Monday, January 12, 2009

January 12 2009: I ain't got no home

Lewis Wickes Hine Lord Byron August 1911
"I cut my finger nearly off, cutting sardines the other day".
Seven-year-old Byron Hamilton of Eastport, Maine, earns 25 cents a day as a cutter at the Seacoast Sardine cannery

Ilargi: $45 billion. That's the amount of money, your money if you're American, that Citigroup received from Henry Paulson's TARP funds a few months ago. The funds that Congress overwhelmingly agreed he could spend, no questions asked, and with 100% legal immunity. Even when, mere hours after your democratically elected officials voted YES!, YES!, please!, all-knowing hammer!, so we won't have anarchy, and so we can keep our bloated rear ends in our velvet seats, Paulson simply stated he was going to do something totally different with the $350 billion first installment.

$45 billion went to Citi. Today, Citi sells its brokerage unit, Smith Barney, which delivered a $7.9 billion profit last calendar year, 16.3% of Citi’s profits, to Morgan Stanley. For $2.5 billion. And I've read a lot about this today, with some smart punditry among it, but nobody I've seen has asked: HEY!, what happened to my $45 billion? We can safely assume that Smith Barney was one of Citi’s best performing units, if only because there are no buyers for the lesser ones. And yes, sure, there is more creative accounting, but of course there is. Citi gets to write the deal up for over $10 billion.

That sort of thing is a great way to restore the confidence in the markets, and in consumers, that we can read about until we lose track of what it means. Meredith Whitney states that Citigroup will have to write off another $10 billion, just for this quarter! If that’s the going rate, and I can't think of any reason why it wouldn't be, or more, the bank will blow through $40 billion in just one year. Simply on bad assets. And that's merely the ones that they can't hide. No level 3, no off-balance sheet.

Citi will get rid of its chairman and its CEO. No can stop that, no can do. It'll live on, if it does at all, which is by no means certain, as a much slimmer company. Once the biggest bank in the world, it’s now, what, no. 5 in the US? The man behind the scenes at Citigroup, of course, in the past 10 years, the man most responsible for all the losses, was Robert Rubin, who left late last week. Want to know his new job? He's the main economic adviser, behind the scenes once more, to the president-to-be, Barack Obama. Rubin will make sure that the country's government will be as much of a disaster as Citigroup has been, and continues to be. It's your $45 billion, people, and nary a voice was raised.

Ford wants a loan, GM wants more loans, Chrysler tries to find a buyer, while it has so many unsold cars sitting in vendor's lots, there's no space left for any new models. Where are we going with this? A $50 million inauguration next week, that's where. And a million times $50 million of heartache and hurt after that. And I know what you want to say: they wouldn't do that, would they? Well, they are doing it. It's time for you to look at your loved ones, your friends, your neighbors, and ask yourself what you can do to make them safe. First thing to do: get them closer to you. Do it, as good as you can. Make sure everybody's got a home. This will not end well.

I ain't got no home

Ilargi: Woody Guthrie wrote this song in 1938, when he was roaming with Dust Bowl migrant families, and heard the Carter family sing a rendition of a gospel named "This World Is Not My Home". Woody got angry. And even. The whole idea of a better world sometime anytime after was not his schtick.

50 years later, over 20 years ago already now, Bruce Springsteen delivered this version:

Ilargi: Springsteen is someone with a very acute sense of who HE is. I find that beautiful to listen to, in his songs, and in how he speaks about his life. In French, they say: a "chroniqueur", someone who writes the chronicles of her/his time. Pity that Bruce did the Obama campaign trail. He's better at looking at himself than at understanding the world at large. I say that as an adept fan. I somehow wish he would contact me, but that won't happen. Meanwhile, the Obama train is off the rails before it's taken off. And if Bruce is blind, who else is there? People needs a conscience. That's why we do Woody. Does money pervert?

Here's an hour long Charlie Rose interview with da man:

Capitalism Freezes in Worldwide Winter of Discontent From China to Russia to Nigeria
As capitalism staggers through its first globalized economic crisis, the costs won’t be measured only in dollars and cents.
From newly rich Russia to eternally impoverished sub- Saharan Africa, social strains are threatening the established political order, putting some countries’ very survival at risk. In the past month, Nigerian rebels threatened renewed warfare against foreign oil producers, Russia sent riot police from Moscow to quell an anti-tax protest in Siberia and China’s communist leadership warned of social agitation as the 20th anniversary of the Tiananmen Square massacre looms.

The disillusionment and spillover effects of the global recession "are not only likely to spark existing conflicts in the world and fuel terrorism, but also jeopardize global security in general," says Louis Michel, 61, the European Union’s development aid commissioner in Brussels. Somewhere in the wreckage may lurk an unexpected test for U.S. President-elect Barack Obama, 47, one that upstages his international agenda just as Afghanistan’s backwardness and radicalism led to the Sept. 11 attacks that defined the era of George W. Bush only eight months into his term.

