Wednesday, December 24, 2008

Debt Rattle, Christmas Eve 2008: Time Is The Fire in Which We Burn

Detroit Publishing Co. Lighthouse 1910
Annisquam Light. Gloucester, Massachusetts

Ilargi: As Chris Hedges cites Joseph Conrad’s "Man is a cruel animal", and the New York Times science section talks about man's elevated propensity for deceit, protests around the world increase exponentially, and wounded economies limp into Christmas. Despite attempts by pundits to point out that Chrismas shopping isn't all that bad in the US, it's not very difficult to see what's coming in 2009. While I admit that even I am surprised to see that already the US economy is forecast to shrink by 6% (!) in this, the fourth, quarter of 2008, I don't see why a crystal ball would be needed going into the new year.

Nobody can predict the future, is a popular line these days. I beg to differ; I have predicted it for a long time. Economies around the world will continue to tank, and at far higher speed and intensity than this year. Mass unemployment will spread everywhere. Retail stores and factories in every community will close their doors. For good. And only those communities that have anticipated the downfall, and have contingency plans either on the shelf or, preferably, already in action, may hope to be spared the worst. Very few, if any, have. There will be too many destitute, angry, helpless and hopeless people in all of our nations. And they will not go quiet into the night, not all of them. It's a sad vision, I know, on Christmas Eve, but, much as I try, I can't find another one, even if I try with all my might to appeal to my own propensity for deceit.

In that vein, today’s guest intro is another one by Dan at AshizAshiz . I don't have to add a word to it. Well, other than to wish you all peace, peace and peace. If even just to know in the future that we’ve once had peace. Is it wrong to ponder the price we've paid for it?

PS: The Automatic Earth will continue to publish every day into the new year. I was thinking earlier that the Federal Reserve was founded stealthily during a Christmas recess 95 years ago. I plan to stay awake and alert this time.

Dan W: Recently Karl Deninnger has been screaming for direct action in the streets of Washington D.C. He is understandably livid about the fraud and lying and theft that exist at the very heart and soul of our current financial crisis. He is apoplectic about the fact that scoundrels like Paulson and Bernanke and Kashkari are spending the taxpayers’ money and giving it away to who-knows-who, and that the banks and financial institutions who are receiving these ill-gotten gains are keeping everything a secret and hiding trillions of dollars in toxic assets from us, and that the FED is simply laughing at us as we hem and haw about how angry we are. And I could not agree with Denninger more. I too am beside myself. There are times when I become so enraged at how rotten these folks are that I have to take a break from my readings and studies and take a deep breath, throw back a big cup of Joe, and gobble down a few pieces of chocolate.

But as angry as I am, I need to point out that Karl Denninger’s calls for thousands of angry people to hit the streets in protest is not, at this juncture, a reasonable expectation. And I’m not talking about apathy here. There is no reason for people---other than a cadre of intellectuals and a few 401K losers---to take to the streets because there is little to no real suffering yet. Now would I be surprised if I read tomorrow that 2000 people had protested in front of the Capitol building in an effort to stop Barney Frank and his legion of idiots from giving Heinrich Paulson the “other” 350 Billion dollars of the TARP? No, I wouldn’t. Would I be surprised if 50 of them were arrested for blocking the doors, or sitting in the streets and chanting silly slogans like “hell no, we won’t go” until the cops came and carted them off to jail for a couple of hours. Nope, it wouldn’t surprise me in the least. I’ve been there. I’ve been to jail for anti-Apartheid protests and anti-war protests. A few hours in jail, maybe overnight, that’s all. And these actions may have felt like a big deal at the time, but it is important to note that I wasn’t suffering. I wasn’t a Black man living in South Africa. I wasn’t a soldier fighting in the war. I was an angry kid fighting for ideas in which I believed, but I wasn’t hungry or homeless or cold or unemployed or unable to feed my children.

Here’s my point: It is real suffering that precipitates civil unrest of a violent, widespread and chaotic nature. When the unemployment rate hits 20% in cities like New York and Houston and LA by the winter of 2010, and when the United States of America experiences its first cholera outbreak in over a century because the water supply in a major urban area becomes contaminated with raw sewage, and when there simply isn’t enough food to go around, and when homeless children begin dying in their parents’ arms---then and only then will Denninger see the streets of Washington D.C. running red with blood.

Take a close look at American history, at the past 150 years, give or take a decade or two, when have we witnessed the most virulent and radical moments of civil unrest. The Vietnam War? Not really. I mean the National Student Strike was pretty dramatic, as was Kent State, but the anti-war movement was not a movement of hungry, poor, homeless, cold, unemployed people. It was predominantly a movement of smart, angry students who were dovetailing on the civil rights movement and the free speech movement and who had become relatively radicalized though emulating the actions of such groups as The Black Panther Party.

And what about the aforementioned Civil Rights Movement? Certainly the racist reaction against the civil rights protesters was violent, and yes there was rioting and civil unrest, but again this was a movement based to a great extent upon an idea---in this case the idea of freedom and equality---and not as much upon mass suffering. Yes, I am willing to admit that toiling under a racist regime is a form of suffering, and it is powerful, but it is still different from the physical, visceral suffering caused by hunger. And so I would posit that movements based upon ideas, while at times quite volatile, are simply not the same as actions taken by people who have nothing left to lose. The actions of those who are losing their homes, losing their jobs, losing their farms, losing their food---these are the actions of men and women whose reaction is based upon a direct threat to their actual survival. And the objects of their wrath are the people who both symbolize and represent their suffering. A couple of examples:

The anti-Renter movement of the 1830s and 1840s in upstate New York was a response to both the mass unemployment that followed the economic Panic of 1837 and the manorial system that existed in this part of US during this era. A few families owned virtually all of the land upon which the tenant farmers lived and worked. When money was tight the landlords could raise rents with impunity: that is until the renters began organizing and eventually battling against the landlord’s agents in a guerilla style “war” that lasted near a decade. The Baltimore Riots of 1835---which ignited in response to a bank collapse and a loss by depositors of all of their savings---saw the attacks upon and burnings of the homes of bank officials as well as of the mayor of the city. Battles in the streets with the police lasted for days. Now some might argue that this situation is absolutely synonymous with today’s financial collapse: but remember, in 1835 money had yet to become a digitized commodity. Additionally, this was a pre-insurance, pre-market diversified monetary environment. When the bank collapsed, that was that. And the folks who lost their money knew from bitter experience that soon enough they would be hungry and homeless. Not so today. While homelessness and poverty are sure to explode during the next few years, at this point there is still food to be had, social services to be tapped, shelters to be filled. You and I are not hungry….yet.

And there were more: The Flour Riots of 1837, The Unemployment Riots of 1857, The Labor Riots of 1863, The Railroad Strikes and Riots of 1877, etc.

I hope my point is clear: Civil unrest in the United States will occur again when people who are not accustomed to being homeless, hungry, unemployed and cold find themselves so. And this time it’s going to be far worse than it was 175 years ago, because we’re talking a helluva lot more people than we were in the mid-19th century, and we’re talking a society that has come to rely upon grocery stores and fast food restaurants and electric blankets rather than upon farming and milling and hunting and curing and chopping and building. And lest we forget: this is the Internet age, the YouTube society. One outburst of anger, one battle in the streets, one case of police brutality, and the whole thing blows. And when the shit hits the fan this time, it’s going to bring our federal government to the brink of collapse and failure. Because the government simply is not going to have either the money or the resources to house and feed 25 million hungry, homeless, unemployed people.

And so of course George Bush sent the “Big 3” 20 Billion Dollars! It’s not that he gives a shit about the workers. It’s also arguable that he is not spending the money to preserve at least a small portion of his legacy from riding the Stygian ferry into the fires of hell. No, he’s spending the money because he doesn’t want to have to respond to mass civil unrest as his presidency comes to an unceremonious close. He doesn’t want to be the last President of the United States Republic!! And that’s why Paulson and his band of merry scumbags are throwing money at anything they can throw money at. It’s not simply because Paulson wants to send his cronies off in style: that argument, while partially true, is over-determined. The reason for the trillions and trillions being tossed hither and thither like beads at a Mardi Gras parade is because these guys really are scared that the rioters and looters could actually come to a city---and neighborhood---near theirs.

And the thing is folks, it IS going to happen. It’s not an “if”, it’s a “when”. There is of course no way to avoid the poverty and hunger and homelessness and mass unemployment that are going to hit the United States like a tsunami. The derivatives Ponzi scammers and the Madoff’s and the fraudulent lenders and the fraudulent mortgage companies and the fraudulent ratings agencies and the fraudulent accountants---all of these folks and more have created a situation in which the quadrillion dollar debt dam must eventually burst. And Paulson and his cronies are desperately trying to kick the can down the road, and Obama and his Keynesian cronies will kick the can further with their trillion dollar stimulus packages and tra la la la, but at some point the can is going fall into the sea. No more kicking. The gig will be up. And that’s when Karl Denninger can sit back and watch Washington and New York burn to the ground.

US consumers fall deeper into debt
U.S. consumers are falling deeper into debt, an official at one of the largest U.S. credit bureaus told Reuters on Tuesday, as the U.S. recession deepens and job losses mount. Dann Adams, president of U.S. Information Systems for Equifax Inc, said the already high rate of personal bankruptcies could increase. "We've seen a continued ramp up of delinquencies across the board," he said. That would pile more bad debt on banks already struggling to cope with heavy mortgage-related losses. Consumers are missing payments on mortgages, credit cards, and auto loans, Adams said, adding that Americans may be growing more reluctant to take on new debt and more willing to save.

Economists have long warned that U.S. households were taking on unsustainable levels of debt, pushing the savings rate near zero. But although increasing savings and reducing debt can contribute to consumers' financial health, if Americans further tighten their purse strings now it could worsen the recession. What happens in this type of economy is that consumers and businesses get caught up in a vicious circle, where they fall behind on payments, banks clamp down on credit, and the economy deteriorates further. Unemployment reached 6.7 percent in November, its highest since 1993. Economists think it will peak above 8 percent.

A government report on Tuesday said the U.S. economy as measured by gross domestic product contracted at a 0.5 percent annual rate in the third quarter. The U.S. Commerce Department, in its final revision, said the decline in the third quarter versus the previous three months was the steepest since the third quarter of 2001, after the September 11 attacks on the United States. U.S. consumer spending shrank by 3.8 percent for the sharpest pull-back since 1980, when a global oil crisis tipped the economy into a prolonged slowdown. And existing home sales fell by a record amount last month. Conditions in the United States are expected to get much worse, with forecasts that the economy will shrink by as much as 6 percent in the fourth quarter and keep declining for the next six months.

Total personal bankruptcy filings in the United States rose to 131,672 in November, up 37 percent from a year earlier. Over a third, 36.6 percent, of subprime homeowners were 30 or more days behind on their home loans in November, according to Equifax data. More than 12 percent of subprime holders of bank-issued credit cards were at least 60 days behind, up 0.43 percentage points from October. And 3.9 percent of subprime borrowers of auto loans from car companies were 60 days behind on the loans, up 0.05 percentage points. The data shows that less risky borrowers with higher credit scores are also falling behind on their payments, but at lower rates. Among all holders of primary mortgages, 5.8 percent were at least 30 days late. That is a lower rate of delinquency than among subprime holders, but still more than a year ago, when a little less than 4 percent of all primary mortgage holders were late by 30 days or more.

At the height of the housing boom in 2005, U.S. homeowners sucked $800 billion in equity out of their homes to refinance their debt and keep spending, Adams said. For 2008, Equifax projects that number will fall to $35 billion. The amount of money owed on bank-issued credit cards also fell slightly in November to $834 billion, a 0.21 percentage decrease from October, according to Equifax. And the number of open bank-issued credit cards declined in November to 424.1 million, down 1.2 percent from October. Credit limits decreased 1.4 percent to $3.507 trillion. Adams said another stimulus package and low mortgage rates could help U.S. consumers to decrease their debt.

US slides deeper into recession
The United States has fallen deeper into recession, data showed on Wednesday, with the number of people filing unemployment claims reaching a 26-year high and consumers cutting spending for the fifth successive month. Governments across the world have tried to boost expenditure to ease a recession ushered in by a credit crisis in the United States, with Japan and Germany becoming the two latest countries to unveil new spending programmes. Japan's government approved an 88.5 trillion yen (£666.6 billion) budget, its biggest-ever, to cover a 12 trillion yen fiscal stimulus programme and Germany pegged its second spending package at 25 billion euros (£23.8 billion). But some economists have said increased spending so far has failed to boost confidence among consumers, markets and investors.

In the United States, consumers cut spending for a fifth successive month during November and their incomes shrank, according to a Commerce Department report that pointed to deepening recessionary pressures. It said spending contracted by 0.6 percent after falling even more steeply by 1 percent in October. Incomes contracted by 0.2 percent after a slight 0.1 percent gain in October. New U.S. orders for long-lasting manufactured goods fell 1 percent in November, a less severe drop than anticipated. The number of U.S. workers filing new claims for jobless benefits jumped by 30,000 to a 26-year peak last week. Initial claims for state unemployment insurance benefits rose to a seasonally adjusted 586,000 in the week to December 20 from a revised 556,000 the prior week, the Labour Department said.

Across the United States almost 2 million workers have lost jobs this year, driving the unemployment rate to 6.7 percent. Many leading companies are struggling to find ways to keep their businesses afloat, cutting jobs, work days or reducing benefits to counter weakening demand. But for others, the crisis has become too powerful. Zavvi, the CDs, DVDs, gaming and books retailer, became the third British high street victim of the crisis in less than 24 hours. Administrators Ernst & Young said they intended to trade the 114-store Zavvi UK with a view to selling all or part of the business as a going concern. Shares in Europe weakened, with a weaker crude price hitting energy companies. U.S. stocks were headed for a flat open.

Under pressure to do more to boost the economy, Germany, Europe's biggest economy, plans to limit to 25 billion euros its second package of stimulus measures, a regional politician said. The programme's scope is less than the 40 billion euros previously reported for new projects. The move is unlikely to ease pressure on Chancellor Angela Merkel who has been attacked by politicians and economists over the 31 billion euros-worth of measures already pushed through. Further east, countries have also sought to stave off recession by cutting interest rates and spending their way out of trouble.

Poland's central bank said it was likely to cut rates further in 2009 because economic growth could be more than halved. In Russia, a central bank source confirmed the rouble had been devalued for the seventh time in a month and a deputy interior minister said the country faced an increasing number of unrest due to crisis measures. "The situation may be exacerbated by a growth in protests, arising from the frustration of workers over the non-payment of wages or those threatened with dismissal," RIA news agency quoted Deputy Minister Mikhail Sukhodolsky as saying.

Ukrainian Prime Minister Yulia Tymoshenko said the 2008 budget deficit may go uncovered due to a lack of funds. "The central bank has refused to refinance banks which had agreed to provide credits for the planned state budget deficit by the end of the year," she told a news conference. Japanese Prime Minister Taro Aso told a news conference: "Japan cannot avoid the tsunami of the world recession, but it can try to find a way out." "The world economy is in a once-in-a-hundred-years recession. We need extraordinary measures to deal with an extraordinary situation," he said

Dollar slips on fears for US growth
The dollar sold off on Wednesday on fears that data due for release later in the US session will suggest that the world’s biggest economy is heading into a prolonged recession. Data on durable goods orders and inflation are due for release at 1330 GMT, but by that time, there will be few traders outside of the US left at their desks as offices close early for the Christmas holiday. ”Parts of Europe have already closed and with others only open for the morning session, there’s little reason to believe that what could be considered rational thinking will return any time soon,” said James Hughes at CMC Markets. ”It may well be a case of waiting until next week before the full impact of today’s data can be taken into account,” he added.

But investors were fearing the worst after Tuesday’s weak numbers on US economic growth, housing and personal consumption. The US economy contracted by 0.5 per cent in the third quarter, while signs of slowing consumer confidence and weak home sales indicated activity could shrink further in the fourth quarter. Against the euro, the dollar fell 0.4 per cent to $1.3991 and was fractionally lower against the pound at $1.4733. The dollar fell 0.6 per cent against the Japanese yen to Y90.38 as investors pushed cash into safe havens ahead of the Christmas holiday. The yen was down 0.3 per cent against the euro to Y126.39 and off 0.7 per cent against sterling at Y133.03.

Parity between the euro and sterling remained at bay, although traders suggested it would likely be met in the coming sessions as extremely thin trading volumes increased the risk of volatile moves. ”After the steady two-three day range at £0.9500, this market may well have the energy to stretch to £0.9850 and once there, a pop to £1.00 has to be feasible,” said analysts at 4Cast. By mid morning in London on Christmas Eve, the pound stood at £0.9512 against the euro, down 0.6 per cent on the day, and just shy of its £0.9556 record low.

Iceland 'Like Chernobyl' as Meltdown Shows Anger Can Boil Over
It was the week before Christmas in Reykjavik, and all through the town Eva Hauksdottir led a band of 60 whistle-blowing, pan-banging, shouting demonstrators. "Pay your own debts," they yelled as they visited one bank office after another in Iceland’s capital. "Don’t make the children pay." When she isn’t leading one of the almost daily acts of protest in this land devastated by the global financial meltdown, Hauksdottir sells good luck charms made from the claws of ptarmigans, a local bird, and voodoo dolls in the form of bankers. She says she expects to lose her home, worth less than when she bought it two years ago, after the amount she owes jumped more than 20 percent.

Unrest following the end of a five-year economic boom is overshadowing the holidays in a country of 320,000 near the Arctic Circle, where the folklore is filled with magic, trolls and elves. Expansion ended with the collapse of the U.S. subprime mortgage market. The fallout in Iceland may presage civil disruptions elsewhere, as job losses multiply and credit bills come due. Few nations can count themselves safe, says Ian Bremmer, president of the New York-based Eurasia Group, which analyzes political risk for businesses. "As people have their expectations changed radically, you can have protests come out of nowhere," even in developed countries, Bremmer said.

Riots in Greece this month, sparked by the police shooting of a teenager, became tinged with economic dissension. A group of Kuwaiti equity traders marched on the emir’s office in October to demand the closing of the stock exchange to stem losses. Even in U.S. cities, civil disorder is "conceivable" if unemployment rises above 10 percent from November’s 6.7 percent, Bremmer says. Hauksdottir, the owner of a Reykjavik witchcraft shop, says over a cup of thyme and juniper tea that only civil disobedience can force banks to stop collecting debts that people can’t pay. "We’ll use our voices, and then if we have to we’ll use our hands, and maybe axes," Hauksdottir says.

At Reykjavik’s half-built concert hall, a symbol of the good times that juts from the harbor toward the North Pole, the visitor center is closed to visitors. The principal owner, Landsbanki Islands hf, failed in October. Marketing director Thorhallur Vilhjalmsson says he’s making ends meet on severance pay. "Iceland right now is like Chernobyl after the blast," Vilhjalmsson says. "It looks normal, but there’s radiation." The protests may escalate as bills come due and severance pay runs out for those who lost jobs at the three biggest lenders, including Landsbanki, the second-largest, says Stefan Palsson, a historian. He once led the Campaign Against Militarism, opposing NATO bases in the 1960s. He said he’s surprised ordinary people are backing activists once considered "hooligans." There was public outrage three years ago when environmentalists poured yogurt over aluminum representatives to protest a new plant.

"Now you have protesters kicking down doors at police stations, and respectable elderly people saying ‘Well, they’re young and full of enthusiasm, and anyway, they’re right!’" he said. Inflation rose to 18.1 percent this month, and the International Monetary Fund predicts that Iceland’s economy will shrink 9.6 percent next year. The Washington-based global lender of last resort put together a rescue package for the country worth as much as $5.3 billion last month. The decline in the krona and surge in prices are creating a triple whammy for borrowers whose home loans are typically linked to inflation or foreign currencies. Households owed more than double their disposable income at the end of 2006, almost twice the level in the U.S., according to the IMF. Some Icelanders say the easy money of the past decade eroded the island’s traditions. A sheep farmer in the 1934 novel, "Independent People," by Iceland’s only Nobel laureate, Halldor Laxness, preferred freedom from debt to any material comforts. His motto was: "I don’t owe anyone a penny."

That philosophy may return, says Birgir Asgeirsson, 63, the priest at Reykjavik’s Hallgrimskirkja Lutheran church. "I grew up learning that you work for what you get, but kids today just get what they want," Asgeirsson says. "Now I can hear parents say ‘No, my little boy, it’s not that easy.’" Gunnlaugur Gudmundsson is an astrologer and chief executive officer of a company that provides horoscope predictions for phone operators such as Vodafone Group Plc. Customer numbers have more than doubled since the crisis broke, he said. "The classic question used to be, ‘I’m in love with this guy, will he marry me?’" he said at a table strewn with star- charts. "Now the questions are about jobs, and when the good times will return."

The answer may be 2011, according to the IMF, which projects two years of economic contraction first. That may take Iceland back to the income levels of five or 10 years ago, "and we weren’t badly off then," said Hannes Holmstein Gissurarson, professor of politics at the University of Iceland and a central bank supervisory board member. Banks and politicians were victims of an "external shock," and weren’t behaving much worse than their counterparts elsewhere, he said. The difference was one of scale. As governments worldwide pumped money into stricken banks, Iceland couldn’t follow suit. By the end of last year, local banks had accumulated assets almost nine times the size of the country’s $12 billion economy, according to the IMF. The lack of backup was a "systemic error no one thought of," Gissurarson said.

