by Lewis Ranieri, a Wall Street legend who grew rich in the 1980s as the pioneering salesman of a new investment product called the mortgage-backed security.

Franklin Bank, based in Houston, described Ranieri in a securities filing last year as "the father of the securitized mortgage market."