Among the possible outcomes: instability in Pakistan, a more aggressive if economically stricken Iran, a collapsing Somalia, civil disorder in copper-dependent Zambia, a strengthened, drug-financed insurgency in Colombia and a more warlike North Korea. The U.S. housing slump that began in 2007 has cascaded into a worldwide crisis that forced central bankers to cut interest rates to near zero to unlock credit markets, pushed governments to bail out their biggest banks amid a $1 trillion of writedowns, and sent titans like General Motors Corp. and American International Group Inc. begging for bailouts. The World Bank reckons trade will shrink for the first time in more than 25 years, deepening the economic hole for governments in developing nations, where higher food and fuel prices cost consumers an extra $680 billion last year and pushed as many as 155 million people into poverty. Nuclear-armed Pakistan, once touted by Bush as the key U.S. ally in the war on terror, sits at the nexus between economic insecurity and extremism.

"Blood and tears" may be Pakistan’s fate, says Thaksin Shinawatra, 59, who as prime minister of Thailand fought rural poverty during a stormy five-year tenure until his ouster by a military coup in 2006. "That’s where I’m worried, and also about political stability, and the terrorist activities are there," he said in an interview. On Nov. 25, Pakistan clinched a $7.6 billion International Monetary Fund bailout to avert a debt default amid ebbing growth and an inflation rate of 25 percent in November that is ruining the livelihoods of its poor. A day later, an Islamic terrorist group went on a rampage in Mumbai, India’s financial hub, killing 164 people and adding a bloody new chapter to six decades of animosity on the subcontinent. India accused Pakistan of harboring the militants, much as the Taliban uses ungoverned Pakistani tribal regions as a launch pad for attacks on Afghanistan.

Neighboring Iran is among the energy-exporting states afflicted by the 73 percent drop in oil prices from last July’s peak of $147.27. The government, reliant on oil income for more than half the budget, may pare subsidies for utility bills, adding to the pain of October’s 30 percent inflation rate. Elections in June may determine whether Iran, part of Bush’s "axis of evil," presses ahead with its nuclear program -- or may change little regardless of outcome, says Yousef al- Otaiba, the United Arab Emirates’ ambassador to the U.S. Whether or not President Mahmoud Ahmadinejad is re-elected, power will remain with Ayatollah Ali Khamenei and religious leaders. "Whoever comes to office in June is going to be a different face of what I think is the same policy," al-Otaiba said in an interview.

On a global scale, the spiral of economic distress and political radicalism has been at work throughout history, from the bread riots that stoked the French Revolution to the mass unemployment that brought the Nazis to power in Germany. Some dictators, like Hitler and Stalin, turned on their neighbors after disposing of internal enemies. Others, like Mao, walled off their societies, condemning millions to misery. The increasingly lopsided world economy "provides fertile ground for extremism and violence," French President Nicolas Sarkozy said at a conference last week in Paris. With globalization, he said, "we expected competition and abundance, and in the end we got scarcity, debt, speculation and dumping." Historians say it’s too early to declare the end of the intertwining of the global economy, under way at least since the collapse of the Soviet bloc in 1989. For one thing, developed nations still have a huge stake in the system:

Even with $29 trillion wiped off the value of global equity markets last year, the Dow Jones Industrial Average is back where it was in 2003, hardly a time of privation. As a result, disturbances in the West -- from Greece’s worst riots since the 1970s, to a 31 percent increase in New Year’s Eve car torchings in France, to a pickup in shoplifting at 84 percent of major U.S. retailers -- won’t shake the foundations of those societies. It’s the failed or failing states that stand to lose the most. "The punch line: Poverty does cause violence," says Raymond Fisman, a professor at Columbia Business School in New York. Researchers led by Edward Miguel of the University of California have even quantified it: a 5 percent drop in national income in African countries increases the risk of civil conflict in the following year to 30 percent.

The frailest nations are those concentrated south of the Sahara desert, plagued by a legacy of despotism, corruption, disease and economic misfortune -- often all at once. The region accounts for seven of the top 10 countries in a ranking of "failed" states compiled by the Fund for Peace, a Washington- based research group. With commodity prices sinking, cutting the UBS Bloomberg Constant Maturity Commodity Index by almost half in the past six months, mining companies including Anglo-American Plc, De Beers, Lonmin Plc, and Xstrata Plc are slashing jobs, adding to Africa’s economic woes. Nigeria, holder of Africa’s biggest fossil-fuel reserves, is staring into a $5 billion budget hole due to the oil-price swoon. It also confronts an emboldened guerrilla movement in the southern Niger Delta, the oil-producing region that has attracted the likes of Royal Dutch Shell Plc and Chevron Corp. "The outlook is not optimistic," says Pauline Baker, president of the Fund for Peace, which ranks Nigeria 18th on the most-at-risk list. "Unless Nigeria begins to pull itself together, I think with the lowering oil price in particular it is quite vulnerable."