The Reykjavik concert hall was budgeted at 170 million pounds ($252 million), Vilhjalmsson says. That was more than 2 percent of gross domestic product -- equivalent to a $250 billion project in the U.S. Pointing to miniature models, Vilhjalmsson says the building’s glass shell was designed to refract the low Arctic sun in kaleidoscopic shades. In midwinter in the world’s northernmost capital the sun appears for just four hours a day, leaving long evenings for Icelanders to figure out how their country got caught up in the global boom-and-bust. Vilhjalmsson has his own version. "The West is having this great, long cocktail party," Vilhjalmsson says. "And then, late in the evening, in comes this cute little dwarf, Iceland. And he gets drunk."

Iceland gives Christmas frosty reception
On the ground floor of one of Reykjavik’s gleaming office buildings, a well-dressed crowd shuffles and waits. Tinny Christmas songs blare from a small hi-fi by the door. As numbers are called out one by one, people file into the next room where rudimentary shelves are filled with free tins, fish, clothes, books and wrapping paper. Some 2,500 people have applied for Christmas relief packages from Iceland’s three main charities in recent weeks, a 30 per cent rise on last year, as growing numbers of the middle class lose their jobs in the wake of Iceland’s banking collapse. Jon Omar Gunnarsson, a pastor at Hallgrimskirkja, Reykjavik’s main church, says applications to the Church Aid group have doubled. “It’s mostly middle class people who have all these obligations, mortgages that are going up, many are losing their jobs ... they just can’t carry the burden alone,” he says.

Iceland is still reverberating after its economy crumpled in October in the face of global financial turmoil. Inflation and interest rates are both at 18 per cent as the country struggles to shore up its currency, which plunged after its three banks collapsed. It has borrowed $10bn from the International Monetary Fund and others which it needs to repay, meaning taxes are rising even as recession deepens. The charities believe more people need help but are too ashamed to ask. “We should just forget about Christmas, just cancel it,” says Sigridur, 57, waiting for her number to be called. “My husband lost his job, I don’t have one either – I am recovering from cancer. We cannot even pay for the house.” Sigridur and her husband are considering moving to Norway where there are jobs in construction. “We would just post the house key back to the bank.” Asa, 44, will give her children Christmas presents provided by charity this year. “You have to take off your pride,” she says. “It’s very difficult to do it. “There will be a lot of people who leave this country, just go away. Think of the future here for the children. When they are 95 they will still be paying for this.”

Although growing, the number of people needing food aid is still small. Many of those who have lost their jobs will continue to get paid until February. The government, which owns the three main banks, has promised mortgage holidays for people who cannot meet repayments. But even those who have not been badly hit are changing their lifestyles. This Christmas, people are giving each other books, home-made trinkets and practical presents such as warm socks. Last year’s must-haves, flat screen televisions and games consoles, are on the list of things people here call “so 2007”. For many, Christmas brings a welcome distraction from the crisis. But others find it impossible to get into the seasonal spirit. Sitting in an old fisherman’s cafe by the port, Orn Svavarsson shakes with rage. He sold his health food business three years ago when he was 54 and, like many of his countrymen, put the money into the stock market. It has been wiped out. “The Icelandic people are too lazy,” he says. “Why don’t we go to the airport and block it until we get answers? “For the first time in my life I have sympathy with the Bolsheviks; with the French revolutionaries who put up the guillotine.”

Housing slide worsens; Spain joins recession club
The U.S. housing market took a sharp turn for the worse while Spain joined a growing list of countries in a recession that shows no sign of abating. Existing U.S. home sales and prices both fell at a record pace last month, according to a report released on Tuesday, further evidence that the financial turmoil which intensified in September was driving consumers deeper into retreat. "The quickly deteriorating conditions in the job market, stock market and consumer confidence in October and November have knocked down home sales to another level," said Lawrence Yun, chief economist for the National Association of Realtors. Sales of newly built U.S. homes slowed to the weakest level since 1991, according to separate figures from the Commerce Department.

Housing is at the root of the year-long U.S. recession and the global malaise, and economists see little hope of a lasting recovery until that market stabilizes. If it deteriorates significantly, that would increase foreclosures and bank losses, putting greater strain on government efforts to revive growth. Modest U.S. stock market gains evaporated after the housing data was released, pushing the Dow Jones industrial average down 0.6 percent in afternoon trading. European shares closed flat, while Tokyo's market was closed for the emperor's birthday. The U.S. economy shrank at an unrevised 0.5 percent rate in the third quarter, official data showed. Consumer spending plunged 3.8 percent, the biggest drop since 1980. "The bottom line: Bah humbug. Recession, recession, recession," said Jennifer Lee, an economist with BMO Capital Markets in Toronto.

Economists expect a much bigger decline in economic activity in the current quarter as job losses pile up and households and businesses curtail spending. That in turn is hurting U.S. trading partners around the world. An economist at the San Francisco Federal Reserve Bank said the U.S. recession would likely last 18 months, making it the longest since World War Two, with unemployment peaking at a 25-year high of 8.4 percent. Britain, Spain and New Zealand added to evidence that global stimulus measures, bank bailouts and deep interest rates cuts may not prevent the worst downturn in decades. The British economy shrank 0.6 percent in the third quarter, the worst quarterly decline since 1990 and a deeper drop than the earlier 0.5 percent estimate. New Zealand's economy declined a seasonally adjusted 0.4 percent in the third quarter, the biggest drop in eight years, following a 0.2 percent fall in the previous quarter.

Spain succumbed to recession for the first time in 15 years. Spain's ISA activity indicator, which tracks gross domestic product, contracted 1.5 percent year-on-year between October and December, according to Economy Ministry data. "The ISA shows the trend, and the trend is that the fall in fourth quarter GDP is going to be steeper than in the third," a ministry spokeswoman said. Governments around the world have ramped up spending to try to cushion the blow of the worst financial crisis in 80 years, a policy underscored by a second day of record-large government debt sales in the United States. The U.S. government sold $28 billion worth of 5-year notes, after a $38 billion 2-year note auction on Monday. Both drew bids worth about twice as much as the amount on offer, suggesting that at least for now there were enough willing buyers to soak up the growing debt supply.

Even more stimulus is on the way when U.S. President-elect Barack Obama takes office next month. His staff is discussing how much money Congress should authorize for a package that is likely to be well over $600 billion. Lawrence Summers, Obama's pick to head the White House National Economic Council, said without prompt action on a stimulus package "we will almost certainly face the worst economic downturn since the second World War." Governments should be ready to increase their spending on economic programs if circumstances require it, the International Monetary Fund's chief economist Olivier Blanchard said in comments published on Tuesday. "The coming months will be very bad. Halting this loss of confidence, providing stimulus and, if necessary, replacing private demand are essential if we want to prevent the recession from becoming a Great Depression," Blanchard told French newspaper Le Monde.

Man Is a Cruel Animal
By Chris Hedges

It was Joseph Conrad I thought of when I read an article in The Nation magazine this month about white vigilante groups that rose up out of the chaos of Hurricane Katrina in New Orleans to terrorize and murder blacks. It was Conrad I thought of when I saw the ominous statements by authorities, such as International Monetary Fund Managing Director Dominique Strauss-Kahn, warning of potential civil unrest in the United States as we funnel staggering sums of public funds upward to our bankrupt elites and leave our poor and working class destitute, hungry, without health care and locked out of their foreclosed homes. We fool ourselves into believing we are immune to the savagery and chaos of failed states. Take away the rigid social structure, let society continue to break down, and we become, like anyone else, brutes.

Conrad saw enough of the world as a sea captain to know the irredeemable corruption of humanity. The noble virtues that drove characters like Kurtz in "Heart of Darkness" into the jungle veiled abject self-interest, unchecked greed and murder. Conrad was in the Congo in the late 19th century when the Belgian monarch King Leopold, in the name of Western civilization and anti-slavery, was plundering the country. The Belgian occupation resulted in the death by disease, starvation and murder of some 10 million Congolese. Conrad understood what we did to others in the name of civilization and progress. And it is Conrad, as our society unravels internally and plows ahead in the costly, morally repugnant and self-defeating wars in Afghanistan and Iraq, whom we do well to heed.

This theme of our corruptibility is central to Conrad. In his short story "An Outpost of Progress" he writes of two white traders, Carlier and Kayerts, who are sent to a remote trading station in the Congo. The mission is endowed with a great moral purpose—to export European "civilization" to Africa. But the boredom and lack of constraints swiftly turn the two men, like our mercenaries and soldiers and Marines in Iraq and Afghanistan, into savages. They trade slaves for ivory. They get into a feud over dwindling food supplies and Kayerts shoots and kills his unarmed companion Carlier. "They were two perfectly insignificant and incapable individuals," Conrad wrote of Kayerts and Carlier, "whose existence is only rendered possible through high organization of civilized crowds.

Few men realize that their life, the very essence of their character, their capabilities and their audacities, are only the expression of their belief in the safety of their surroundings. The courage, the composure, the confidence; the emotions and principles; every great and every insignificant thought belongs not to the individual but to the crowd; to the crowd that believes blindly in the irresistible force of its institutions and its morals, in the power of its police and of its opinion. But the contact with pure unmitigated savagery, with primitive nature and primitive man, brings sudden and profound trouble into the heart. To the sentiment of being alone of one’s kind, to the clear perception of the loneliness of one’s thoughts, of one’s sensations—to the negation of the habitual, which is safe, there is added the affirmation of the unusual, which is dangerous; a suggestion of things vague, uncontrollable, and repulsive, whose discomposing intrusion excites the imagination and tries the civilized nerves of the foolish and the wise alike."

The Managing Director of the Great Civilizing Company—for as Conrad notes "civilization" follows trade—arrives by steamer at the end of the story. He is not met at the dock by his two agents. He climbs the steep bank to the trading station with the captain and engine driver behind him. The director finds Kayerts, who, after the murder, committed suicide by hanging himself by a leather strap from a cross that marked the grave of the previous station chief. Kayerts’ toes are a couple of inches above the ground. His arms hang stiffly down "… and, irreverently, he was putting out a swollen tongue at his Managing Director." Conrad saw cruelty as an integral part of human nature. This cruelty arrives, however, in different forms. Stable, industrialized societies, awash in wealth and privilege, can construct internal systems that mask this cruelty, although it is nakedly displayed in their imperial outposts. We are lulled into the illusion in these zones of safety that human beings can be rational. The "war on terror," the virtuous rhetoric about saving the women in Afghanistan from the Taliban or the Iraqis from tyranny, is another in a series of long and sordid human campaigns of violence carried out in the name of a moral good.

Those who attempt to mend the flaws in the human species through force embrace a perverted idealism. Those who believe that history is a progressive march toward human perfectibility, and that they have the moral right to force this progress on others, no longer know what it is to be human. In the name of the noblest virtues they sink to the depths of criminality and moral depravity. This self-delusion comes to us in many forms. It can be wrapped in the language of Western civilization, democracy, religion, the master race, Liberté, égalité, fraternité, the worker’s paradise, the idyllic agrarian society, the new man or scientific rationalism. The jargon is varied. The dark sentiment is the same. Conrad understood how Western civilization and technology lend themselves to inhuman exploitation. He had seen in the Congo the barbarity and disdain for human life that resulted from a belief in moral advancement. He knew humankind’s violent, primeval lusts. He knew how easily we can all slip into states of extreme depravity.

"Man is a cruel animal," he wrote to a friend. "His cruelty must be organized. Society is essentially criminal,—or it wouldn’t exist. It is selfishness that saves everything,—absolutely everything, --everything that we abhor, everything that we love." Conrad rejected all formulas or schemes for the moral improvement of the human condition. Political institutions, he said, "whether contrived by the wisdom of the few or the ignorance of the many, are incapable of securing the happiness of mankind." He wrote "international fraternity may be an object to strive for ... but that illusion imposes by its size alone. Franchement, what would you think of an attempt to promote fraternity amongst people living in the same street, I don’t even mention two neighboring streets." He bluntly told the pacifist Bertrand Russell, who saw humankind’s future in the rise of international socialism, that it was "the sort of thing to which I cannot attach any definite meaning. I have never been able to find in any man’s book or any man’s talk anything convincing enough to stand up for a moment against my deep-seated sense of fatality governing this man-inhabited world."

Russell said of Conrad: "I felt, though I do not know whether he would have accepted such an image, that he thought of civilized and morally tolerable human life as a dangerous walk on a thin crust of barely cooled lava which at any moment might break and let the unwary sink into fiery depths." Conrad’s novel "Heart of Darkness" ripped open the callous heart of civilized Europe. The great institutions of European imperial powers and noble ideals of European enlightenment, as Conrad saw in the Congo, were covers for rapacious greed, exploitation and barbarity. Kurtz is the self-deluded megalomaniac ivory trader in "Heart of Darkness" who ends by planting the shriveled heads of murdered Congolese on pikes outside his remote trading station. But Kurtz is also highly educated and refined. Conrad describes him as an orator, writer, poet, musician and the respected chief agent of the ivory company’s Inner Station. He is "an emissary of pity, and science, and progress." Kurtz was a universal genius" and "a very remarkable person." He is a prodigy, at once gifted and multi-talented. He went to Africa fired by noble ideals and virtues. He ended his life as a self-deluded tyrant who thought he was a god.

"His mother was half-English, his father was half-French," Conrad wrote of Kurtz. "All Europe contributed to the making of Kurtz; and by-the-by I learned that, most appropriately, the International Society for the Suppression of Savage Customs had entrusted him with the making of a report, for its future guidance. ... He began with the argument that we whites, from the point of development we had arrived at, ‘must necessarily appear to them [savages] in the nature of supernatural beings—we approach them with the might as of a deity,’ and so on, and so on. ‘By the simple exercise of our will we can exert a power for good practically unbounded,’ etc., etc. From that point he soared and took me with him. The peroration was magnificent, though difficult to remember, you know. It gave me the notion of an exotic Immensity ruled by an august Benevolence. It made me tingle with enthusiasm. This was the unbounded power of eloquence—of words—of burning noble words. There were no practical hints to interrupt the magic current of phrases, unless a kind of note at the foot of the last page, scrawled evidently much later, in an unsteady hand, may be regarded as the exposition of a method. It was very simple, and at the end of that moving appeal to every altruistic sentiment it blazed at you, luminous and terrifying, like a flash of lightning in a serene sky: ‘Exterminate all the brutes!’ "

2009 Real Estate Forecast: Troubles Spread
Wealthier neighborhoods that avoided subprime borrowing will be hurt in the new year as the downturn weakens even healthy markets. 2008 was the year that subprime borrowers and speculators got hurt by the real estate crisis. 2009 could be when everyone else gets hit. Until now, the nation's most serious home price declines have been in low-cost markets that were dominated by subprime mortgages, and in overbuilt markets such as Florida, California, and Las Vegas, where residential values are sliding fast toward pre-housing boom levels. The Commerce Dept. reported Dec. 23 that November new-home sales in the U.S. fell to their lowest level in 17 years, down 35.3% compared with November 2007. And the outlook is even bleaker.

The same day, Credit Suisse forecast that more than 8 million homes will go into foreclosure over the next four years, or approximately 16% of all U.S. households with mortgages. That's because the big story in 2009 could be that, with the deepening recession and mounting job losses, serious housing troubles could infect wealthier communities and markets that were just beginning to stabilize this summer before the bankruptcy of Lehman Brothers on Sept. 15 sparked the most serious financial turmoil in decades. In fact, according to online real estate research firm, based in Destin, Fla., housing prices nationwide will fall 12.5% next year, compared with an estimated 11.1% this year. Housing and mortgage problems pushed the nation into a recession that could now amplify, draw out, and expand the reach of the housing declines. Take Manhattan, for example, where condo and co-op prices soared years after housing bubbles in most other major cities popped. New York City's real estate market was bolstered by residents who were still earning sky-high Wall Street bonuses and by a weak dollar that attracted overseas bargain hunters.

Now that the dollar has strengthened, the economic woes have spread to potential New York home buyers across the globe, and thousands of New York financial professionals are collecting severance. Manhattan apartment prices, as a result, have dropped as much as 20% since the summer, said Jonathan Miller, president and chief executive officer of real estate appraisal firm Miller Samuel. Miller's analysis is based on contracts signed in recent months, rather than actual closings. "Mid-september was a milestone," Miller said. "That's where you saw a pronounced slowdown in transaction volume." is projecting a 19.4% decline in Manhattan home prices in 2009. And Moody's is predicting that condo prices in New York City, Northern New Jersey, and Westchester County will fall 29% by the fourth quarter of next year. "Nationally, we think this recession is going to be worse than anything we've seen in 40 years," said Marisa DiNatale, senior economist for Moody's "If the economy gets that bad, then you will start to see foreclosures in Manhattan as well."

On the other hand, the speculative Las Vegas, Arizona, California, and Florida markets, which have already seen annual home-price declines of up to 30%, could see slightly smaller declines simply because values have already fallen so much, according to Mike Colpitts, editor of Some Florida markets, including Naples, Orlando, and Tampa, are already seeing declines moderate a bit, but problems in other Florida markets, such as Miami, continue to get worse, Colpitts said. Few areas across the country will likely escape the recession and the corresponding impact on the real estate market, housing experts say. Another wave of foreclosures could be triggered next year as a flood of Alt-A and option adjustable-rate mortgages, which were given to people with decent credit, begin to recast.

Most of the option ARMs, which allow borrowers to make minimum payments that don't even cover the accrued interest, are concentrated in already battered California, Florida, and Las Vegas. Option ARMs originating in 2006 make up about $140 billion of the $350 billion of outstanding option ARMs, and 45% to 50% of them are expected to default, according to an analysis this past summer by Lehman Brothers. The 2007 option ARMs, which were originated just as home prices began falling, were expected to perform similarly badly. Problems in other states could have less to do with risky mortgages and more to do with job losses. The impact of unemployment on the real estate market and the larger economy are already on display in hard-hit manufacturing cities such as Gary, Ind., and Detroit.

Alabama, Arkansas, Atlanta, Michigan, and Ohio could see problems next year, Colpitts said. "We're in the middle of the game here," said Joseph Seneca, professor of economics at Rutgers University in New Jersey. "There's significant further unwinding to come…. We're in a downward spiral with job losses that is reinforcing the weakness in the consumer markets, particularly in the largest investment the consumer makes, in his home." Seneca said the government's aggressive policies to stabilize housing by injecting liquidity in banks, lowering interest rates, tax stimulus packages, and other efforts will help. But the downward cycle will end only when prices fall far enough that they attract large numbers of buyers. The nation's energy-producing states, such as North Dakota, South Dakota, Oklahoma, Alaska, and Montana, could be economic bright spots next year. Despite falling oil and natural gas prices, those industries remain robust. The economy in Texas, however, is beginning to get hit as unemployment rises and consumer spending drops, Colpitts said. He added that the Houston market, which has been remarkably stable, could drop about 8.5% next year. Five of the six supermajor energy companies maintain large operating bases in Houston, including ConocoPhillips, ExxonMobil, Royal Dutch Shell, and BP.

The overbuilt San Antonio market could see a 10.2% drop. Austin, which is a high-tech center, could also be hurt as the technology sector gets damaged by weak consumer spending, he said. And Charlotte, N.C., a major banking center that had been one of the nation's strongest real estate markets, could have its own housing troubles. Charlotte-based Bank of America just this month announced that it would cut up to 35,000 jobs over the next few years. But a few places are poised for a potential recovery. The housing market in and around Washington, D.C., which suffered greatly in the wake of the housing bust, could begin to recover, largely because the nation's capital has so many recession-proof government and defense contracting jobs, said DiNatale of Moody's Other areas, such as the Boston area, San Diego, and Orange County, Calif., are getting close to affordability levels seen before the housing boom and could begin to level off, said DiNatale. She added: "A lot of this depends on the economy over the next few months, help from the federal government, and whether buyers come back to the market."

Will Obama's stimulus work fast enough?
President-elect Barack Obama's plan for economic revival puts a big emphasis on public works projects. It also would rely on tax cuts. But with the nation bruised by recession, with hundreds of thousands of jobs vanishing monthly, Obama's plan raises an urgent question: Will his remedies work fast enough? The answer won't be clear for months or longer. In the meantime, pressure on the Obama team to deliver help quickly is intensifying. At least as designed, the Obama plan, like a calibrated drug regimen, aims to deliver both short- and long-term relief. The short-term help would flow partly from tax cuts of $1,000 for couples and $500 for individuals, costing about $140 billion over 2009-2010. The Obama team, said two congressional Democratic aides familiar with the discussions, will likely deliver those tax cuts by reducing the tax withheld from paychecks. This would put more money in paychecks, unlike the lump-sum rebates issued earlier this year. Many people used those rebates to pay down debt, rather than spending them as the administration had hoped.

In addition, states would get up to $200 billion over two years for Medicaid health coverage for the poor and to narrow state budget gaps, which are forcing layoffs and cuts in services. The aides spoke on condition of anonymity to candidly discuss the evolving plan. Also in the short term, the nation's governors are pushing a wish list of $136 billion in jobs-producing public works projects -- chiefly road and bridge repairs -- that they say are ready to go. But even if they are, the Obama administration faces a much harder task, too: creating jobs that won't disappear once a bridge is fixed. What's needed are millions of permanent jobs that would put legions of laid-off people back to work for years to come. It's too soon to know whether many of the 2.5 million jobs the president-elect has said he intends to "save or create" within his first two years would become permanent. And with economic signs worsening, Obama wants to raise the goal to 3 million jobs, a presidential transition official said. For now, given the depth of the recession, the Obama plan focuses on the early months.

By embracing projects already in the pipeline and stressing infrastructure repairs, parts of the plan could roll out soon -- perhaps within weeks -- creating jobs and stirring economic activity. That way, the new administration also buys time to allocate money for other projects that might take years to complete. "Looking after the existing infrastructure is not as exciting as cutting ribbons on new projects, but it could generate jobs quickly," Martin Baily, who served as President Bill Clinton's top economist and is now at the Brookings Institution, told Congress. Economists say the combination of tax cuts and infrastructure spending could deliver a quick one-two punch against the recession: the faster-acting tax breaks, plus the time-released benefits of infrastructure spending. "You need a cocktail of drugs to go after this recession," said Sean Snaith, economics professor at the University of Central Florida. "It needs to be a multipronged attack." Obama is proposing a package priced at perhaps $675-$775 billion over two years, his advisers say, though they think add-ons by lawmakers could raise the price to $850 billion. His advisers say an $850 billion plan could generate about 3.2 million jobs by the first quarter of 2011.

Some economists favor an even bigger spending stimulus: up to $1.3 trillion. Vice President-elect Joe Biden said Tuesday, though, that anyone expecting a bounty of pet projects should think again. "There will be no earmarks" in the stimulus plan, Biden said at the start of a meeting of Obama's economic staff, referring to the special-interest projects that lawmakers often attach to legislation. Obama said his plan would "make the single-largest new investment in our national infrastructure since President Eisenhower established the Interstate Highway System in the 1950s." For each $1 invested in infrastructure spending, around $1.60 in economic activity would be generated, according to estimates by some economists. Put a different way: Peter Morici, economist at the University of Maryland, projects that $100 spent on a bridge or school boosts economic activity by about $200. (That doesn't count the benefit of improving Americans' longer-term productivity. For instance, better roads could reduce commuting times or help get goods to customers more efficiently.)

Can tax cuts help rejuvenate the economy? Some are skeptical. "Most infrastructure spending will create more jobs by year-end 2010 than a tax cut, particularly a temporary tax cut," said Mark Zandi, chief economist at Moody's "Some of any tax cut will be saved. And some of it will be spent on imported goods, reducing its jobs impact." The rap on infrastructure projects as an economic boon has been that they can be too slow to work -- at least six or nine months to kick in. But that's less of an issue now because the economy's weakness is expected to last for so long -- perhaps into 2010 and possibly beyond. "I think in this case it is right," said Simon Johnson, former chief economist to the International Monetary Fund and a professor at the Massachusetts Institute of Technology's Sloan School of Management. "A lot of U.S. infrastructure is run down. Compared to other rich countries, the U.S. is lagging behind." Still, timing is tricky. Public works projects need to roll out while the economy is still hurting. If they launch after the economy has rebounded, they could drive up costs and wages and fan inflationary forces. A more philosophical matter is how much the government should be involved in industrial policy -- in picking winners and losers.

Obama's vision of infrastructure goes beyond repairing or building roads and bridges. It includes modernizing schools, boosting high-speed communications networks and installing technology at hospitals and doctors' offices to electronically access medical records. URS Corp. and Fluor Corp., which provide engineering and construction services, are among companies that could benefit from an infrastructure initiative, said Heiko Ihle, an analyst at Gabelli & Co. Other firms passed up would likely raise questions about the fairest and most efficient use of taxpayer money. A more fundamental problem is today's work force is more skilled and specialized -- and in some ways less fluid -- than during the 1930s when President Franklin Roosevelt launched the New Deal during the Great Depression.

The jobs Obama's stimulus plan would create wouldn't likely help laid-off white-collar workers. "I don't think it's realistic to think you'll see unemployed financial services people and retail clerks flocking to construction," says Brian Bethune, economist at IHS Global Insight. "So you have to be careful about not overdoing it and thinking this is going to be the savior of our problems. There are only a certain number of big engineering firms that can do certain big projects and only a certain number of workers skilled in those trades." Whatever its ultimate size, the stimulus package will dig the government budget hole ever deeper. The U.S. is on track to hit a record budget deficit of $1 trillion or more for 2009 budget year, which began Oct. 1. That would be more than twice the previous record-high deficit set last year. Yet despite the swelling costs, economists agree that forceful action with staying power is desperately needed. "With negative or low economic growth projected well into the future, the economy needs a long-term fix," said John Taylor, a Stanford economics professor who held a top Treasury Department post in the Bush administration. "We need to worry about the next few years, not just the next few months."

US retail group wants national sales tax holidays
A U.S. retail trade group asked President-elect Barack Obama on Tuesday to add a series of temporary sales tax holidays to an economic stimulus package as a way to revive consumer spending. The National Retail Federation called for three 10-day periods of sales tax-free shopping in March, July and October 2009, which it said would save consumers almost $20 billion, or $175 for the average family. Under the NRF's proposal, the federal government would reimburse states for the lost tax revenue. State sales tax rates range from 2.9 percent to 7.25 percent, the group said.

In a letter signed by the chief executives of retail chains, including JC Penney Co Inc and Saks Inc, the NRF said the situation was "critical" with consumer confidence at the lowest level on records dating back 41 years. "With consumer spending accounting for 70 percent of GDP, it is difficult to foresee an improvement in overall economic growth until the consumers regain their footing," the NRF said. The trade group wants tax-free treatment to apply to all tangible goods subject to state sales tax, except tobacco and alcohol.

Several U.S. states have sales tax holidays at various times during the year, and retailers see them as a good way to entice consumers to shop. However, the housing market bust and subsequent recession have left gaping holes in state budgets. Florida has scrapped its sales tax holiday because of budget constraints. Obama's advisers are considering a two-year stimulus package that is likely to exceed $600 billion as they try to stem a recession that has dragged on for a year and looks likely to worsen. The package is expected to include infrastructure investment, which the NRF said it also supported because it would create jobs and lift consumer spending.

Putin hails end of 'cheap gas' era
If Russian Prime Minister Vladimir Putin has his way, your Gazprom bill will soon be going up. Despite fast-falling oil prices, he claims Europe will soon be hit with the bill for "sharply" rising gas field development costs. Russian Prime Minister Vladimir Putin says European consumers will have to get used to surging natural gas prices. "The expenses necessary for developing fields are rising sharply," the Russian government head told attendees at a meeting of gas-exporting nations in Moscow on Tuesday. "This means that despite the current problems in finances the era of cheap energy resources, of cheap gas, is of course coming to an end," he added in his keynote speech. Russian energy giant Gazprom supplies about one-quarter of all the natural gas consumed by European Union member states via pipelines. Russia has been in a standoff for months with Ukraine over unpaid energy bills and a planned hike in January of the price of gas. Gazprom -- a monopoly controlled by the Kremlin -- claims it is owed $2 billion and wants payment from Ukraine by Jan. 1. Russia is threatening to cut off gas to its onetime Soviet satellite state, in the middle of winter -- again.

The last time Gazprom cut off supplies to Ukraine, on New Year's day 2006, gas deliveries to Western Europe were also disrupted. Moscow officials warned on Monday it could happen again. About 80 percent of Russian gas exports to Europe travel through pipes across Ukraine. In 2005, Moscow had jacked up gas prices in Ukraine after the country voted in a pro-Western government during the Orange Revolution in 2004. The move was widely seen as political. Until then, the country had enjoyed favorable, post-Soviet prices compared to the rates paid in Western Europe. This week, the most important gas-exporting nations have gathered in Moscow to further intensify cooperation. Russia, Iran and 12 other nations are members of the Gas Exporting Countries Forum (GECF). Gas importers fear that an effort is underway in Moscow to recast GECF into a gas cartel similar to Organization of Petroleum Exporting Countries (OPEC). The members have rejected such claims in the past, though, and observers say the structure of the gas industry would make it difficult for gas exporters to implement OPEC-like quotas.

On Tuesday, Putin spoke out against what he described as the "politicization" of international energy relationships. "The interests of producers, consumers and transit nations can only be unified through clear and long-term relations based on the foundations of a market economy," Putin said. GECF, which has been a loose-knit organization since its creation in 2001, is expected to pass a new charter on Tuesday that would formalize its structures and establish a permanent secretariat based in St. Petersburg. Despite Putin's statements, energy experts in Germany anticipate that gas prices will drop in the near future. Holger Krawinkel of the Federal of German Consumer Organizations (VZVB) estimates that natural gas prices for the average German consumer will fall in the next year by up to 25 percent. The drop in prices is connected to the recent and precipitous decline in oil prices, which has seen the cost of a barrel of crude fall to about $43 -- from a high in July of over $147. The price of natural gas is pegged to that of oil, with a delay of about six months. Krawinkel warned that the slide in prices would be temporary, offering consumers a moment to breath again after record high prices. In the longer term, he said, gas prices would rise again because of growing global energy demand.

5,000 march in Kiev against job cuts
Five thousand trade union members marched through Ukraine’s capital on Tuesday to protest against job cuts and economic ills that have rattled this ex-Soviet country in the wake of the global financial crisis. Recent demonstrations in Ukraine and Russia have raised fears that such uprisings could spread if dire economic predictions for eastern Europe materialise. World Bank officials this month said eastern Europe and former Soviet republics faced a deep and protracted economic slowdown as investment ran dry. Protesters held placards that read “No cuts in social benefits” and “We will achieve social justice,” according to Reuters, and urged leaders to end poisonous politics as the country braces for a recession. The size of the protest was small compared with crowds seen during the Orange Revolution of 2004. But unionists and other activists in this country of 46 million promised to muster larger rallies next year.

A particularly hard landing is expected in Ukraine, where officials see unemployment doubling in coming months to more than 1 million. Redundancies and unpaid leave are spreading at export-oriented factories and property constructors paralysed by frozen credit markets. Ukraine’s currency lost nearly half of its value since July due to falling prices on steel, Kiev’s main export, and a widening current account deficit. The hryvnia strengthened slightly on Tuesday, finishing at 7.9 to the US dollar. Depreciation could boost exports while also triggering defaults on loans, half of which are dollar-denominated. Russia’s Gazprom is also putting pressure on Ukraine by threatening to cut off natural gas supplies on January 1 due to debt arrears, as it did in 2006. Even if Kiev pays off the debt, next year’s price for gas imports is likely to rise sharply fuelling inflation. Overall though, inflation is expected to ease a bit next year on falling demand, from a rate of more than 20 percent this year.

Ukraine’s shaky financial system stabilised this autumn when the International Monetary Fund issued a $4.5bn (£3bn, €3.2bn) tranche, the first from a $16.5bn standby stabilisation loan granted. Future assistance depends on a social spending freeze and other painful conditions. A World Bank economist predicted on Tuesday that Ukraine’s economy could shrink by 4 percent next year. Kiev’s leaders are under pressure but are locked in a deep rivalry. A top confidant of Victor Yushchenko, the president, this week suggested that Yulia Tymoshenko, the prime minister, had engaged in currency speculation with international financier George Soros. Days earlier Ms Tymoshenko accused the president’s inner circle of profiting on currency speculation in partnership with Dmytro Firtash, a billionaire partner of Gazprom, in supplying gas to Ukraine and Europe. “In Ukraine, the evidence is still that policymakers do not quite understand the seriousness of the challenges they face,” said Timothy Ash, an analyst at the Royal Bank of Scotland.

Job squeeze hits migrants in Spain
From the moment you arrive, it is obvious that something unusual is happening this winter in Ubeda, a Spanish market town in the heart of the olive-growing region of Andalucía. Christmas shoppers go about their business in the streets near the medieval centre, entertained by festive lights, the obligatory mime artist and a perfume-seller dressed as an elf. But the presence of hundreds of unemployed Africans – knots of young men in anoraks waiting at street corners, their shoulders hunched against the cold – is not normal. Nor is the fact that Ubeda’s indoor sports centre is converted each night into a giant temporary dormitory for the homeless. Migrants have been coming for the olive harvest for years, but never in such large numbers or with so little chance of finding a job, say local officials, charity workers and the migrants themselves. The towns and villages of Jaén province have been flooded with thousands of destitute jobseekers in need of food and shelter.

The word “crisis” is on everyone’s lips. “It’s the first time the situation is like this,” says Bakary Konate, a 27-year-old Malian who entered Spain illegally by boat four years ago and is based in Almería on the south coast. “In Spain they have stopped a lot of construction, so there’s no work.” Like other migrants – some are from Senegal and Gambia, others from Algeria and Morocco and a few from Romania and Bulgaria – Mr Konate is hoping that a jefe, a farm boss, will drive past in a van or a tractor, take him off the freezing streets of Ubeda and give him an olive harvesting job that can pay €46 per day. No jefe, however, is likely to oblige, even to pick up the legal immigrants whose presence on the farm would not expose him to a hefty fine for breaching Spanish labour laws. The 4.5m immigrants in Spain make up a 10th of the population, the highest proportion in the European Union. In the good years after the mid-1990s, they filled the toughest and worst paid jobs on building sites and farms, but now they are losing work at twice the rate of Spaniards in a country where unemployment already exceeds 3m. Ubeda’s townspeople are seeing face-to-face the results of a triple crisis facing immigrants in Spain this winter.

First and most important, the home construction industry has collapsed now that the housing bubble has burst. Second, Spaniards who previously shunned farm jobs are beginning to accept any work they can get and are sometimes given preference by Spanish employers. Third, a late start to the olive harvest as a result of rain and snow has left an army of peripatetic workers without a living for weeks on end. “This year is more problematic because this famous crisis means that Spaniards working in construction have lost their jobs, so they are harvesting olives,” says Antonio Moral Muñoz, vice-president of the local Red Cross, which is providing bus tickets to Madrid or Valencia so that immigrants can head back to the cities. “The people of Ubeda were surprised by the number of migrants.” On its busiest night this year in Ubeda, Caritas, the charitable arm of the Catholic church, fed 700 immigrant jobseekers at its makeshift dining hall in the town. Ubeda’s total population is 34,000.

So far, the mood in the town has been relaxed and friendly in spite of sometimes lethal brawls elsewhere in Andalucía between migrants of different nationalities. Many jobseekers have given up, heading for Spain’s big cities or eyeing the next stop on the migrant worker’s rounds: the Huelva strawberry harvest in January. No one, however, is optimistic. Albert Mbila, a 29-year-old Madrid-based Cameroonian, is standing on a corner outside an olive growers’ co-operative hoping that someone will give him work. “Some of them treat us like dogs,” he says bitterly as a tractor driver waves him away from inside his cab. Mr Mbila, who has work papers, has lived in Madrid for six years and recently lost his construction job, is also sharply critical of the Spanish government’s lax approach to illegal immigrants. “People just keep on coming, coming, coming,” he says. “I’ve been one month in Ubeda on the street. There’s no work.” And next year? “I heard [finance minister Pedro] Solbes say that next year will be worse than this,” he says despairingly. “We’re just going to die.”

Clawback ruling says Madoff investors must pay back past profits
Investors who have lost their money in what is alleged to be the world’s biggest financial fraud may also be made to repay any profits that they made to US liquidators. Under a new bankruptcy ruling, any investors who withdrew cash from the hedge fund run by Bernard Madoff before the $50 billion (£34 billion) fraud was discovered could be forced to return their original investment and any profits. The ruling, which was made in October, will come as a devastating development to Walter Noel, 78, the billionaire whose own investment firm — Fairfield Greenwich — lost $7.3 billion in Mr Madoff’s scheme. As the victims began a batch of lawsuits against him, one financier who had invested his own clients’ money with Mr Madoff committed suicide yesterday. Thierry de la Villehuchet, 65, the co-founder of Access International Advisors, a fund management company, killed himself in his Madison Avenue office after losing as much as $1.4 billion.

As the FBI and the Securities and Exchange Commission began to construct the world’s biggest fraud case against Mr Madoff, a second class-action lawsuit was filed against Mr Noel and Fairfield Greenwich. The plaintiffs accuse Mr Noel of failing to vet Mr Madoff adequately. The Fairfield Greenwich founder had invested $7.3 billion of his own, his family and investors’ money. Mr Noel’s role as a financier who introduced new clients to Mr Madoff — through "feeder funds" such as Fairfield — is also under scrutiny by federal investigators. While the financial cost to Mr Noel is already public, the personal cost to the Manhattan socialite and his wife, Monica, has yet to emerge.

The couple and their five daughters were well known on the New York and Connecticut party circuits, regularly hosting social events at their Park Avenue apartment in the Upper East Side of New York and at their home in Greenwich, Connecticut. It was through these parties that Mr Noel and four of his sons-in-law, who worked for the family firm, were able to attract new investors drawn from America’s financial elite. According to David Patrick Columbia, of New York Social Diary, the website chronicling the city’s monied social scene, Mr Noel and his wife had made a concerted effort over the past five years to be part of the wealthy New York set. He said: "He is a kind of Jimmy Stewart figure with a craggy face and has five beautiful daughters. They were very attractive, very rich and very successful — that gets you into that set." Speaking to The Times on Monday evening, Monica Noel seemed unruffled by the scandal. Believing that she had been connected to another party, she chatted about arrangements for a wedding reception in Mexico. The family divide their time between the flat in New York — 11 blocks from where Mr Madoff is under 24-hour house arrest — the house in Connecticut and a villa in Florida. It is also believed that the Noels have a home on the Caribbean island of Mustique.

Two weeks ago Mr Madoff shocked the world’s financial community when he allegedly confessed to his two sons — Mark and Andrew, who worked for him — that his business was "basically, a giant Ponzi [pyramid] scheme" and that "it’s all just one big lie". He also told his sons he believed that he had defrauded about $50 billion from his investors. Mr Madoff is said to have told his sons that he would disburse the remaining $300 million in his business to staff, family and friends and then turn himself in, but they informed the FBI before he had chance to do so. Mr Madoff is charged with one count of fraud and, having failed to secure a remaining $3 million to meet bail conditions, has been electronically tagged. His wife, Ruth, has been ordered by a New York court to hire and pay for security guards to protect her husband from irate investors and to prevent him from fleeing.

Lawyers are preparing class actions on behalf of investors against Mr Madoff, his business, and the feeder funds that supplied him with fresh capital.
They are expected to use a precedent set by a landmark case seeking the return of cash from the Bayou Hedge Fund Group, which defrauded investors of an estimated $450 million. A US judge said that investors who withdrew money they had made from Bayou before it collapsed must return the cash so that it could be shared among those who had lost money. The only way this could be avoided was if investors could prove that they withdrew the money "in good faith". Carole Neville, a partner at Sonnenschein representing investors in the Bayou case, said of Mr Noel: "He lived high on the hog and was very visible so I’d expect people to go for him. Anything they’ve redeemed from the Madoff fund is vulnerable for clawback."
Some investors are appealing against the Bayou ruling

Madoff investor kills himself at his desk
A hedge fund manager facing $1.4bn in losses from Bernard Madoff's record-breaking Wall Street fraud has been found dead in his Manhattan office, his wrists slit and a bottle of sleeping pills by his side. The apparent suicide of René-Thierry Magon de la Villehuchet, who set up his own company after rising to become one of the most powerful Frenchmen on Wall Street, was discovered early yesterday morning.

Mr Madoff's historic swindle was uncovered less than two weeks ago, and investors around the world have been struggling to cope with losses that are estimated at $50bn. Charities that placed their endowments with the Wall Street veteran have been forced to shut down, wealthy individuals from Mr Madoff's social circles in New York and Florida have been wiped out, and the pressure is being felt most intently by the hedge fund managers who trusted their own fortunes and those of their clients to Madoff Investment Securities – only to discover that the business was, in Mr Madoff's words to the FBI, "all just one big lie".

M. de la Villehuchet, 65, a former head of Credit Lyonnais Securities in the US, was the scion of an aristocratic French family who appeared as well-connected in Europe as Mr Madoff was in the US. His hedge fund, Access International Advisors, enlisted intermediaries with links to the cream of Europe's high society to garner clients. Among them was Philippe Junot, a French businessman and friend who is the former husband of Princess Caroline of Monaco. Another was Prince Michel of the former Yugoslavia.

On Monday night, M. de la Villehuchet told Access International's cleaning staff he wanted them out by 7pm so that he could work late, then locked the door and placed a waste paper basked under his desk to catch blood from his wrists. Security staff found him the next morning, still sitting at his desk, with a box-cutter on the floor beside him. Such was Mr Madoff's pedigree, as a trader of almost 50 years standing and a former chairman of the Nasdaq stock exchange, that investors clamoured to be let into his fund.

Access International had placed about $1.4bn with Madoff Investment Securities, putting intolerable pressure on M. de la Villehuchet, according to a friend who spoke last night to La Tribune newspaper in France. "He had been searching day and night for a way to recover the funds of his investors. He couldn't bear the blame game that broke out among Europeans." M. de la Villehuchet lived with his wife in a suburb of New York and was known for his love of sailing, regularly taking part in regattas as a member of the exclusive New York Yacht Club. The couple had no children.

As Mr Madoff remains under house arrest at his Manhattan apartment, a legal firestorm has broken out over the fund managers who handed clients' money to him to invest. Furious investors say these managers should have done more investigation before handing over billions of dollars, and should have known the high returns he was claiming were simply too good to be true. Several big names in the hedge fund industry are among those facing scrutiny. Walter Noel's Fairfield Greenwich placed $7.5bn with Mr Madoff, including funds it was managing for local authorities and public sector pension funds. Yesterday, Mr Noel wrote to investors saying: "At this point in time, the value of the company's investment in Madoff is not certain. There may be residual assets in Madoff to be distributed or, alternatively, there may be no assets."

Lawsuits have also been filed against the Securities and Exchange Commission – the Wall Street regulator, whose botched investigation into allegations against Mr Madoff in 2006 failed to uncover the fraud – and against KPMG, which audited one fund of funds, Tremont Group, which lost $3.3bn. Mr Madoff was feted on Wall Street for generating annual returns of more than 10 per cent, year in, year out, but the results were not real. Instead, he was paying his existing clients with money coming in from new investors. Investigators believe the scheme could have been running undetected for more than two decades.

L'Oreal heiress joins list of Madoff victims
Liliane Bettencourt, the world’s wealthiest woman and heiress to the L'Oreal empire, entrusted part of her $22.9 billion (£15.5 billion) fortune to Bernard Madoff through the fund manager found dead in New York yesterday. Ms Bettencourt, the daughter of L’Oreal founder Eugene Schueller, was the first investor in a fund managed by Access International Advisors. Thierry Magon de la Villehuchet, the co-founder and chief executive of Access International, was found dead in his office in New York yesterday. It appears that he committed suicide.

Mr Villehuchet was said to be "devastated" when news of the $50 billion Ponzi scheme perpetrated by Mr Madoff - the biggest corporate fraud in history - emerged, and he feared clients would turn against him in the courts. He had been trying for a week to recover at least $1.5 billion in European funds that Access International had invested through Mr Madoff's business, The Wall Street Journal reported. Access, which had $3 billion under management, raised money mainly from wealthy European investors. It admitted in a letter to clients on December 12, the day after Mr Madoff's arrest, that funds including its LUXALPHA SICAV-American Selection were invested solely with Mr Madoff’s investment firm.

Ms Bettencourt, 86, joins a list of wealthy individuals from all over the world who have been hit by the biggest ever financial fraud. Alicia Koplowitz, the Spanish billionaire, Steven Spielberg, the Hollywood director and Elie Wiesel, the Nobel laureate, have all been affected. "More high-profile names who have been victimised by Madoff will start to become known now," said Ron Geffner, who represents hedge funds at the New York-based law firm Sadis & Goldberg LLP. "There’s a strong sense of anguish, fear and distrust." Ms Bettencourt was placed 17 in Forbes’ list of the world’s richest people in 2008, the highest-ranking woman.

Fortis loses 295 million euros due to troubled takeover
The troubled Belgian-Dutch bank Fortis, whose suspended takeover by BNP Paribas brought down the Belgian government, said Wednesday the aborted deal also cost it 295 million euros in currency transactions. Fortis said it bought US dollars and British sterling after the takeover by the French bank was announced December 6 to fund its share of a planned credit portfolio entity, Royal Park Investments. That plan was suspended when a Brussels appeals court blocked the deal six days later, leaving Fortis stuck with foreign currencies that were rapidly declining on the money market. The court upheld arguments by shareholders that the acquisition by BNP Paribas was improper because they had not been consulted.

Fortis said it decided to offload the dollars and sterling, at a loss of 295 million euros (worth 412 million US dollars at Wednesday's rate). The sale reduced its net cash position to 1.8 billion from 2.1 billion euros, it said. The Belgian government of outgoing prime minister Yves Leterme resigned Monday after it was accused of trying to influence the court decision. Fortis, once the largest bank in the Benelux countries, was forced repeatedly to seek government help during tight credit conditions. The Dutch government bought all Fortis' Dutch operations on October 3. Two days later, the Belgian government nationalised Fortis in Belgium, and planned to sell a a majority stake of the Belgian banking operations and all of its Belgian insurance operations to BNP Paribas.

UK heads for deeper recession as GDP shrinks
The UK economy is heading for a deeper recession after official figures showed third-quarter growth shrank by more than expected. GDP contracted by 0.6pc between July and September, the steepest drop since 1990, as service industries including financial companies, hotels and restaurants suffered, the Office for National Statistics said. Household spending dropped 0.2pc, despite the usual splurge before Christmas, and savings inched up. "This means the recession is deepening and consumers are saving more. That is a pretty clear sign that we’re going to get a bigger fall in output in the fourth quarter," said Brian Hilliard, chief UK economist at Societe Generale.

The UK economy is expected to shrink by up to 1pc in the fourth quarter, pushing the country officially into recession - defined as two consecutive quarters of contraction. Third-quarter GDP was revised downwards from a previous estimate of 0.5pc. The economy was stagnant in the second quarter, making growth for the year 0.3pc. There was significantly weaker growth in a number of the main service industries, particularly distribution and business services.

Howard Archer, economist at Global Insight, said: "Consumer spending is being increasingly pressurized by now rapidly accelerating unemployment, muted income growth, very tight lending practices, heightened debt levels, a depressed housing market and substantially lower equity prices."
Heightened concerns about the economic outlook and jobs would lead consumers to tighten their belts, he said. "These factors seem certain to outweigh the support to consumer spending coming from lower interest rates, the VAT cut and increased discounting on the high street.".

UK recession will be worst since 1947
Britain's economy is heading for its worst year since the notorious post-war winter-torn 1947 recession, experts warned on Tuesday, as official figures shed light on the scale of the downturn. The UK's economy will shrink by 2.5pc in 2009 - a significantly worse year than any experienced either in the early 1990s or the 1970s, a number of economists warned. It came after the Office for National Statistics announced that the economy shrank by 0.6pc in the third quarter, notching down its previous estimate from 0.5pc, and the British Bankers' Association reported a 61pc annual fall in mortgage approvals in November.

Although the UK will not be in technical recession until the fourth-quarter figures, published next month, confirm that the contraction continued into the winter, economists said all the signs were that the slump would deepen in the coming months. A number of economists, including those at Capital Economics and Bank of America, believe that 2009 will see the worst year for the economy since at least 1947, when Britain was still recovering from the Second World War. That year, the UK was hit by one of the coldest winters on record, combined with fuel shortages and a fiscal crisis as the US threatened to pull back from their post-war loans.

Bank of America's Matthew Sharratt said: "The ongoing global financial market turmoil, the correction in the domestic housing market, historically weak household disposable income growth from recent surges in energy costs, and now rising unemployment will extract a heavy toll on the economy, in our view." He warned that the slump in 2009 could be even worse than his 2.5pc forecast if the financial markets - still in "intensive care" - endure another crisis. Jonathan Loynes of Capital Economics said that even the slide in the pound would not provide much relief for the economy. The figures revealed that the UK's productivity also fell for the first time since 1989. Output per worker, a key benchmark of economic performance and efficiency, fell 0.2pc in the third quarter compared with the previous year.

As the economy slows, the Government and the Bank of England are taking efforts to mitigate the slowdown. The Bank is expected to drop borrowing costs beneath 2pc next month for the first time in its 300-year history. However, Alistair Darling's controversial plan to cut VAT by 2.5pc to 15pc came under further fire as Olivier Blanchard, chief economist of the International Monetary Fund questioned how much this would really boost consumer spending. "Temporarily cutting VAT... does not seem to me to be a good idea," he said. "2 per cent less is not perceived by consumers as a real incentive to spend." Although the data coincided with weak GDP figures in the US, the pound dropped by almost half a cent against the dollar to $1.4693. It also fell further against the euro.

2009 will deliver new victims in retailing
Shares in retailers fell sharply on Monday amid growing fears that the new year will kick off with a raft of profit warnings from the retail sector. In fact, with the Financial Services Authority reminding retailers of their responsibilities to keep the market updated in recent weeks, some believe we could see the first warning as early as Tuesday. Traders wiped hundreds of millions of pounds off the value of Marks & Spencer and Argos-owner Home Retail Group as they compiled a short-list of the most likely losers victims of the carnage on the high street. Evidence from this weekend was, in fact, much more positive. Sales at John Lewis were still down but the 1.8pc fall was a lot better than the 13pc decline seen just a few weeks ago.

As usual the message from the "footfall" experts was mixed (trying to count the number of shoppers used to be the preserve of shopping centre landlords desperate for any evidence that they could use at the next rent review but these days it is big business despite the fact that the figures are pretty meaningless). Anecdotal evidence suggested that Monday was also better. One major retailer told me he was "way, way, way above forecast" – but as he freely admitted "the die is now cast".

Nothing short of a miracle can rescue retailers from what looks set to be the most miserable Christmas for decades. As my colleague James Hall revealed in The Sunday Telegraph, 82 of the UK's top 100 retailers are now on sale. Even those that have managed to entice shoppers into their stores have done so at considerable cost to profits. The really bad news is that no matter how awful 2008 was, 2009 looks set to be even worse as retailers – who typically buy stock in dollars – face a further blow as currency hedges expire and they are forced to buy at deeply unfavourable exchange rates.

IMF's criticism of Britain's fiscal stimulus package misses the point
No-one agrees with Alistair Darling! His hare-brained scheme to cut VAT was not only ill-advised but dangerous; he risks consigning the UK to bankruptcy. This, at least, is what the Conservatives would like you to believe. It is a compelling argument, given how many people have come out against the Chancellor's tax plans in recent weeks. Yesterday it was the turn of International Monetary Fund chief economist Olivier Blanchard to warn that the 2.5 percentage point cut will not lure people back into the shops, and not so long ago Jean-Claude Trichet signalled his disapproval of out-of-control fiscal splurges. But compelling as such arguments are, they should be treated with some scepticism. There are undoubtedly flaws aplenty in the Chancellor's tax plans – prime among them the fact that he has scared people off spending by signalling both implicitly and explicitly that taxes will rise fast thereafter. This was a mistake, since, as economics 101 teaches us, if you tell people tax cuts will be followed by rises, folk will save rather than spend their money.

But whether there is a case against fiscal stimulus per se is far less clear. The Conservatives argue that evidence that Government spending during a recession boosts the economy is limited. Furthermore, the UK's finances are in such dire straits that any extra borrowing could now risk sending the pound into a proper spiral as investors abandon the UK. Such arguments should not be dismissed, but they must be set against the scale of the crisis now facing the economy. As experts point out in today's newspaper, next year is likely to be the worst for the UK economy since post-War demobilisation. It will be the worst worldwide slump since the 1930s. Despite the Tories' scepticism about the efficacy of Keynesian spending plans, a line of Nobel-prize-winning economists are testifying to the contrary. Many of them were, like this newspaper, stern critics of politicians, like Gordon Brown, who borrowed and spent uncontrollably when they ought to have been more sensible.

But they judge that in a crisis of this scale one has to be pragmatic and do everything possible to avert a repeat of that depression. Britain's structural annual budget deficit is extremely nasty by international standards, but its national debt – the pile of debt from previous years – is not. Provided markets do not become convinced that borrowing will swell out of control, there is room for manoeuvre – particularly since pretty much every other major country in the world is implementing their own Keynesian-style plan. None of this is to say the Government should borrow much more. It will need a fair few billions left over next year to spend recapitalising the banks even further. But pre-emptively ruling out a fiscal stimulus when the world faces what looks very much like a once-in-a-century Keynesian event seems foolish in the extreme.

Treasury provides support for 92 more banks
The Treasury Department says it has provided an additional $4.7 billion to 92 banks as part of the government's $700 billion rescue of the financial system. The department released a list of 49 banks that got final approval last Friday to receive $2.8 billion. It said an additional 43 banks received final approval Tuesday, but those names will not be released until Monday.Treasury also confirmed that it had given preliminary approval to American Express Co. and CIT Group to receive support from the $700 billion bailout fund.  The money is being disbursed as part of the government's effort to buy stock in banks, to bolster their balance sheets and spur them to step up lending to fight the worst financial crisis to hit the country in seven decades. But critics contend that many banks are not using the government funds for the purpose Congress intended.

An Associated Press survey of 21 banks that received at least $1 billion each in government support found that none of them would provide specific answers on how the money was used.  Credit card giant American Express said it had received preliminary approval for $3.39 billion in government money. And commercial finance company CIT Group said it had received approval to obtain $2.33 billion.  The Treasury confirmed that both companies had received preliminary approval for government support. The final authorization comes after lawyers draw up the documents needed to transfer the funds. Under the rescue legislation passed in October, Treasury has two business days after the final documents are signed to announce the actual release of the money.  In the list of banks released Tuesday were 14 banks that do not have publicly traded stock. They were the first institutions in this category of banks to win government funds.

The Bush administration last Friday said it would lend $17.4 billion to General Motors and Chrysler LLC in an effort to buy them time to reorganize and avoid having to file for bankruptcy. GM and Chrysler had said they would run out of cash within weeks if they didn't get help.  Under the White House plan, the two companies must extract enough financial concessions from workers, dealers and other stakeholders by the end of March to show their long-term viability. But the biggest decisions about the industry's future have been left to President-elect Barack Obama.  Treasury Secretary Henry Paulson announced Friday that with the decision to provide loans to the auto companies, the first half of the $700 billion bailout fund has been committed. He said Congress needed to approve the release of the final $350 billion.

House Financial Services Committee Chairman Barney Frank, D-Mass., said Monday he is preparing legislation to require that some of the bailout money be spent for specific purposes, such as stemming foreclosures and reducing mortgage rates. Frank is pushing to get the second half of the $700 billion rescue fund released next month, before Obama is inaugurated.  Frank's bill would impose tighter restrictions on the second $350 billion, such as requiring banks to report on their new lending every quarter and toughening limits on executive compensation.  Frank said his legislation would also include a version of a plan, supported by Federal Deposit Insurance Corp. Chairman Sheila Bair, to spend $24 billion to give lenders financial incentives to modify more loans and help more borrowers keep their homes. Bair has estimated it could prevent 1.5 million foreclosures.

It was unclear whether Frank could gain enough support to win congressional approval to release the second $350 billion before Obama takes office, given opposition among Republicans.  Meanwhile, other financial industry groups are pushing to use the bailout fund to help a wider array of companies, including automotive financing companies such as GMAC Financial Services. GMAC is 51 percent owned by Cerberus Capital Management LP, a private equity firm; General Motors owns the rest.  GMAC, which provides financing for GM vehicle and dealer loans along with home mortgages, is having trouble finding adequate support from its bondholders for a debt transaction that would allow it to become a bank holding company and gain eligibility for bailout money.

SEC acts on credit default swaps
The Securities and Exchange Commission took a step Tuesday toward a new system of central clearinghouses for credit default swaps, complex investments traded globally that have been partly blamed for the financial crisis.   The SEC commissioners approved temporary exemptions from agency rules, a move that will allow LCH.Clearnet Ltd., a British firm, to operate as a central clearinghouse for transactions involving credit default swaps.  Traded in a $60 trillion market that is unregulated and secretive, credit default swaps have come under scrutiny by Congress and federal regulators in the wake of the financial and credit crises that have plunged economies around the world into recession. The idea behind a system of central clearinghouses -- promoted by a White House advisory group of regulators -- is to bring transparency to the market, possibly reducing risks to the financial system.

The SEC move Tuesday "is an important step in our efforts to add transparency and structure to the opaque and unregulated" market for credit default swaps, SEC Chairman Christopher Cox said in a statement. "These ... exemptions will allow a central (clearinghouse) to be quickly up and running, while protecting investors through regulatory oversight."  The swaps are commonly used contracts to insure against the default of financial instruments such as bonds and corporate debt. But they also are bought and sold as bets against bond defaults.  They played a prominent role in the credit crisis that brought the downfall of Lehman Brothers Holdings Inc., a government rescue plan for giant insurer American International Group Inc., and Merrill Lynch & Co. selling itself to Bank of America Corp.  The huge volume of credit default swaps sold by AIG, for example, coupled with rising levels of defaulted mortgage and other debt, threatened the company's existence and prompted the government to spend $150 billion to bail it out to avoid a catastrophic collapse. If AIG were to fail, the losses would spread to the companies and investors who bought swaps from it.

In announcing the exemptions for LCH.Clearnet, the SEC did not specify how long they would remain in force.  They will allow firms such as LCH.Clearnet to quickly put in a centralized system for clearing swaps trades, while giving the SEC time to review their operations and assess whether permanent exemptions should be granted, the agency said in a statement.  Well-regulated central clearinghouses "should help promote stability in financial markets" by reducing the risks from the default or financial distress of a major market player, the SEC said.  Several companies are seeking similar exemptions, some of them from other federal agencies that oversee them such as the Commodity Futures Trading Commission.  Executives of CME Group Inc. and IntercontinentalExchange Inc. in the U.S., Britain's LIFFE exchange and Eurex Clearing AG of Germany assured the House Agriculture Committee at a recent hearing that they would provide safe, neutral central structures that would contain risk and manipulation in the market for the  swaps.

US home sales in 2008 slowest in a decade
U.S. home sales in 2008 are expected to be the worst in a decade, November data confirmed Tuesday, and there appears to be no quick turnaround coming next year. Existing home sales plunged to a rate of 4.49 million last month, down 8.6 percent from October, and worse than economists predicted. Total sales, not calculated as an annual rate, fell 17 percent in November from a year earlier to 322,000, the National Association of Realtors said.  The median sales price tumbled 13 percent to $181,300, the largest decline since record-keeping began 40 years ago. The deteriorating economy makes the timing of any recovery in sales a moving target. While sales are growing in foreclosure-plagued areas like Las Vegas and Los Angeles, most of the country is still sinking.  And though mortgage rates dropped to nearly 5 percent last week, providing an attractive opportunity for borrowers to refinance, real estate agents say it's too early to tell how much of a sales boost low rates will provide.

"The interest rates aren't helping as much as we had hoped," said Russ Graber, an agent with Coldwell Banker in Des Moines, Iowa. "My guess is you're going to see more refinancing than people moving. I don't think people are going to want to put on more debt." Making matters worse, lending standards remain tight, the market remains flooded with unsold properties and job losses are mounting. "Once you get to a point where the economy stops contracting, then those lower mortgage rates could have some traction," said IHS Global Insight economist Brian Bethune.  On the more optimistic side, other analysts hope the big drop in mortgage rates will prop up sales early next year.  And while 45 percent of existing home sales are now foreclosures and other distressed properties, there is a silver lining, said David Resler, chief economist at Nomura Securities. "The quicker those properties get into steadier hands at prices that are more realistic, the sooner the economy gets back to some kind of health," he said.

Meanwhile, the Commerce Department said November sales of newly built homes fell 2.9 percent from October to a pace of 407,000 units, the slowest rate in nearly 18 years. The median price of a new home sold in November was $220,400, a drop of 11.5 percent from the sales price a year ago and the biggest year-over-year price decline since March. Builders have struggled to reduce production in the face of a two-year slump in housing that has seen sales and prices plummet. November sales activity was depressed by the worst financial crisis in seven decades, which has made it harder for potential buyers to get home loans.  The inventory of unsold new homes stood at 374,000 in November, down 7 percent from the October inventory level. JPMorgan Chase analyst Abeil Reinhart called that figure "the only positive news in this report." Still, there is almost a one-year supply of both new and existing homes at the current sales pace.

Lawrence Yun, the normally upbeat chief economist of the National Association of Realtors, found few positive spots in the month's dismal data. But he did note that after prior stock market crashes home sales usually rebounded within a few months. "We hope that, similarly, the current slowdown in home sales activity is a short-term phenomenon," Yun said.  The Realtors association is lobbying for a government aid package of up to $50 billion, including a $7,500 tax credit for all homebuyers. Meanwhile, builders want a more expansive aid package of at least $100 billion, including tax credits of up to $22,000 for home purchases and subsidies that would bring mortgage rates to as low as 3 percent for the first half of next year. "It's just a matter of some spark," said David Crowe, chief economist at the National Association of Home Builders. "The consumer is looking for some signal that now is the time."

Regulator Let IndyMac Backdate Infusion
A senior bank regulator was removed from his job after being accused of helping mortgage lender IndyMac Bancorp alter its records so it appeared to be in better shape -- weeks before it was seized by the government.  The Office of Thrift Supervision has reassigned its top West Coast official, Darrel Dochow, who was also a controversial figure in the regulatory lapses surrounding the savings-and-loan crisis of the late 1980s.  In a letter sent Monday to Sen. Charles Grassley, the senior Republican on the Senate Finance Committee, the Treasury Department's inspector general wrote that the federal OTS allowed the bank to backdate records of capital infusions last spring. That leeway made IndyMac appear more solid than was actually the case, shortly before federal regulators seized the bank in July -- at a cost of $8.9 billion to the government's deposit-insurance fund.

The inspector general's probe of oversight of IndyMac, once the nation's 10th-largest mortgage lender, comes as the administration is under fire for allegedly failing to rein in banks, investment firms and others who were taking huge financial risks with subprime home loans and endangering the wider financial system.  "It seems to me the people responsible for the supervision aren't doing the supervising," Sen. Grassley said in an interview Monday. "They didn't learn the lesson of 20 years ago, and some of the evidence that they didn't learn that lesson is they have still got people around who made the same mistakes 20 years ago."  An OTS spokesman said Mr. Dochow wasn't available to comment.  The key concern raised by Treasury Inspector General Eric Thorson in his letter was that OTS supervisors allowed IndyMac to register an $18 million capital injection from its holding company made on May 9 as if it had been carried out before the end of March. That appeared to put the bank's total risk-based capital ratio for the first quarter of the year over the 10% threshold for a "well-capitalized" institution, when in fact the bank had been below that mark and qualified only to be considered "adequately capitalized."

Mr. Thorson said his office was still investigating the "motive for approving and recording this transaction in the manner it was recorded." He didn't allege any criminal activity on the part of OTS officials or others in the letter.  Mr. Thorson said in the letter that his investigators had also uncovered other incidents in which OTS supervisors had allowed banks to backdate capital infusions. The letter didn't specify which banks those incidents involved.
In a letter Sunday to Mr. Thorson, OTS Director John Reich called the backdating episode "a relatively small factor in the events leading to the failure of IndyMac." He said he was taking "certain actions to ensure that OTS remains a well-managed regulatory agency," including reminding staff of "proper regulatory and accounting reporting expectations." According to Mr. Reich, without the backdated capital contribution, IndyMac's capital ratio would have fallen to 9.98% as of March 31, barely below the 10% cutoff.

Failing to hit the 10% figure would have reduced IndyMac's rating to "adequately capitalized," forcing the bank to get special permission from the Federal Deposit Insurance Corp. to offer brokered deposits. Such deposits offer higher yields to consumers but pose a greater risk to the FDIC's deposit-insurance fund. "Adequately capitalized," which has a risk-based capital minimum of 8%, isn't an uncommon status, but a move downward in a ranking can unnerve regulators and investors.  Thrifts have been particularly hard hit by the financial crisis because they typically have large mortgage portfolios. The OTS has lost two of its largest institutions this year. In addition to IndyMac, Washington Mutual Inc., which was once the nation's largest thrift as measured by market value, was seized by regulators in September in the biggest failure in U.S. history.  Some observers have speculated that the incoming Obama administration may seek to merge the OTS with the Office of the Comptroller of the Currency, another part of the Treasury that regulates national banks. "The OTS is an agency that has got a particular need to reform," said Karen Shaw Petrou, managing partner in Federal Financial Analytics, a financial-industry consulting company based in Washington D.C. But she added that all financial regulators showed lapses during the boom and were prone to "looking the other way, hoping for the best and giving institutions way too much credit for unproven assertions."

Neither Ms. Petrou nor Sen. Grassley thought the backdating incident itself was a major contributor to IndyMac's failure. But both said they saw it as symptomatic of spotty regulation. "The role of the Office of Thrift Supervision, as the name says, is to supervise these banks, not conspire with them," Mr. Grassley said in written statement.  In the case of IndyMac, Ms. Petrou said, "you had an institution which OTS should have fully recognized was a highly risky institution at the point when the backdating took place." In his letter, the inspector general singled out Mr. Dochow, director of the OTS West Region, for personally approving IndyMac's request to backdate the capital injection in a phone call with the bank's chief executive on May 9, 2008.  As chief of regulation and supervision at the Federal Home Loan Bank Board, Mr. Dochow had a role in the savings-and-loan crisis, which led to the closures of hundreds of thrifts nationwide. An aide told Mr. Dochow in 1987 that Charles Keating Jr.'s Lincoln Savings & Loan Association "is operating in an unsafe and unsound manner," according to a 1989 Wall Street Journal article. But Mr. Dochow and other regulators held off on a crackdown. Lincoln later collapsed, costing taxpayers billions of dollars and triggering a political scandal for the "Keating Five" senators who had intervened with regulators on the thrift's behalf. Mr. Dochow was demoted in the wake of the scandal, but worked his way back up the OTS hierarchy.

Germany May Limit New Stimulus Program to €25 Billion
The news, if confirmed, may irk Germany's neighbors in Europe. Newspapers are claiming the second economic stimulus package due to be unveiled next month will total just €25 billion rather than the originally planned €40 billion because Germany doesn't want to give other nations an excuse to breach deficit rules. Germany's second economic stimulus package due to be unveiled in January will be far smaller than initially discussed because the government doesn't want to give other European Union countries an excuse to break EU deficit rules, two German newspapers reported on Wednesday. Reports in Süddeutsche Zeitung and Frankfurter Rundschau said the new program to avert recession would amount to €25 billion ($34.9 billion) compared with the figure of €40 billion initially discussed.

The finance minister of the regional state of Rhineland-Palatinate, Ingolf Deubel, confirmed the figure of €25 billion in an interview with the Rhein-Zeitung newspaper following a meeting of regional government representatives with Chancellor Angela Merkel's chief of staff, Thomas de Mazière, in Berlin on Tuesday.A spokesman for the federal Finance Ministry in Berlin said no decision had yet been taken on the program "so there's no figure yet." But figures are being leaked to the press. According to Süddeutsche Zeitung, which cited unnamed government officials, the program will include €10 billion in cuts in social contributions, further billions for possible tax cuts and other measures and a "high single-digit billion sum" for public investments. The government wants to limit the program so as not to break fiscal discipline rules for the members of the euro single currency which state that the public budget deficit must not exceed three percent of gross domestic product. The rule is enshrined in the euro zone's Stability and Growth Pact, which is aimed at underpinning the strength of the single currency by ensuring that governments don't borrow too much and thereby fan price inflation.

The newspapers said that Germany's regional states and the federal government had decided to adhere to the Stability Pact in 2009 despite the looming recession. The aim is to avoid giving other EU states like France and Italy, which are already destined to breach the pact next year, no additional justification for getting lax with their budgets. The leaders of the two main parties in Merkel's government coalition, the conservative Christian Democrats and the center-left Social Democrats, are due to meet on January 5 to discuss the stimulus package, which will come on top of a €32 billion economy-boosting program agreed to earlier this month. One of Germany's leading economic research institutes, IfW, this week predicted that the German economy will shrink by 2.7 percent in 2009, which would be three times worse than the worst downturn Germany has suffered since World War II. In 1975, its gross domestic product shrank by 0.9 percent. If confirmed, the self-imposed limit to the new stimulus measures and the reason given for it could fuel tension within the EU where Merkel has been criticized for not doing enough to combat recession in Europe's largest economy.

The Bottomless Pit
The German government whipped its €480 billion bank bailout package through parliament in record time, but now the program has run into trouble. The banks are still fighting for survival, the money market isn't functioning properly, and taxpayers' money is being burned. Who knows Claudia Hillenherms? Almost no one, and yet, for some time now, she has been one of the most powerful women in Germany. To reach Ms. Hillenherms, one has to pass through a thick, heavy steel door. The painters have left their paint buckets standing in the stairwell of the historic building that belongs to Germany's central bank, the Bundesbank. Everything there smells new and seems temporary. Until two months ago, the villa in the Taunusanlage park in Frankfurt was being used as a training site for six central bankers from developing countries. But then they were suddenly forced to move to a different location because the Special Fund for Financial Market Stabilization (Soffin) needed a home. Now the building serves as the headquarters of Germany's bank bailout program. Soffin has been charged with making €480 billion ($672 billion) available to German financial institutions. Those who want a piece of the pie must deal with Claudia Hillenherms. Hillenherms, an accountant by trade and a specialist in the valuation of companies, is on loan from her employer, publicly-owned regional bank Landesbank Hessen-Thüringen (Helaba). At Helaba, she was responsible for managing the bank's takeover of a savings bank, Frankfurt Sparkasse.

Her new job as head of the financial stability measures is far more complex. In addition to protecting German financial institutions from failure, she has been charged with ensuring that the banks can continue to pursue their central purpose -- injecting money into the economy. If this doesn't happen, government stimulus programs, no matter how large, will fail, and the foundations of the German economy will begin to crumble. Hillenherms and Soffin Director Günther Merl, a former chairman of the board at Helaba, have already met dozens of bank representatives at the Frankfurt villa. "On some days, we sign off on a few billion here," says a senior member of the staff at Soffin who, despite the turbulent times, has preserved a modicum of respect for such big numbers. To date, Soffin has approved government guarantees for €90 billion ($126 billion) in loans. After prolonged negotiations with the European Union, Soffin now plans to release the first equity assistance package, worth €8.2 billion ($11.5 billion), for the German bank Commerzbank. Soffin has already received requests for at least another €100 billion ($140 billion) in liquidity assistance. Even German carmaker Volkswagen is now lining up for money.

Nevertheless, criticism of Soffin's work is growing by the day. It is not always clear what exactly is meant by Soffin: the agency itself, which is regarded as rigid and bureaucratic, its government overseers, who give it little leeway and are believed to be deeply divided amongst themselves, or even the structure of the entire bailout package. Some consider its rules too harsh, because of the conditions attached to receiving financial assistance, while others see them as far too lax because they do not force banks to seek the government's protection. The fact is that the banks' situation has hardly improved since the government decided to put up a protective umbrella for the entire banking sector. The €480 billion ($672 billion) package was approved by the government, whipped through the upper and lower houses of the German parliament and enacted -- all in the space of five days. All German banks can now take advantage of government guarantees to secure liquidity and, if necessary, obtain capital directly from the government and dispose of risky securities as needed. The goal is to reestablish trust among the banks so that they begin lending money to each other again, a system that came to a standstill after the failure of the US investment bank Lehman Brothers. The hope is that if the banks regain liquidity and can refinance themselves at any time, they will resume their normal role of injecting cash into the economy. The reality looks different. Bankers are loath to accept government protection out of fear of intervention into their business models and salaries. Those who do accept money complain that Soffin is slow to take decisions. Both circumstances reduce the effectiveness of the government's protective shield.

But what happens if the government's billions are spent and the banks are still in trouble? And what if the economy continues to tank and even large corporations can no longer borrow funds? The rescue package was originally conceived as a protective shield for the entire industry. The government wanted to back off from its previous case-by-case approach, especially after it had been forced twice to rescue the ailing mortgage lender Hypo Real Estate (HRE), where prosecutors conducted searches of executives' offices and private homes last week. Although Soffin has now been created, its attempt to bring about a general solution has proven to be a sum of case-by-case solutions -- and a bottomless pit. HRE is still the most troublesome case. The mortgage bank is requesting new guarantees at a breathtaking pace. At first, the federal government and other financial institutions assembled a €50 billion ($70 billion) packet to provide the necessary liquidity and keep the Munich-based lender afloat. A short time later, Soffin was forced to approve an additional €20 billion ($28 billion) bailout. The next €10 billion ($14 billion) followed in early December. "What else is coming?" asks a concerned member of parliament, pointing out that a single institution cannot possibly absorb the bulk of the government rescue package.

HRE's management wants to begin by downsizing to a healthier level by cutting a third of the company's workforce of 1,800 people. Management's next step, if it had its way, would be to split the company, with problematic subsidiary Depfa being nationalized and the remainder of HRE getting back to business. But the plan has encountered resistance from politicians who argue that the strategy would only benefit shareholders -- at taxpayers' expense. Bundesbank President Axel Weber has proposed an alternative solution. To shore up the German bond market, specialty lenders like HRE or Aareal could be made subsidiaries of another bank or merged to form a single bond bank. In both cases, the government would have to reach deeply into the structures of the economy. So far, the government has shied away from taking on a restructuring of the banking industry. It has also been sharply opposed to nationalizing financial institutions. The government would prefer not to become involved. It could have imposed a certain capital ratio on the banks, thereby forcing the publicly-owned Landesbank regional banks under the Soffin umbrella. It should not have given the banks any choice in the matter. Then it would have been able to force them to merge and develop new business models. Both are overdue, and yet no progress has been made.

Instead, the damaged Landesbanken continue to plod along, frittering away taxpayers' money. HSH Nordbank is a case in point. For weeks now the bank, under new CEO Dirk Jens Nonnenmacher, has had its back to the wall, and it is believed to be facing a loss of up to €2 billion ($2.8 billion) for the year. At the end of November, after lengthy negotiations with Soffin, HSH Nordbank secured a liquidity guarantee for €30 billion ($42 billion). Despite the government bailout, however, the Hamburg-based institution still has not managed to raise €3 billion ($4.2 billion) in the capital markets with a three-year corporate bond. Officially, the bank claims that the potential investors' books were already closed. In reality, says a Frankfurt banker, it was "the market's fatal vote of no confidence." In the same week, the major French bank BNP Paribas and the Italian bank Intesa Sanpaolo had no problems placing their new bonds -- without government guarantees. The strike by investors shows that hardly anyone believes that the owners of HSH Nordbank want to or are capable of raising additional equity. Its government owners, Schleswig-Holstein and Hamburg, two financially strapped German states, are in dire straits. Among the other owners, the local savings banks want out completely, and US private investor J.C. Flowers is also proving to be uncooperative.

Insiders expect HSH to be knocking on Soffin's door in January. It is not likely to be the only one. This year's fourth quarter has been disastrous for banks. Even Deutsche Bank was hard-hit. According to estimates by JP Morgan, Deutsche Bank will have to write off an additional €2.3 billion ($3.2 billion), leading to widespread speculation over whether the industry leader will be able to manage without government funds in the long run. Deutsche Bank CEO Josef Ackermann wants to avoid the walk to Soffin, only a few hundred meters from his corporate headquarters, at all costs. His name has been closely associated -- in good and bad ways -- with the government's rescue package from the beginning. Ackermann was the first to call for a general bailout for the industry. But the government is also convinced that Ackermann stigmatized the package when he said, at an internal event, that he would be ashamed to see his bank requesting help from the government. Finance Minister Peer Steinbrück was livid when he heard the news. Ackermann, he said, had paved the way "for a two-class society in the banking sector: into those that don't need help and those that are at risk of relegation. This is dangerous, because the markets respond to it." A man like Ackermann should have known better.

At a Dec. 14 economic summit at the Chancellery, the office of Chancellor Angela Merkel, Ackermann proposed the idea of what he called a Bad Bank -- a government institution that would buy risky securities from the banks and hold onto them until they matured. In this way Deutsche Bank, too, could shed excessively high-risk securities without having to apply directly for government assistance. It is already possible to transfer bad loans to Soffin as part of the rescue package. But no one has made use of this option yet, because the toxic loans can only be outsourced for three years, at which point they are transferred back. This restrictive provision led to the failure of talks between Postbank and Soffin. Postbank wanted to get rid of high-risk securities worth €5 billion ($7 billion). If the bank had come to an agreementwith Soffin, Deutsche Bank would also have benefited from the government bailout, because it recently became a major shareholder in Postbank. Approaching Soffin directly would come at a heavy price for Deutsche Bank and its chief executive. Ackermann has stated his position so adamantly that he could hardly hold onto his job if his bank were forced to apply for government bailout funds. Soffin already has its hands full. Hillenherms, who sees everything from minor exploratory inquiries ("What would it cost us to secure equity capital from you?") to urgent calls for help ("We'll be bankrupt tomorrow") cross her desk, is currently reviewing a preliminary inquiry from Aareal Bank. The publicly traded mortgage lender is not in critical straits but merely wants to recapitalize, says an individual familiar with the situation. Aareal Bank has not submitted an official application yet, but its options include guarantees as well as equity capital injections from the government. The bank has declined to comment.

Many applicants complain that Soffin is taking far too long to process their requests. It can take weeks before they are even looked at, and applicants say that the decision-making criteria are vague. The 21 employees at Soffin, most of them on temporary loan from the Bundesbank, see themselves as whipping boys, forced to take responsibility for everything that goes wrong in the bank rescue effort. Karlheinz Bentele, the former president of a savings bank and a member of the managing board of Soffin, returned to his regular job after only a few weeks. Soffin Director Merl has yet to sign a valid contract, and the names of potential successors are already being mentioned in the industry, including that of former Finance Minister Hans Eichel. The source of the trouble is a tangible dispute over competencies. Even though Merl heads the managing board of Soffin, a steering committee must approve key decisions. The Finance Ministry and even the Chancellery are involved in major cases. A senior staffer at Soffin complains that the agency operates in a gray zone between business and politics. This is complicated by the fact that even the government's representatives cannot always agree on what the right approach should be. What is clear, though, is that the system cannot continue in its present form. The weaknesses are all too obvious, including those of the underlying legislation that created the system. As long as old toxic debt can only be outsourced for three years and is capped at €5 billion ($7 billion), a permanent clean-up will be impossible.

The risks continue to hover around the banks. Even senior Soffin representatives are now convinced that the creation of one or more Bad Banks, as Ackermann proposes, is inevitable. Finally, the government will have to clarify when and under what circumstances banks should be nationalized. Most of all, however, the money market needs to be revitalized. Before the crisis, the banks would lend each other up to €500 billion ($700 billion) every day. This flow of money back and forth between banks during normal times is extremely important for the economic cycle. It ensures that the banks use the capital available to them in an optimal way. This, in turn, benefits corporate customers that require larger loans. Conversely, if this interbank market no longer functions properly, the banks must stockpile liquidity -- that is, form reserves -- to be able to service all obligations at all times. As a result, they are left with little or no latitude for new business. Mid-sized companies, in particular, are currently feeling the impact. A government clearing house could be a possible solution to this problem. Banks would no longer lend money directly to other banks. Instead, all cash would flow through this central clearing house and would be guaranteed by the government. The Bundesbank has been asked to examine such a measure, and the government plans to discuss it in January. But what happens if this solution is also ineffective? Or if the banks start lending money to each other again, but not to companies, because they see commercial lending as too risky? If that happens, the government will face calls to start lending money to companies directly.

An Ethanol Bailout?
Along with Russia, Venezuela, Iran and the Dubai property market, add another name to the list of bubble economies hurt by the falling price of oil: the ethanol industry. And naturally, the ethanol lobby is looking for a bailout on top of its regular taxpayer subsidies.   The commodity bust has clobbered corn ethanol, whose energy inefficiencies require high oil prices to be competitive. The price of ethanol at the pump has fallen nearly in half in recent months to $1.60 from $2.90 per gallon due to lower commodity prices, and that lower price now barely covers production costs even after accounting for federal subsidies. Three major producers are in or near bankruptcy, including giant VeraSun Energy.  

So here they go again back to the taxpayer for help. The Renewable Fuels Association, the industry lobby, is seeking $1 billion in short-term credit from the government to help plants stay in business and up to $50 billion in loan guarantees to finance expansion. The lobby would also like Congress to ease the 10% limit on how much ethanol can be added to gasoline for conventional cars and trucks -- never mind the potential damage to engines from such an unproven mix. Of course, the ethanol industry wouldn't even exist without the more than $25 billion in taxpayer handouts over the past 20 years. Congress only recently passed energy and farm bills that further greased ethanol production with a 51 cent a gallon tax credit, corn subsidies, plus increasingly stringent biofuel mandates. We were told, as usual, that profitability was just around the corner. 

The uglier realities of corn ethanol are at least becoming more widely recognized, even on the political left. The Environmental Working Group and five other environmental organizations said this week they oppose a bailout because subsidies "for corn-based ethanol have produced unintended, yet potentially catastrophic environmental consequences, with little or no return to taxpayers in energy security [or] protection from global warming."  Don't expect Congress to listen. Ethanol may never be profitable in the real world, but in Washington it's a lucrative business that provides jobs and votes. Like Fannie Mae and Freddie Mac, ethanol is a business created by Congress that now has to be bailed out to save Congress from   embarrassment.

A Highly Evolved Propensity for Deceit
When considering the behavior of putative scam operators like Bernard "Ponzi scheme" Madoff or Rod "Potty Mouth" Blagojevich, feel free to express a sense of outrage, indignation, disgust, despair, amusement, schadenfreude. But surprise? Don’t make me laugh. Sure, Mr. Madoff may have bilked his clients of $50 billion, and Governor Blagojevich, of Illinois, stands accused of seeking personal gain through the illicit sale of public property — a United States Senate seat. Yet while the scale of their maneuvers may have been exceptional, their apparent willingness to lie, cheat, bluff and deceive most emphatically was not. Deceitful behavior has a long and storied history in the evolution of social life, and the more sophisticated the animal, it seems, the more commonplace the con games, the more cunning their contours.

In a comparative survey of primate behavior, Richard Byrne and Nadia Corp of the University of St. Andrews in Scotland found a direct relationship between sneakiness and brain size. The larger the average volume of a primate species’ neocortex — the newest, "highest" region of the brain — the greater the chance that the monkey or ape would pull a stunt like this one described in The New Scientist: a young baboon being chased by an enraged mother intent on punishment suddenly stopped in midpursuit, stood up and began scanning the horizon intently, an act that conveniently distracted the entire baboon troop into preparing for nonexistent intruders.

Much evidence suggests that we humans, with our densely corrugated neocortex, lie to one another chronically and with aplomb. Investigating what they called "lying in day-to-day life," Bella DePaulo, now a visiting professor of psychology at the University of California, Santa Barbara, and her colleagues asked 77 college students and 70 people from the community to keep anonymous diaries for a week and to note the hows and whys of every lie they told. Tallying the results, the researchers found that the college students told an average of two lies a day, community members one a day, and that most of the lies fell into the minor fib category. "I told him I missed him and thought about him every day when I really don’t think about him at all," wrote one participant. "Said I sent the check this morning," wrote another.

In a follow-up study, the researchers asked participants to describe the worst lies they’d ever told, and then out came confessions of adultery, of defrauding an employer, of lying on a witness stand to protect an employer. When asked how they felt about their lies, many described being haunted with guilt, but others confessed that once they realized they’d gotten away with a whopper, why, they did it again, and again. In truth, it’s all too easy to lie. In more than 100 studies, researchers have asked participants questions like, Is the person on the videotape lying or telling the truth? Subjects guess correctly about 54 percent of the time, which is barely better than they’d do by flipping a coin. Our lie blindness suggests to some researchers a human desire to be deceived, a preference for the stylishly accoutred fable over the naked truth.

"There’s a counterintuitive motivation not to detect lies, or we would have become much better at it," said Angela Crossman, an assistant professor of psychology at the John Jay College of Criminal Justice. "But you may not really want to know that the dinner you just cooked stinks, or even that your spouse is cheating on you." The natural world is rife with humbug and fish tales, of things not being what they seem. Harmless viceroy butterflies mimic toxic monarch butterflies, parent birds draw predators away from the nest by feigning a broken wing, angler fish lure prey with appendages that wiggle like worms. Biologists distinguish between such cases of innate or automatic deception, however, and so-called tactical deception, the use of a normal behavior in a novel situation, with the express purpose of misleading an observer. Tactical deception requires considerable behavioral suppleness, which is why it’s most often observed in the brainiest animals.

Great apes, for example, make great fakers. Frans B. M. de Waal, a professor at the Yerkes National Primate Research Center and Emory University, said chimpanzees or orangutans in captivity sometimes tried to lure human strangers over to their enclosure by holding out a piece of straw while putting on their friendliest face. "People think, Oh, he likes me, and they approach," Dr. de Waal said. "And before you know it, the ape has grabbed their ankle and is closing in for the bite. It’s a very dangerous situation." Apes wouldn’t try this on their own kind. "They know each other too well to get away with it," Dr. de Waal said. "Holding out a straw with a sweet face is such a cheap trick, only a naïve human would fall for it."

Apes do try to deceive one another. Chimpanzees grin when they’re nervous, and when rival adult males approach each other, they sometimes take a moment to turn away and close their grins with their hands. Similarly, should a young male be courting a female and spot the alpha male nearby, the subordinate chimpanzee will instantly try to cloak his amorous intentions by dropping his hands over his erection. Rhesus monkeys are also artful dodgers. "There’s a long set of studies showing that the monkeys are very good at stealing from us," said Laurie R. Santos, an associate professor of psychology at Yale University.

Reporting recently in Animal Behavior, Dr. Santos and her colleagues also showed that, after watching food being placed in two different boxes, one with merrily jingling bells on the lid and the other with bells from which the clappers had been removed, rhesus monkeys preferentially stole from the box with the silenced bells. "We’ve been hard-pressed to come up with an explanation that’s not mentalistic," Dr. Santos said. "The monkeys have to make a generalization — I can hear these things, so they, the humans, can, too." One safe generalization seems to be that humans are real suckers. After dolphin trainers at the Institute for Marine Mammals Studies in Mississippi had taught the dolphins to clean the pools of trash by rewarding the mammals with a fish for every haul they brought in, one female dolphin figured out how to hide trash under a rock at the bottom of the pool and bring it up to the trainers one small piece at a time. We’re desperate to believe that what our loved ones say is true. And now we find otherwise. Oh, Flipper, et tu?

Profiles in Panic

With Wall Street hemorrhaging jobs and assets, even many of the wealthiest players are retrenching. Others, like the Lehman Brothers bankers who borrowed against their millions in stock, have lost everything. Hedge-fund managers try to sell their luxury homes, while trophy wives are hocking their jewelry. The pain is being felt on St. Barth’s and at Sotheby’s, on benefit-gala committees and at the East Hampton Airport, as the world of the Big Rich collapses, its culture in shock and its values in question.

A snapshot: East Hampton, late summer, a lawn party at a house on the ocean overlooking the dunes. The host is a prince of private equity known for dressing well. One of his guests is Steven Cohen, the publicity-shy billionaire whose SAC Capital, with $16 billion under management, is perhaps the most revered of the 10,000 or so hedge funds spawned by this giddily rich time. Nearby is Daniel Loeb, of Third Point, one of the better-known "activist" hedge funds, who hopes to move soon into a 10,700-square-foot, $45 million penthouse at 15 Central Park West, a Manhattan monument to the new gilded age. Gliding easily between them is art dealer Larry Gagosian, so successful at selling Bacons and Serras to Wall Street’s new titans—including to Cohen—that he now travels in his own private jet and has his own helicopter to take him to it. But here’s the odd thing: despite the beauty of the ocean view, nearly all the guests have their backs to it. Cohen is deep in conversation with a colleague who seems to be pitching him a deal. Loeb hovers close to his wife, a former yoga teacher. Gagosian is near his stunning young girlfriend. No one notices the clouds that are, quite literally, on the horizon.

Snap. Six weeks later, the photograph is cracked and sepia-toned, curling at the edges, a historic print. In just that short time, the storm has hit and nothing looks the same. It may be premature to say our gilded age has ended. Third Point dropped 10 percent in October, bringing it down 27 percent for the year, but Daniel Loeb is still moving into his extravagant new apartment. Steven Cohen’s SAC was down 11 percent in October and 18 percent for the year to date, but that still leaves him plenty of money to add a second ice-skating rink to his Greenwich, Connecticut, estate. And Larry Gagosian is still selling plenty of art. What’s definitely gone—along with Lehman Brothers and Bear Stearns—is leverage, at least to the dizzying degree it was recently used by Wall Street’s investment banks, hedge funds, and private-equity firms to parlay each dollar of their assets into $10, $20, even $30 or more of credit to make gargantuan deals and profits. The credit crunch has made such leverage as quaint as the market in Dutch tulips. Without it, Wall Street salaries have already started drifting gently back to earth like so many limp balloons.

Gone, too, are jobs—lots and lots of them. Along with a sizable portion of Lehman’s 26,000 worldwide, and Bear Stearns’s 14,000, Wall Street firms across the board—even Goldman Sachs—are cutting back, and that pain radiates out to the limousine drivers and caterers and lawyers and personal trainers and restaurant owners and real-estate brokers who rely on Wall Street clients, not to mention to the many nonprofits and charities that have grown accustomed to Wall Street money. The latest estimate of jobs New York will lose, both on and off Wall Street, is 160,000. Governor David Paterson says the state’s budget deficit has already reached $12.5 billion. In New York City, where Wall Street accounts for more than a quarter of the tax revenues, Mayor Michael Bloomberg thinks the financial-sector crisis will leave a $2 billion hole in the next fiscal year’s budget. Almost everyone has lost something—if not their jobs, then 25 to 50 percent of their retirement savings—and nearly everyone is glum, anxious, hung over. Prudence is the watchword now: sackcloth after the brilliant silks and brocades of the gilded age. The day after Lehman Brothers went down, a high-end Manhattan department store reportedly had the biggest day of returns in its history. "Because the wives didn’t want the husbands to get the credit-card bills," says a fashion-world insider. A prominent designer says ruefully, "People really aren’t shopping at all unless there’s a deal or sale. It’s pretty dramatic—they have the stores at their mercy."

Even those who have plenty left to spend aren’t spending it. "I ran into a couple I always see at the antiques show," one Upper East Side woman recounts of her visit to the Armory show on Park Avenue. "They always buy something fairly grand. ‘What have you bought this time?’ I asked. ‘Oh, nothing!’ they said. ‘We’d feel … ashamed.’" Another Upper East Side woman often goes from lunch at Michael’s restaurant on West 55th Street to Manolo Blahnik a block away to pick up a $600 or $700 pair of shoes as "retail therapy." No more. "I was at Michael’s yesterday and was thinking, Oh, Manolo’s … But then I thought, Why? Why do that? It just doesn’t feel good." Only months ago, ordering that $1,950 bottle of 2003 Screaming Eagle Cabernet Sauvignon at Craft restaurant or the $26-per-ounce Wagyu beef at Nobu, or sliding into Masa for the $600 prix fixe dinner (not including tax, tip, or drinks), was a way of life for many Wall Street investment bankers. "The culture was that if you didn’t spend extravagantly you’d be ridiculed at work," says a former Lehmanite. But that was when there were investment banks. Now many bankers, along with discovering $15 bottles of wine, are finding other ways to cut back—if not out of necessity, then from collective guilt and fear: the fitness trainer from three times a week to once a week; the haircut and highlights every eight weeks instead of every five. One prominent "hedgie" recently flew to China for business—but not on a private plane, as before. "Why should I pay $250,000 for a private plane," he said to a friend, "when I can pay $20,000 to fly commercial first class?"

The new thriftiness takes a bit of getting used to. "I was at the Food Emporium in Bedford [in Westchester County] yesterday, using my Food Emporium discount card," recounts one Greenwich woman. "The well-dressed wife of a Wall Street guy was standing behind me. She asked me how to get one. Then she said, ‘Have you ever used coupons?’ I said, ‘Sure, maybe not lately, but sure.’ She said, ‘It’s all the rage now—where do you get them?’" One former Lehman executive in her 40s stood in her vast clothes closet not long ago, talking to her personal stylist. On shelves around her were at least 10 designer handbags that had cost her anywhere from $6,000 to $10,000 each. "I don’t know what to do," she said. "I guess I’ll have to get rid of the maid." Why not sell a few of those bags?, the stylist thought, but didn’t say so. "Well," the executive said after a moment, "I guess I’ll cut her from five days a week to four."

There were, to be sure, some big-name "blowups" as the market began to implode. Here was Sumner Redstone, chairman of Viacom and CBS, who had to sell $233 million worth of Viacom and CBS stock in order to pay down part of an $800 million loan. T. Boone Pickens, legendary Texas oilman, was another blowup, and so was Chesapeake Energy’s Aubrey McClendon, forced by a margin call to sell 94 percent of his 32 million company shares into the bear market. (Worth $2.2 billion last July, the shares were sold in October for $569 million.) Kirk Kerkorian, 91, has lost about $12 billion on his 54 percent ownership stake in MGM Mirage, the casino and hotel operator that owns almost half the hotel rooms on the Las Vegas Strip, including those in the Bellagio, the MGM Grand, the Mirage, and Mandalay Bay. The company’s stock is down 86 percent this year, and its bonds were downgraded deeper into junk status in October. Kerkorian has reportedly told friends that he "lived one year too long." (He now claims he never said it.) Nevertheless, he and the other three men are all still billionaires.

These were the stories known because they involved large chunks of publicly traded stock. But as October turned into one of the worst market months since October l929, rumors ran rampant about which high-flying hedge funds would crash as they tried in vain to unwind their investments in derivatives and other unregulated securities, many of them entwined with subprime mortgages. With their lenders forcing them to sell assets at new lows, and their investors trying to pull their money out, the hedge funds were caught in the middle: the gilded age’s biggest winners were now among its biggest losers. Would Ken Griffin’s Citadel be the first big hedge fund to go? Or Fortress—whose clients are trying to redeem $4.5 billion? In fact, the first big tree down following that dreadful month was Tontine Associates, which managed $11 billion through its four hedge funds and whose activist founder, Jeffrey Gendell, had become a billionaire by generating more than 100 percent returns in 2003 and 2005. After two of his funds had lost two-thirds of their value, Gendell bowed to the inevitable and is expected to close them. Days later came word that Steven Rattner was closing his small but high-profile media hedge fund, Quadrangle Equity Investors, after approximately 25 percent year-to-date losses.

Of those 10,000 hedge funds, as many as half may join the casualty list in the next few years. Not that many hedge-fund managers, though, will be reduced to selling apples. Take Remy Trafelet, 38, a handsome, smooth-faced preppy whose fund faces steep year-end losses and dwindling capital—from $6 billion to $3 billion—as investors depart. In a good year, such as 2005, when Trafelet racked up 42 percent returns, he and his partners pocketed hundreds of millions of dollars. Still, he may have to trim his lifestyle a bit. Tellingly, no fewer than 50 high-end New York apartments have been put on the market since late September, most by Wall Streeters. Usually, the fall listings for apartments between $10 and $20 million are all teed up by Labor Day. Not this year, as The New York Times’s Josh Barbanel notes. At the Majestic, on Central Park West, two Wall Streeters listed their three-bedroom units within hours of each other. Robert Long, a managing director of hard-hit Allied Capital, listed 8C for $13.8 million as "the most magnificently renovated grand apartment to become available on Central Park West in years." James Kern, a former senior managing director of Bear Stearns, listed 17D—the "ultimate renovation"—for $12 million.

Ten blocks away, at the Park Laurel tower, on 63rd Street, Charles Michaels, of the hedge fund Sierra Global Management, listed his 2,800-square-foot, four-bedroom apartment with terrace for $14.9 million. In early October, Steven F. Stuart, of the Garrison Investment hedge fund, listed the apartment directly above Michaels’s—no terrace—for $10.8 million. Ten days later, real-estate developer Ira Resnick put his own, similar apartment at the Park Laurel up for sale—for $10 million. Nowhere is the downturn more dramatic, though, than downtown, where new condominium towers by cutting-edge architects vie for a market that’s almost vanished overnight: young Wall Streeters with bonuses to throw at sleek, overpriced apartments in Richard Meier–knockoff buildings. For the developers, it’s proved a game of high-stakes musical chairs. Those who got their buildings up by early 2007 have sold many of their units by now. Those who started selling after Bear Stearns’s collapse, last March, are struggling, as the Web site StreetEasy confirms. And for those just getting started, good luck.

In the financial district itself, hotel impresario André Balazs embarked on the 47-story William Beaver House in 2006. StreetEasy’s Sofia Kim suggests the name was meant—or at least interpreted—as a naughty wink to hard-partying bachelor traders. With the Tsao & McKown–designed building due to open this month, 209 of its 320 mostly one- and two-bedroom units have sold at top-of-the-market prices—from $900,000 to $6 million. But the rest are either for sale or being held in reserve. That’s a lot of unsold units. Still, Balazs has done better with the Beaver House than Kent Swig has with his condominium tower at 25 Broad Street, designed by Cetra/Ruddy. Swig closed its sales office until further notice, citing liquidity problems due to Lehman Brothers’ demise. At One York Street, the soaring glass tower designed by Enrique Norten overlooking busy Canal Street, developer Stan Perelman says 28 of his 40 units have closed, though he admits that his 6,096-square-foot penthouse, with an asking price of $34 million, has yet to find a taker. The raw space, entirely glass-walled, is both exhilarating and somewhat vertiginous; as for the small ventilation windows at ankle height, they’re probably not a good idea for an owner with cats. "When the hardwood floors are in, the slabs, the home theater—press a remote and all the shades go up automatically and the music begins—someone will say, ‘Where do I sign?,’" Perelman suggests. Next month, that is, or the month or the year after …

River views—and the cachet of a world-class architect—do help. The Superior Ink building, a former factory on West 12th Street overlooking the Hudson, was given a Robert A. M. Stern makeover, and most of its 68 apartments and seven adjoining town houses have sold. So, then, how about partial river views and a famous artist, just one block away? On West 11th Street, painter and filmmaker Julian Schnabel has lived for years in a wide former stable he calls Palazzo Chupi. In keeping with the gilded age, he added nine lavish floors of his own design. Richard Gere bought the fourth floor, but now it’s back on the market. A "private individual" took the fifth, and Schnabel himself lives on the sixth and seventh. Still for sale above are a duplex and a triplex penthouse. From across the street, the addition’s dusty-rose stucco and Italianate arches look striking enough. Inside, Palazzo Chupi is nothing less than a brilliant artist’s interpretation of a gilded age—only not this one. More like the Italian Renaissance. A bronze-domed elevator with Italian-tile floor opens into the penthouse’s furnished living room, with nearly 15-foot ceilings of hand-hewn wood beams, a colorful Venetian-glass chandelier, and a massive, 8-foot-high fireplace. Giant Schnabel canvases fill the walls. They aren’t included in the $24 million price, but as Corcoran broker James Lansill puts it, "You could try … " Schnabel is, he says, a seller. In fact, the triplex started at $32 million—before the market meltdown.

The triplex has 3,713 square feet of interior space, but also 2,304 square feet of balconies and terraces (seven in all). It has arched windows throughout, baronial bathrooms with vintage fixtures, and the most romantic master bedroom in New York. The interior of the duplex is even larger, and features a living room—25 feet by 41.6 feet—with wood-beamed ceilings nearly 20 feet high. Only three terraces, though, hence the bargain price of $23 million. Among its many splendors is a huge square bathroom with a sunken tub in the middle, a fireplace, and French doors that open out through red velvet drapes to an Italian-tiled balcony. "His idea is for you to be able to sit in the bath with a roaring fire, the doors wide open, and snow on the balcony," Lansill says. Either of Schnabel’s gilded-age fantasies is well worth the price for anyone with $20 to $30 million to spare. The question is: Does anyone have $20 to $30 million to spare on a gilded-age fantasy these days? Perhaps. In the black-and-white-tiled lobby, as Lansill leads the way out, a trim, elegantly dressed Russian fellow with blond hair and wraparound sunglasses sweeps in. "I have an appointment," he says to the guard in a thick Russian accent, "with Mr. Schnabel."

Fall’s auctions, in both London and New York, have tracked the deepening gloom as surely as real estate and stocks have. Literally on the heels of Lehman’s bankruptcy, in mid-September, Damien Hirst held a two-day sale of animals in formaldehyde and other nature-based art at Sotheby’s in London and raised $200 million, apparently from Russian, Middle Eastern, and Asian buyers for the most part, thus panicking the private-art-dealer world, which he’d circumvented by using the auction house. For perfect end-of-an-age timing, his "Beautiful Inside My Head Forever" auction ranked right up there with Blackstone’s June 2007 I.P.O., at private equity’s high-water mark. Then came the sickening slide in the stock market. By early November London’s Evening Standard was reporting rumors that some buyers had reneged on their bids and that a lot that had purportedly sold was being offered to a collector. (A Sotheby’s spokesman denied the rumors.) By mid-November, Sotheby’s was reporting a $52 million loss in guarantees from the season’s first auctions—sums the auction house had guaranteed sellers before the market meltdown and had to make good on when their art fetched prices below those figures. That included the $40-million-plus guarantee reportedly promised to private-equity titan Henry Kravis and his wife, Marie-Josée, for Edgar Degas’s Dancer in Repose. On November 3, the circa 1879 pastel and gouache sold over the phone, with a bid placed in Tokyo for only $33 million, leaving Sotheby’s on the hook for millions. William Ruprecht, Sotheby’s chief executive, later announced, "We’re out of the guarantee business, at least for a while."

Christie’s had its own problems. One in particular involved auctioning 16 postwar drawings owned by former Lehman chairman Richard Fuld and his wife, Kathy, in New York on November 12. Christie’s had given them a $20 million guarantee, but the group fetched only $13.5 million. The entire auction, of contemporary works by such noted artists as Barnett Newman, Willem de Kooning, and Roy Lichtenstein, achieved only half its pre-sale low estimate. As auctions go, so, soon enough, will museums, accustomed to Wall Street largesse. People are wondering: Will Kathy Fuld, who has donated or helped acquire 42 artworks for the Museum of Modern Art, stay on the board as a vice-chairman? For that matter, will private-equity billionaire Leon Black, another MoMA vice-chairman? In early October a company owned by Black’s Apollo Management lost a legal battle in Delaware chancery court over its efforts to back out of a $6.5 billion deal. The judge ruled that a deal was a deal and must go forward, but Apollo’s lenders, Credit Suisse and Deutsche Bank, now seem unlikely to participate, and Black and his Apollo co-founder, Joshua Harris, may face having to pay billions in damages. That may not put Black in a mood to buy art for MoMA.

Other museums face similar funding threats, as do all philanthropies. When the meltdown deepened, talk inevitably turned to the Robin Hood Foundation, started by hedge-fund legend Paul Tudor Jones II and underwritten largely by hedge-fund money. Citadel Investment’s Ken Griffin has been a generous donor, but with his largest fund down nearly 40 percent for the year, how likely is Citadel to pony up a major gift in 2009? Or Glenn Dubin, of Highbridge Capital Management? (Two of its funds are down 32 and 37 percent for the year.) Or Alan D. Schwartz, on whose watch as C.E.O. Bear Stearns went down? In the case of Richard Fuld, the answer seems already clear: as of late October, his name was no longer listed on Robin Hood’s board of directors. The fate of the Lehman Brothers Foundation tells the larger story of post-meltdown Wall Street philanthropy all too well. In the halcyon days, before the downturn, when one year Lehman Brothers was racking up a record $4 billion net income, its employee-funded foundation pledged $3 million to Lincoln Center’s redevelopment campaign, $1 million to the Apollo Theater’s education and outreach programs, and $50,000 to the Orchestra of St. Luke’s, among other New York causes. The good news is that the foundation, as a non-profit entity, wasn’t linked to Lehman’s bankruptcy filing. The bad news is that Lehman’s ex-employees, their jobs gone and their stock all but worthless, probably won’t be kicking in any more money to the foundation. (A spokesman for the Lehman foundation did not respond to a call from Vanity Fair.)

If the gilded age has come to an end this fall, surely Lehman’s demise—with its bankruptcy filing on that Monday morning of September l5, 2008—was the tipping point. It panicked the money markets, froze global credit, and sent stock prices spiraling down. Lehman’s 31st floor—where Fuld and his top executives worked—was by all accounts a quiet place, especially by midafternoon, one managing director recalls dryly. Among Fuld’s loyalists, no one was more loyal than his number two, chief operating officer Joe Gregory, whose story, even more than Fuld’s, seems emblematic of the age now past. If Tom Wolfe were writing a sequel to The Bonfire of the Vanities, Gregory would be his man. Gregory, 56, was a legend at Lehman—less for his business exploits than for his lifestyle. He had several homes: a principal residence in Lloyd Harbor, on Long Island’s North Shore; an oceanfront McMansion in Bridgehampton; a ski home in Manchester, Vermont; an apartment at 610 Park Avenue; and reportedly a house in Pennsylvania. "He had a kid who went to a small school in Pennsylvania," a former senior colleague recalls. "Joe didn’t like the hotel, so he bought [a] house in town. It was probably only $500,000, but he paid for it so that, on the maybe two trips a year he took there, he’d have a nice place to stay. And then he had it redecorated!" The colleague says he heard it on good authority that Gregory’s after-tax expenses approached $15 million per year. That, he heard, was exclusive of mortgages. (Gregory’s lawyer declined to comment on e-mails from Vanity Fair.)

Gregory came from a modest background, an ex-colleague recalls; at one time he had aspired to be a high-school history teacher. One summer while attending Long Island’s Hofstra University, though, he worked as an intern at Lehman and got hooked. Both he and Fuld joined the firm soon after college; as the two men rose in the ranks, they became close friends. Like Fuld, Gregory started on the commercial-paper trading desk. By the 1980s he’d become a top executive in fixed income and was known as one of Lehman’s Huntington Mafia, because all four executives in it lived in or near that North Shore town and often commuted together. "It was said that the four of them decided the fate of the floor every day on their drives back and forth," recalls one ex-colleague. "And you had to be in their good graces to survive on the fixed-income floor." Gregory’s rise was strongly linked to Fuld’s: loyalty was his strong suit. "Joe never had clients," says a lawyer who worked with the firm. "So he wasn’t on 31 because he was a rainmaker. And he never really had a business he was responsible for. He was Fuld’s full-time loyal lieutenant. And Fuld did have a yes-man mentality, where if people didn’t agree with him they’d get shot. And Gregory was sort of the hatchet man, who fired them or tried to enforce rules."

Gregory played the sidekick role well, two ex-colleagues suggest. The problem, says one, is that as president and chief operating officer, beginning in 2004, he came to oversee all departments, including the derivatives that would get so tricky. The commercial paper (i.e., short-term loans solicited by creditworthy companies and banks) he’d traded in his early days was lower-risk. "If you bought it wrong, you could hold the position," one ex-colleague explains, "till it rolled off—30 or 60 days. So it would cost you a few basis points, that’s all." The longer end of the market involved bonds you might get stuck with if the market changed. "I don’t know if Gregory knew how much risk he was taking," the ex-colleague says. "The other thing, which Joe had never seen, was how a market could go highly illiquid. Joe had observed this but not lived it."

As the real-estate bubble swelled, and with it the $55 trillion market in unregulated, collateralized debt obligations and credit-default swaps, so did Gregory’s compensation—and lifestyle. He and his current wife, Niki, provided generously for their five children—three of them hers, two his. They gave to medical charities—Huntington Hospital, Weill Cornell Medical Center, and the Maurer Foundation for Breast Health Education, among others. When their daughter became a serious soccer player, the Gregorys underwrote a new local soccer field. "Joe had a huge heart—he gave a ton of money away," says one ex-colleague. At Lehman, the ex-colleague adds, "he drove all the diversity and philanthropic initiatives." But the Gregorys rewarded themselves too. Tired of the 90-minute commute, Joe bought a helicopter for the ride. When he realized the chopper couldn’t fly to Manhattan in inclement weather, he got a seaplane. Niki was known as the best customer at the high-end boutique where all the wealthy North Shore wives shopped; the store’s personal buyers came to the house, their arms filled with couture and cashmere. The Gregorys undertook a renovation of the Lloyd Harbor home that would cost, by one report, $3.5 million. They bought the Bridgehampton home for about $19 million in 2006 and hired a top local designer to do it up. One day Gregory called his staff out to admire the new Bentley he’d just bought for his wife. "Look at the dashboard," he allegedly said. "It’s one piece of burled wood."

"They weren’t society people," says an acquaintance of the Gregorys. "They didn’t buy art the way the Fulds did; they didn’t really entertain." The Lloyd Harbor renovation included a new state-of-the-art kitchen, but the Gregorys ate cold cuts on their fine china. (One guest espied a $4,600 price sticker on one of the plates. She chose not to ask whether the price was for one plate or the set.) At a local restaurant he frequented, Gregory once left an $1,800 tip for a $200 tab, says a Lehman colleague. The problem was that roughly 75 percent of Gregory’s compensation—which reached $26 million in 2007—was in Lehman stock. Some of the stock could be sold only after a five-year waiting period, but most Lehman employees kept the bulk of their holdings long after that—not only out of loyalty but because its rise from $6 a share in 1998 to $85 in early 2007 had made them very, very rich. At least on paper. Fuld had by far the largest in-house holding: at the high-water mark, he owned stock worth almost $1 billion—not counting his stock options. Gregory had the second-largest stake: an estimated $574 million.

Most Lehman bankers saw little risk in borrowing against their stock to fund the lifestyle to which they were, on paper, entitled. "Say you have $8 million of Lehman stock," suggests a senior investment adviser, using hypothetical numbers but a true-life case about a good friend who worked at Lehman. "You want to build a $2 million house. You pledge your stock and you borrow the money and you say to yourself, ‘Let’s say the worst happens: we have a terrible drop in the market. My $8 million will still be worth $4 million, and I’ve only borrowed half of that. So I’m being very conservative.’ But that doesn’t allow for $8 million down to zero."

At Lehman, Gregory set a new goal in 2007, according to a former colleague: he wanted Lehman to overtake Goldman Sachs, which was raking in huge profits by leveraging as much as 40 to 1. And he wanted Lehman’s share price to reach $100. He imposed ambitious targets on all of Lehman’s capital departments, targets that required taking big risks on deals that would become increasingly shaky. As the real-estate market collapsed, so did those investments. For Gregory, the end came in June 2008, with the release of Lehman’s shockingly bad second-quarter numbers: $2.8 billion in losses, after months of confident pronouncements from the firm. When the numbers came out, the outcry was fierce. Lehman was accused of misleading the market by attaching wildly over-optimistic values to its portfolio of commercial real estate and mortgage-backed securities. Class-action suits by pension funds hard-hit by Lehman’s losses were filed. Groups like the Operative Plasterers and Cement Masons International Association Local 262 and the Fire & Police Pension Association of Colorado—these were among the plaintiffs who hadn’t even known they were part of the gilded age. Only they were: Lehman’s bankers had used their retirement money to make those 40-to-1 bets and live like princes. Now that money was gone.

Fuld seemed reluctant to fire his old friend, so Gregory made the decision for him. "Wall Street wants a head," he said sadly, The Wall Street Journal reported. At some point, Gregory apparently turned to Lehman for a loan, according to New York magazine, borrowing money against his stock. He did not sell any of his Lehman stock in the first half of 2008, company records show. How much of it he was able to sell over the summer—if any—remains an open question, since upon his departure from the firm his transactions were no longer publicly posted. Ben Silverman, of, which tracks corporate compensation and insiders’ transactions, says that regulatory filings indicate that Gregory was bound by a lockup agreement preventing him from selling his stock for 90 days. By the time that period was up, it was Friday, September 12; the following Monday, Lehman announced its bankruptcy and the stock closed at 15 cents a share. Unless Lehman had agreed to release Gregory from the lockup after he resigned, he would barely have had a chance to act before his paper millions vanished into thin air. What Gregory could do—and did—was put property up for sale. The apartment at 610 Park Avenue found a buyer in October for $4.4 million. The Bridgehampton house is still on the market for what local brokers diplomatically call an "aggressive" price: $32.5 million.

Outside, the Gregory house on Surfside Drive looks like a thousand other Hamptons McMansions—an architectural hodgepodge built on spec—though it sits somewhat oddly next to a public parking lot, separated only by a hedge of tall firs. Inside, the house is decorated not just exquisitely but relentlessly. The long foyer has a high, arched ceiling, raised-panel walls, and a curved papal balcony from which the owners might look down from the second floor to greet arriving guests. One guest recalls that when the Gregorys bought the house it was already fully decorated, but the couple hired Winn Cullen, a decorator based in nearby Locust Valley, to rip everything out and make it perfect again—in an entirely new way. No expense was spared. In the main living room—all creams and beiges—the built-in bookcases hold not one but two large flat-screen TVs: one on either side of the fireplace, like big black bookends. Why two? The broker is stumped. Perhaps because the bookcases would be almost empty without them. Or perhaps it’s a theme: in the kitchen are two Sub-Zero refrigerators flanking the large butcher-block island. And upstairs are two master bedrooms, each with a grand view of the Atlantic.

Sometime over the summer, before the market meltdown, the house on Surfside was nearly sold. Unfortunately, the would-be buyer was perturbed to learn that the large back lawn, with its gunite pool and walkway over the dunes to the beach, would have to be drastically reduced before the house could be sold. That’s because Gregory’s property is in violation of a Southampton town ordinance requiring preservation of natural beachfront vegetation. Before a sale can close, the broker explains, a broad swath of the lawn will need to be ripped up and the natural flora restored. The potential buyer may also have balked at the carrying costs: $66,000 annually for full insurance, including extra flood coverage for hurricane damage, and $34,000 in taxes—$100,000 a year before walking in the door. Plus the grounds crew. Gregory never used the Bridgehampton house much; these days, he spends his time dealing with his lawyers. He’s one of a dozen top Lehman officers federal prosecutors have subpoenaed for one of three grand-jury investigations probing whether Lehman painted too rosy a picture of its finances—including that portfolio of commercial real estate. If they knowingly misled investors, some of those officers may go to jail.

Most 60-year-old ex–Lehman Brothers bankers likely squirreled away enough to at least scrape by on a couple of million a year. As for the 25-year-olds, they never earned enough to have much to lose. But the mid-30s or mid-40s Lehman banker who lived up to his high compensation—or beyond it—is reeling, hurting, and possibly bankrupt. One Sunday evening in October, a former Lehmanite in his mid-30s settles into a velvet banquette at the Gramercy Park Hotel’s elegant Rose Bar. At first he’s circumspect. But after a couple of Johnnie Walker Blacks on the rocks, he opens up. "Let’s take a guy who makes $5 million a year," the banker suggests. "He’s paid two and a half million dollars of that in equity compensation"—Lehman Brothers stock. Plus he gets to buy that stock at a 30 percent discount, so he’s really getting $3.25 million in stock. "Plus appreciation? Over five years? That’s $25 to $30 million! "Then let’s say a guy in that position borrowed $5 million against the $30 million in stock. It would seem a very conservative loan, right? Until the $30 million goes down to zero, which is what happened. So now he’s negative $5 million." True, that same Lehman banker got the other half of his compensation in cash. The banker nods. "For five years, he made two and a half million dollars a year in cash. So that’s twelve and a half million dollars. But of course he’s had to pay more or less 50 percent in taxes, so divide that and he’s got six and a quarter million. He’s probably spent that money over those five years—$1 million a year, it’s not so hard to do, right? So he has nothing—and he has to repay that $5 million loan." A month before the bankruptcy, the banker muses, his peers were complaining about the $10,000 or $20,000 they had to pay for lifetime dibs on the best season tickets in the New York Giants’ new stadium. But they were paying. They were complaining about private-school tuitions. "But it was actually a way of saying, ‘I’m rich—rich enough to afford it.’ "The day Lehman went bankrupt, people realized they were going to get no bonuses, no severance, and no equity. Oh—and no health care. And no salary."

So far, many seem more stunned than angry, or even timidly hopeful now that Barclays, the English bank, has bought much of the firm and offered shell-shocked Lehmanites their jobs—for now. Peter J. Solomon, 70, a former vice-chairman of Lehman Brothers who runs his own investment-banking firm, says, "What I see in the Lehman people is not enough bitterness. They’re still there, they have three months, Barclays is offering them jobs for a while. But that won’t last for most of them. You’re going to see the biggest impact in the first quarter of next year." At least the thirtysomething banker in the Rose Bar isn’t married with kids. Alexandra Lebenthal, a New York–based wealth manager for investors with between $2 million and $20 million in assets—the modest to mid-level rich—offers a keenly authoritative portrait of a thirtysomething Lehman banker, married with kids, in a guest column called "What It Costs" on the Web site NewYorkSocialDiary. Blake and Grigsby Somerset are fictional, their finances all too plausible.

Before Lehman’s stock began to plummet, Lebenthal suggests, Blake’s annual compensation was $9.5 million—much of that in company stock. He was carrying a $2 million loan used for a house in the Hamptons, but felt perfectly able to afford his annual expenses: the Park Avenue apartment maintenance ($120,000); the Hamptons house mortgage ($75,000); the nanny and driver ($100,000); his wife’s clothing ($100,000); the personal trainer three times a week ($18,000); food, including restaurants ($30,000); charitable benefits and other nonprofit causes ($200,000); private school for three children ($78,000); Christmas in Palm Beach ($15,000); spring in Aspen ($15,000); and a wedding-anniversary diamond necklace for Grigsby ($50,000). At least Blake has been hired on by Barclays. But his Lehman stock portfolio is now worthless. He and Grigsby have to cut their annual living expenses from about $1 million to a fraction of that, and do it in ways that don’t show, for the worst—the worst—would be the public disgrace of falling out of their social class.

First to go: vacations, the trainer, the driver, and entertaining. No restaurants, no shopping excursions, no new ball clothes for Grigsby (last year’s will have to do). But, for now—for appearances—the Somersets will scrimp to keep the kids in their schools, and the nanny, and the Hamptons house. For now. What, indeed, of the Hamptons, where the Somersets still go, though they can’t afford to anymore? On high-hedged roads everywhere, for-sale signs are nearly as prevalent as in southern Florida. A broker in Bridgehampton says she’s often the only one in her storefront office, the neat rows of little white desks as desolate as tombstones. Some brokers are rumored to have even taken jobs in East Hampton Main Street stores. All over the Hamptons, overstretched owners hope to rent next summer to cover the bills. But even if supply doesn’t overwhelm demand, fear and greed may roil the market. One East Hampton broker tells a story of clients who wanted to renovate their house and asked her—before the meltdown—to find them a rental to live in for a year while the work was being done. The broker called an owner on Further Lane, who agreed to rent for $425,000. Then came Lehman’s demise. The owner decided she’d need more money: $500,000. One week later, the market had fallen again. Now the owner panicked: "I’ll take $400,000," she declared. Six days later, she was down to $300,000. Then … $250,000. "The $500,000 was all about greed," says the broker, "and the $250,000 was all about fear." At East Hampton airport, so recently the scene of Gulfstream gridlock, an eerie silence has settled in. The private-jet parade diminishes, of course, right after Labor Day, but this fall, says one airport employee, "it was like turning off a light." September traffic was down 35 percent from the previous year. The stalwarts still come, sources say: Revlon’s Ronald Perelman, industrialist Ira Rennert, Michael Bloomberg, and Starbucks chairman Howard Schultz. But there’s a lot of time for staff to read.

Up in Greenwich, Connecticut, unofficial hedge-fund capital of the world, the real-estate market is, if anything, worse. Jean Ruggiero, one of the town’s leading brokers, at William Raveis, still sells houses—the good brokers know how to play a down market—but currently there are 55 available for $9 million and up. That’s a lot for Greenwich. "The owners are having a hard time just getting the brokers to come," says Ruggiero. "The broker thinks, Why bother? I don’t have any clients—why waste the gas?" Ruggiero offers a white-elephant tour. Here’s a Georgian mansion that sold not long ago, she says, to a Russian oligarch for more than $10 million, with a 10 percent down payment. Unfortunately, says Ruggiero, the Russian was unable to close on the deal. "So he lost the deposit, and the house is still on the market." Here’s the infamous "Lake Carrington Estate," an unfinished stone mansion of 35,000 square feet that sits seemingly abandoned in an overgrown field surrounded by a chain-link fence. When the spec mansion was listed at $28 million in mid-2007, it was declared "couture-ready." Ready, that is, for a proud hedge-fund buyer to make his own design decisions about the interior, since the house was raw inside, with unfinished floors and no kitchen or bathroom fixtures. Those flourishes would probably cost another $10 million, not counting the grounds, which are couture-ready too. Is its recent sale for $13.7 million to an unnamed buyer a good market sign … or a bad one?

Here’s one more: a $19.9 million mansion that just sold—after 763 days on the market—for $11 million. Good or bad? "Oh, that’s a good one," Ruggiero says. Greenwich estate manager Jacqueline de Bar describes how wealthy locals are cutting back: letting the pastures grow, canceling the leaf blowers, doing the storm windows themselves. At Betteridge Jewelers—known as Wall Street’s jeweler—third-generation owner Terry Betteridge says a lot more customers are coming in since the meltdown, to sell, not buy. "I’ve seen some bad ones in the last two months," he says. "I know a Wall Street guy who’s literally been selling jewelry to make the mortgage payments. He and his wife came in together, bringing things to sell.… Just this morning, we took in a $2.7 million lot. An amazing collection, some of the best jewelry in the world, everything signed—extraordinary things I couldn’t buy before. No matter what I bid wasn’t enough. Now I can." Down the street is Consigned Couture, where Wall Street wives come to unload last year’s designer clothes and accessories. Some send their housekeepers, others their daughters. "My calendar is booked a month ahead, up to eight appointments a day," says owner Dolly Ledingham. That’s sellers. Buyers? Not so much. "They used to come in to spend $1,000. Now they spend $100."

In this global economy, the age’s excesses and aftermath are spread wide, nowhere as vividly as in London. Notting Hill was the epicenter of London’s gilded age, where every driveway, it seemed, had a Maserati, every mansion a makeover, often including an underground pool. Now, says Sunday Times columnist Rachel Johnson, who chronicled the invasion of the financiers in her 2006 novel, Notting Hell, bankers are staggering around like lost souls, while their wives gather at 202, the stylish Westbourne Grove restaurant in Nicole Farhi’s boutique, to share their fears. "What they’re crying about is they’ve lost all their stock, and their houses are worth less than they were," says Johnson of the wives, "but they’re really upset that on January 31 they have to pay huge tax bills. Even though they don’t have the cash anymore, the liability remains on what they earned before." In London as in New York, Lehman bankers are among those hardest hit. One in his mid-30s says that for two weeks after the bankruptcy the New York office was cloaked in ominous silence—no communication from the 31st floor to London’s Canary Wharf. After the filing, the banker and his colleagues were all told to keep coming to work, or else possibly not get paid. So they came in and played Pac-Man and Tetris. Finally, he says, the whole London-based fixed-income group was called into an auditorium and "made redundant" by a representative from the accounting firm PricewaterhouseCoopers. That was it for the banker’s Lehman career—and the $1 million in company stock that a friend says he lost.

On a higher level, major figures on the London financial scene have lost billions—tens of billions, in some cases. Only last May, Indian tycoon Lakshmi Mittal, who owns the world’s largest steel company, paid $230 million for Israeli-American hedge-fund tycoon Noam Gottesman’s Georgian mansion, in Kensington Palace Gardens—a London record. Now, amid the commodities plunge, Mittal is said to have lost some $50 billion, and to be down to his last $16 billion. Michael Spencer, founder of icap, the interdealer broker, watched roughly $700 million of his stake in the firm go up in smoke as the market came down. Another name bandied about is that of Nat Rothschild. The 37-year-old son of Lord (Jacob) Rothschild, he some years ago weaned himself from a dissolute life, gave up alcohol (even his family’s Château Lafite Rothschild wine), and turned to the serious work of making money, eventually becoming co-chairman and rainmaker of the New York–based hedge fund Atticus Capital. Rothschild continued to live well—very well, with homes in London, Manhattan, Moscow, Greece, and Klosters, Switzerland, where he established his principal residence, where there are no English taxes. He went from home to home, the London Daily Mail reports, in an elaborately equipped Gulfstream jet, supposedly always with two uniformed butlers, rarely staying more than four days in any locale. But the rainmaking worked: Atticus pulled in eye-popping returns, and Rothschild probably made more than $800 million—all in advance of the $750 million or so he’d one day inherit. "He has a very difficult relationship with his father," suggests London-based columnist Taki Theodoracopulos. "I think his father would have liked him to be more interested in houses and furniture. This guy just cares about making money." Now Atticus has racked up staggering losses of $7.5 billion. Its Atticus European fund, once worth $8 billion alone, was down 43 percent by early October.

Usually, December is the year’s most festive time in New York. Wall Street bankers either have their bonuses or know what they will be. Their wives have bought new gowns for the season’s charity balls—the Metropolitan Museum’s acquisition-fund benefit and the New York Botanical Garden’s Winter Wonderland Ball, and more, at ticket prices ranging from $400 to $15,000. Then it’s off to St. Barth’s for sun worshippers, Aspen for skiers. But not this year. Privately, some New York benefit organizers wonder if even half the stalwarts will show up. On St. Barth’s, rental villas are usually booked by early fall; this year, many were available as of early November. At Aspen’s St. Regis hotel, Christmas week was still available, at $13,920 for two. For bankers and hedgies, the fear this holiday season is not of bonuses reduced or denied—that’s expected. The real fear is of massive layoffs and massive redemptions by hedge-fund investors, of another Wall Street bloodbath in early ’09.

Soon, says wealth manager Alexandra Lebenthal, the Blake and Grigsby Somersets will find out what they’re really made of. "Were their lifestyle, friends, and even marriage based on living a certain way, without limits, or do they have the values to make it through the tough times?" Philip K. Howard, a New York lawyer and social critic whose new book is Life Without Lawyers, sees a sea change which was overdue. Every 30 years or so, he notes, the country has to redefine its social values. We’ve just reached the next time. "So this end of the new gilded era—it’s like a bucket that spilled, and finally the money spilled out, and we were left with a culture whose sense of purpose and responsibility were lacking. And now there’s a real need for people, and society as a whole, to rethink and re-structure their values." "I may be the only one who’s thrilled by this recession," says the wife of one London private-equity manager who took his lumps this fall. "It just means we’ll have to get possibly another job. But the bottom line is that it is just money. When you realize that you have enough—your health and a roof and good food and your family—you have to just feel lucky."

Happy New Year.


Anonymous said...


nice Delmore Schwartz quote. Had to look that up, thanks.


"There are times when I become so enraged at how rotten these folks are that I have to take a break from my readings and studies and take a deep breath, throw back a big cup of Joe, and gobble down a few pieces of chocolate."

One word. Caffeine.

But good summation. I started reading Denninger after the crisis broke, and admire the fact that he hasn't lost his sense of outrage.

Thanks to all for their hard work and, if I may, Merry Christmas.

Anonymous said...


Thank you for your diligence. And peace to you, Stoneleigh, and TAE community.

"Not only is another world possible, she is on her way. On a quiet day, I can hear her breathing." ~ ARUNDHATI ROY


Anonymous said...

Any thoughts on escaping to Canada? Will they fare better than we?

Anonymous said...

I just want to take a moment to say Hi and Happy Holidays to Ilargi, Stoneleigh and all the regular posters. I'm a regular reader but have only made a couple brief comments because I'm at home here with my three little kids (aged almost 5 years, 3 years and 18 months) and although I can sit and read for a few minutes here and there, it's almost impossible for me to actually sit and type anything. Most of the time when I have a comment to make it takes me so long to get it typed up that the moment has passed and a new Debt Rattle or two is up. (The reason I'm getting to type this up now is that my husband is outside with the littles shoveling snow.) But I thought it'd make me feel like a bit less of a voyeur if I at least introduced myself.

And to Ilargi and Stoneleigh, my husband is the Dutch guy who sent a donation via Paypal last night (since you say you speak dutch I figure you'll recognize a really dutch name, and his is definitely that.) Happy Holidays from us to you :)

Anonymous said...

Happy Xmas Ilargi and Stoneleigh, keep up the good work, things don't imporve much!


lineup32 said...

Any thoughts on escaping to Canada? Will they fare better than we?

Back in 2005 I had a research assignment to look at wine country property around the globe. It was then that I realized how insane RE had become on a world wide basis and based on some other imput sold my Calif home and began to rent.
My point is that there is no place to hide, the economic conditions are global, if you find a good squirrel hole please let me know!

Anonymous said...

That long article at the end, about all those rich people losing billions....

I'm just a little fly, greedily rubbing my little mitts together in glee.

Bigelow said...

I & S,
The check is in the mail, since paypal is jerking me around insisting I be re-bonafided.

jewishfarmer said...

Hey Ilargi, since you are keeping an eye on the anti-Santas, did I miss you commenting on the Japanese suggestion that they might forgive American debt? I'm curious about your thoughts about why make that public statement - my own theory is that it was a kind of water-testing directed at China, but I don't claim to be an expert.

Curious - not trying to cut into your cookies and wassail ;-).

Happy Christmas/Chanukah/Solstice/Festivus to both of you.


Anonymous said...

Just a quick note of thanks on the great work you've been doing on Automatic Earth. And ditto on the Delmore Schwartz poem - it's a favourite.

Happy Holimasolstice.

Jim R said...

The check is in the mail. I don't much care for Paypal.

A smallish fraction of what you deserve, for what you do every day.

Oh, and a request: I'd like to see a few tutorials on this stuff, along the lines of the TOD briefings on the extraction industries. I have a background in the sciences but am utterly ignorant about money.

I have this vision of a great shoal of silver minnows, whooshing this way and that as the sharks and dolphins circle below. I'm trying to predict when some of them will whoosh my way, without being eaten :)

Merry Xmas, Yule, Saturnalia,

Ilargi said...


I'll write more on it tomorrow. For now: I have the idea that Mikuni is trying to confuse my Christmas Eve.

Japan's exports are down 26.7%, and the theory seems to be that they can be revived if the US builds roads?!

"The U.S. government needs to spend on infrastructure to maintain job creation as it will take a long time for banks to recover from $1 trillion in credit-market losses worldwide...."

I'd say those losses are way higher than $1 trillion.

Anyway, you think Japan, with it own economy swirling downwards in a dirty drain, will forgive US debt?

The whole planet is waking up to reality, and Christmas is a cold place for many "leaders". No way Japan saw that export drop coming, and neither did China see their own. And then comes January.

japan has a lot of dollar denominated assets, and they may seek a good deal for them before those assets fall even further. They also want to bring down the yen (they've lived of the yen carry trade for over a decade, and want a restart), but at what cost?

I have long suspected that China will use its own dollar reserves for political, rather than purely financial, purposes. And yes, you're right, Japan watches China, and vice versa. the USD has lost a lot of value recently, and it hurts.

Lots of rulers, no matter how developed their propensity for deceit, are sleeping uneasily these days.

Ilargi said...


We're working on a series of primers.

Right, Stoneleigh?

Anonymous said...

The Iceland-Chernobyl article above mentions the book, "Independent People," by Iceland’s only Nobel laureate, Halldor Laxness. This is a nice read, about a simple man leading a difficult life during WWI in the countryside. Many themes are touched upon--poverty, religion, living off the rugged land, birth, death, socialism, class, etc. Anyway, I was glad to see it mentioned in one of these article's about Iceland, and in case anyone's looking for some "different" fiction I recommend it. And a merry, merry, to each and everyone!

Ilargi said...

And what's more, Sharon:

There will come a point when Japan, China, Germany, Britain and the Arab oil states sell off their USD denominated reserves. It's a musical chairs party: nobody wanted to be first, and nobody can afford to be last. Also, they all hold far too much to dump in one fell swoop. Many people say that China will never do it, because it would shoot itself in the foot, but China knows it will happen anyway. The Chinese sent out another warning to Washington this week to get its act together. Which is not going to happen.

Merry XMukkah to you and the whole family.

jewishfarmer said...

Thanks Ilargi - No, I never thought that Japan was going to forgive US Debt - not at all. What I was wondering was whether they were trying to press China towards a selloff, or to combining with them to pressure Obama's new government.

It does provide a lovely distraction from that export collapse, doesn't it.

My major question is whether it might work - whether Japan and China might actually ally long enough to start a stampede towards the exit of US debt.

Cheers to y'all!


Anonymous said...

There will come a point when Japan, China, Germany, Britain and the Arab oil states sell off their USD denominated reserves. It's a musical chairs party: nobody wanted to be first, and nobody can afford to be last.
Like I've said before, ... they can read the tea leaves better than us.

I would be frantically buying assets under the table so as to not spook the others.

Hummm! There must exist an underground way of doing this.
The US and other could wake up to a very big nightmare.

Anonymous said...

Coming to your neighbourhood!
Poverty, Pension Fears Drive Japan's Elderly Citizens to Crime

Gravity said...

To help you keep going, that should read.
I wouldn't want to distract or offend anyone, so I will only post if I have something worth reading.

Anonymous said...

There was a typo in the link to Dan's blog; here is the corrected link:

Anonymous said...

Illargi, marry x-mas to all!

Why is it that our civilization will not learn from the mistakes made and become stronger out of these cirsis?


Ilargi said...

Dan's link is fixed.Blogspot gave a me a lot of pain in posting today. I had to redo everything 4 times before it worked. Sorry for that, Dan.

Gravity, I banned you and that sort of thing is not easy to do. Since it's Xmas eve, I'll un-ban you for now, but if you blubber all over the place once more, you ain't ever welcome here again. This is not a kindergarten.

Gravity said...

Agreed and understood.
Thanks for this gift, much appreciated. I'll be more constructive from now on.
You'll be recieving a helpful donation, and keep up the good work.

Chaos said...

Dan W, very nice post. Having waited vainly for the US public to "wake up" to peak oil, resource depletion, species and habitat destruction, and overpopulation, I well understand why only hard experience will bring economic awareness about. Love Denninger's outraged rants, but he surely knows we are far from the moment when hundreds of thousands storm the barricades. Hats off to I & S for awakening me, at least, to what's coming...

Anonymous said...

I've been 'on the road' and 'out of the loop' lately so:

An 'old school' Merry Christmas' to all


a big thanks to I & S for all the hard work over the last year

Anonymous said...

Thanks Dan for your comments

I watched What Would Jesus Buy? chronicling the activism of the Rev. Billy and the Church of Stop Shopping the other day. I reminded me of how deeply supported and ingrained the whole system of debt financed consumption has become in the US. There are wonderful, and sadly too familiar, scenes of women who put themselves deep into dept in order to make sure that the kiddies have 'good x-mas.' I have interview data with women that shows that this is DEEPLY ingrained in the cultural construction of motherhood in the United States.

We have built a vast symbolic landscape of consumerism in the united states, and it will take a while for people to be able to shake it off as it collapses around them. People will be disoriented, angry, and fed a steady diet of propaganda BS from MSM and USG each and every day in an attempt to redirect their anger (currently redirected at Union Bosses and industrial workers). The mastery of PR and its control by the elite can certainly lead not to protests in DC but a sort of scapegoat driven nationalism and the rise of fascist leaders. In the past, cataclysmic world war follows within the decade.

Personally, I think there are currents that keep fascism from rising here in USA, but lately, I'm not so sure.

Anonymous said...

Re my earlier Canada question - specifically, Canada's looney is not going to crash like our dollar, right - not total economic collapse of Canada along with US?

Also, they have a much better deficit and are less likely to go martial law?

They seem more civilized and less gun crazed than here in the US. I'm just wondering if, in the short term, I wouldn't be better off in Canada than the US.


Anonymous said...

Want to come to Canada?
I'll try to answer.

First look up the immigration rules.

Second, Find out if you have the skills that would let you in.
ie. doctor would do it but auto worker would not.

Third, Find out if you have enough cash, (investment), to get in.

If you have one or both then perhaps going to Mexico might be a better place to set up a "safe haven".

Anonymous said...


What if I have a sponsor or someone willing to bring me over the border of Canada?

el gallinazo said...

So now that I have almost everything in 13 week Treasuries upon Stoneleigh's suggestion, Ilargi is (apparently) talking about an imminent dollar crash as the creditor nations start a sell off of USA government debt. Stoneleigh wrote recently that we are now seeing a counter rally to the USD strengthening over the past half year, but the dollar will stay strong vis-a-vis most of the other currencies for a while. Is their a consensus? Is it time for serious gold?

Anonymous said...


Dan, your piece today was much stronger today. Good job.


General question for the people here.
If U.S. bonds head south for whatever reason (China selling off, etc.), what impact will that have on the main European government bonds? Will they follow the dollar in a general crash or will they rise because they are one of the few things left to invest in?

Any opinions?


Anonymous said...

Sorry for that first sentence. The result of rewriting without rereading.

I simply wanted to compliment Dan.


D. Benton Smith said...

Having never previously heard of Karl Denninger I popped over to The Market Ticker' for a quick read and was just as quickly disappointed.

When there are not one but TWO major logic errors in the first half of a one page essay then it's time to cut the losses and invest my time elsewhere.

Illogic #1: His assertion about credit purchases of consumer goods being essentially a "Time Shift" of demand is false for a list of reasons, including but not limited to:

1. His assertion presumes an unproved and unsupported belief that the buyer will not buy another TV later on whether he needs it or not.
2. It does not address the 'knock on' effect of the retailer using the sale proceeds to now demand another TV set from the manufacturer.
3. He states that purchases like TV sets (and maybe the beer you need to drink while watching them?!) are intrinsically different than 'productivity' purchases like seed corn. Presumptuous, unimaginative and prejudicial. Maybe the seed corn is for making beer (or popcorn to go with the beer!) while watching the TV.

Illogic #2 : That human 'want' becomes sated by having enough stuff, and is tempered by the pain of debt service.

Karl may be good with numbers, but he sure ain't no student of human behaviour. It is a rare primate indeed (let alone human being) who ever felt that enough was enough, or did not want something today just because it had to be paid for tomorrow.

His essay started off with some energetic ideas, but tired coming out of the first turn and by the backstretch wandered into the infield to graze.

Overall I give it a C+ because he's onto a couple of interesting lines of thought, but too easily accepted his own prejudices as evidence ... when further real research and reasoning might actually have gotten him somewhere.

Anonymous said...

el gallinazo said...
"Is it time for serious gold?"

All That Glitters Isn't Gold

The main argument made by advocates of gold is that they believe that it is a good hedge against inflation. For the period from 1935 (when the price of gold was fixed at $35 an ounce by the Federal Reserve) through October 2008, gold did provide a positive real return of 0.6 percent


Strategies have no costs, but implementing them does. The most direct way to invest in gold is to purchase actual gold coins or bars, which may require additional transportation, storage, and insurance costs. Another common option is to use the futures market. The problem there is that like all easily storable commodities gold trades in contango-the futures price is higher than the spot price by an amount equal to the cost of carry (financing, storage and insurance costs).

Anonymous said...

NORAD is Tracking Santa


Anonymous said...

Karl D wears his naivete like a heart on his sleeve. He's outraged that a half century of unchecked Hyper- individualism (memememememe) has produced ego maniacal greed and deceit on Wall St?

He needs to get his Gordon Gekko Groove on. ( For God Sakes Karl, at least watch the trailer if not the film, it's 20 twenty years old, it says it all.

Karl sounds like someone who has finally been told him there is no stinking "Free Market" any more than there is a Santa Claus.

He's shocked, shocked, that there was gambling going on in Casa-wallstreet and that no one is rounding up the usual suspects.

He is so invested in the notion of the "Invisible Hand" solving All Problems, he simply won't admit maybe "It" was really just wanking off, not directing capital investment into 'productive channels.' Duh

Denninger's usefulness has expired like week old bread. He has nothing left to offer other than the now obvious observations of a libertarian narcissist.

Blue Monday

Anonymous said...

So, the financial outlook in Canada not one of total economic collapse and if so, why am I still sitting here and not heading for there?

I'm no survivalist...if things are going to hit the fan soon I only have about $6,000 to my name and a friend in Ca who would temporarily take me in. I have no backup plan, no stores of food and nobody else who believes me that this is happening.

Why not run to Canada?

Jim R said...

I'm not sure how this is relevant, but when I saw this illustration in the paper copy of VF:
, I thought of TAE. I could see it at the top left corner where the christmas tree is currently located.

Anonymous said...

D.Benton_Smith, and especially anonymous 7:40 PM, some of the sharper points re Denninger I've seen here. I've thought the same repeatedly as well... the disappointed free market libertarian complaining about... about what exactly? This pattern of greed and abuse is the reason you must have regulations, and why governments have to be stronger than the organizations they are supposed to govern. Maybe in a fairy-tale world we wouldn't have these corporate and finance sleaze bags, but until we're in that world, Libertarianism remains publically exposed as the intellectual joke it always has been. Well, really, I mean, any ideology that depends on 'thinkers' as bad as Ayn Rand... well, they obviously aren't worrying about consistency or well reasoned positions in the first place.

Anonymous said...

Merry Christmas everyone.

Thanks so very much I & S. You have been an eye opener this year.

I have a few Loonies to send your way on Friday.

Best holiday wishes


The Lizard said...

Anon 8:26 ...

Exactly why Denninger has to be taken with a grain of salt.

I wonder how 'transparent' his financial dealings were back in the tech-bubble?

At the end of the day (as the Brits like to say) success in business is less about a great product than it is about words on the eighteenth green and friendships of convenience.

tickmeister said...

Some here are quick to praise government and condemn free markets. The government set up the Federal Reserve system, established Freddie and Fannie, dictated that private lenders loan to unqualified buyers, pulled all sorts of stunts to keep interest rates low, and vastly overspent their revenues for decades. Without these things and a hundred more like them the massive financial crimes of the last couple of decades would not have been possible. Of course regulation and law is required, but I suspect that the wall street mega-thieves would have been limited to petty larceny without the help and support of ignorant and corrupt government.

If you would like a first hand look at a really strong government that is making sure no mischief is done, maybe you should vacation a couple of weeks in N. Korea. I understand that there is no free market running amouk there.

Theft is not part of a functional free market. Personally, I would not be dismayed by having a banker and a congressman or government regulator hanging from alternate light poles all the way from Washington DC to Wall St. I am by nature a very non-violent person, but it appears that firm words are having no effect.

The Lizard said...

Canada does not generally recognize university degrees obtained elsewhere. There's a lot of Masters and PhDs driving cabs in Montreal, Ottawa, and Toronto.

Where I work, the cubicles are full of Russians and Chinese because the company can hire them cheap.

The province of Ontario has some provision for qualifying people with degrees in engineering.

I don't know about other provinces, and each province would have a different policy.

Anonymous said...

I am finally back.I attempted to post 3 times on Monday,but each time,a power flicker wiped my screen,till the power finally stayed off,and left Mrs.snuffy and myself in a snowstorm,with no power.

We do however have r-50 walls and ceilings,wood heat[w/5 split seasoned cords]a very very well stocked larder and books.LED lights,water for the loo from the pond[break ice first]as well as projects in the house that require lots of time,but little money.

Excellent dry run for the future.I know the lights will come on,and the roads will be clear soon.This time.

The last several days of posts have given me a lot of food for thought.I see the "ashes to ashes"link as a very real phenomena that may start sooner than later.At each time it happens,the chance grow that it will end badly.With blood,and death ,and more rage against the machine.

The way this has come out,with the widespread perception of the free ride for the banks,and the wealthy....and stone illegality of the actions of those in power,one of the greatest challenges the next administration has is re-establishing the belief of the public in the rule of law.For all.
Our laws have been so twisted,ignored,and "re-defined"that the average citizen knows the quality of the justice you get will depend on the size of your wallet.
This is pure poison to a free society.

I have a appointment to start my taxes sat.I hope to get a chunk back fast enough to make the final business investments,and storm preps that I hope will keep me and mine safer,and more secure in the coming times.

The stories of the trials and tribulations of those wealthy folks who have just had a bucket of cold water poured in their faces are good for a quick laugh,not much else.The way they have mis-used their positions,abilities has left a sour distaste for that class of people in most regular folks minds.When their women are selling themselves on the street,and their children are starving with the rest of the "lower sort"perhaps they will figure out "social Darwinism"is only acceptable to sociopaths.Many of these folks have some terrible lessons to learn.

It does me,and no one else any good to dwell on the foolishness of those at the top of our worlds financial food chain.That they have wasted the resources that could have been used to advance our world state of being to something better,should not be forgotten.That the wealthy blew it when they were in charge should give everyone a jaundiced eye when they speak in the future.They have lost credibility with this generation,in such a way they may never recover in my lifetime.I hope there will form some new sort of doing things,with heavy on the kind and gentle part.Our world needs that.

This is a quiet Christmas for my wife and I.Due to the weather,we are isolated from the families.Little decoration.Snow,and quiet thoughts about our future.

Peace to you and yours


Anonymous said...

Ilargi and Stoneleigh,

Just sent you a donation. I've been reading your site for a few months after finding out about it from Stranded Wind.

You do amazing work. I'm working on trying to reduce my debt; unfortunately I don't see any way of eliminating it before things spiral out of control.

Thanks once again for everything you're doing here. I hope you enjoy the holidays.

Anonymous said...

So are we facing an imminent dollar crash? If so than what currencies are actually "safe".

Is anywhere safe? LOL.

Worried about my country Kenya as well, we are so dependent on tourism and exports of tea, coffee and flowers around the world. This will all dry up pretty soon it seems.

The article from Vanity Fair was a great piece of journalism. It was really mind boggling to read about the losses and the extravagance. What will happen next year and the year after that?

The Conrad article was deeply insightful as well.

Merry Christmas to all TAE readers and best wishes to Ilargi and Stoneleigh.

Anonymous said...

I wonder when will the SHTF in Australia. People are still spending and partying like it's 1999!

Maybe they'll be immune from this crisis. So far it seems to have held up well, outside of the AUD falling substantially and the stock market tanking. Home prices have started falling as well BUT you still don't get a sense that Australia will ever see 10% unemployment, let alone the 30% envisaged by some.

The party goes on down under!

Anonymous said...

Merry Christmas and blessings, Ilargi, Stoneleigh and all at the automatic earth.

Anonymous said...

D.Benton_Smith said about Karl D:
"Presumptuous, unimaginative and prejudicial. "

Ditto on that. To which I'd add the term "extremely" to "narcissist.".

el gallinazo said...

Re Denninger

One thing that makes I&S so valuable is that they have found a path to use Austrian analysis without falling into the trap (crap?) of Libertarian hogwash. Mish is a card carrying Libertarian, but he seems to keep his heart somehow in the right place, his analytical skills are very good, and on a practical level, he subscribes to most of the positions of I&S. With the substantial perverseness of human nature, putting forth a utopian solution to this mess would be an exercise in wankosity. However, the Schumacker prescription, "Small is beautiful," would be a good place to start.


Assume you don't have heat because your system is dependent on some electricity to function. The amount of electricity to run a gas or #2 oil system is actually fairly small for a reasonably sized house - under a KW, since of course the serious energy comes from the fossil fuel. The energy is just for controls and heat transfer mediums. One solution is a small gasoline generator. Hondas are exceptionally quiet. Some of the older ones have lawnmower mufflers and could drive you bonkers in a few minutes.

Another solution I have been thinking about for a while, I call the Bagdad system, where you have 2-3 hours of central electric per day. This consists of a 2-3KW combo inverter/12 volt charger ( USD ~ 300) and a number of 12v deep cycles hooked in parallel. The number of deep cycles would determine the length of time you could run your house off the grid.

Re gold.

I don't trust any form of "paper gold" whatsoever. Coins are overpriced because the national mints have chosen not to mint them in the quantities in demand. Large bars are freely available at market prices for those with enough capital to buy them. The question would be how to buy them and how to store them. Certainly not in the USA after 1933. Probably a Switzerland vault. Then the question is can you trust operations such as James Turk's?

The Swedroe article doen't mention that the USG fixed gold at $35 per troy ounce and made it illegal for American citizens to own it, and in fact confiscated it. That probably put a dent in it's attractiveness.

Second, he is dealing with it's value vis-a-vis inflation, in the period in issue ( 1933 to the present). While we had fluctuations in currencies, sometimes fairly volatile, we never faced a panic collapse of the USD due to fears of a Treasury default. That is what we may be talking about here. It may have been more informative to study gold in relationship to countries' currencies which the USA is beginning to resemble, such as Argentina and its peso in the past decade. Anyone know of a source for this info?

Anonymous said...

Is it accurate to say GDP is projected to shrink 6% in the quarter? It seems more likely that it's projected to shrink *at a 6% annualized rate* in the quarter, which would be 1.5%. Not good, by any means, but a much less precipitous drop.