As incomes shrivel in the poor world, the economically troubled rich world isn’t able to fill the gap. Even when the going was good, the Group of Eight industrial powers were struggling to meet a 2005 commitment to increase annual aid to poor countries by $50 billion by 2010. Now, official donations are set to fall by as much as 30 percent, the European Commission predicts. The IMF may need another $150 billion to help reverse the damage to emerging markets, Managing Director Dominique Strauss- Kahn says. While "demand may be above what we have," Strauss- Kahn said in an interview that he is convinced the IMF could scrounge up the extra funds. Perched between advanced economies and the raw-materials exporters in the southern hemisphere is Russia, which used the eight-fold oil-price surge from 2002 to 2008 to reassert its claim to the great-power status that evaporated along with the Soviet empire.

Under President-turned-Prime Minister Vladimir Putin, that newfound clout became manifest in last year’s invasion of neighboring Georgia and this month’s shutdown of gas shipments to Europe. The tactics deflected domestic attention from the onset of the first recession since Russia’s debt default in 1998. The ruble dropped 19 percent against the dollar in 2008, the steepest slide in nine years. Belligerency fueled by sudden wealth is likely to be inflamed by sudden scarcity, says Harold James, a history professor at Princeton University. "Economic difficulties are always a spur to foreign political adventurism," James says. "In Russia, there’s already a big devaluation, there’s unrest in Siberia and other provincial cities. This is really where the destabilization is going to come from."

As Russia clashes with its neighbors, China may be headed toward domestic repression. While growth of 7.5 percent as predicted by the World Bank will outstrip the industrial economies, the pace will be the slowest since 1990, the year after the army put down the Tiananmen pro-democracy uprising. China’s recipe for raising the standard of living has relied on creating jobs in coastal boomtowns like Shanghai as a magnet for millions of poor from the vast, rural interior. Now that formula is breaking down.

More than 10 million migrant workers lost their jobs in the first 11 months of 2008, an unidentified Labor Ministry official told Caijing Magazine last month. Using Communist Party code for riots and civil disorder, the state-controlled Outlook Magazine last week warned that a spike in "mass incidents" will test the government’s ability to preserve the social peace. At stake is the endurance of the Chinese hybrid of an open economy and closed political system. During its two-decade ris that has increased growth domestic product almost 10 times to make China the world’s fourth-largest economy and engine of global growth, a buoyant economy provided insurance against political dissent. In a worst-case scenario, U.S. intelligence agencies warn, the communist leadership would roll back China’s integration into the world economy. "

Although a protracted slump could pose a serious political threat, the regime would be tempted to deflect public criticism by blaming China’s woes on foreign interference, stoking the more virulent and xenophobic forms of Chinese nationalism," the U.S. National Intelligence Council concluded in November. China has known outbursts of chauvinism in the past and remained intact, thanks to a social hierarchy dating back to the age of Confucius. Poorer countries lacking that political anchor face a bleaker outlook. The crisis "could undermine the development momentum," Liberian President Ellen Johnson Sirleaf said in an interview. "It would mean joblessness would increase, and that could undermine the stability of nations

Whitney Weighs in; Citi Still Needs More Capital
As FOX Business first reported Friday, Citigroup is poised to report much deeper losses for its coming fourth quarter on January 22d than both the company and analysts had anticipated, "the worst quarter in the company’s history," insiders say, with quarterly losses estimated to surpass $10 bn, despite the sale of its German retail banking unit. A breakup of what was once the world’s largest bank could be in the cards, employees say, as Citi is selling its once-prized jewel and profit machine, Smith Barney, to Morgan Stanley. Meanwhile, insiders at Merrill Lynch speculate that Merrill’s top broker, the leader of is brokerage unit, the widely respected Robert McCann, could be wooed to Morgan Stanley to help run the combined Smith Barney-Morgan brokerage operation.

Morgan Stanley co-president James Gorman, considered to be a brilliant, effective executive, is expected to become chairman of the joint venture. Gorman ran Merrill Lynch’s brokerage business before Morgan wooed him away in 2005. A combined Smith Barney-Morgan Stanley brokerage operation with more than 22,000 brokers and a total of $1.8 tn in retail client assets would easily challenge the Thundering Herd’s brokerage business at Merrill Lynch and Bank of America, with 16,000 brokers and $1.5 tn in assets. However, McCann, who recently quit, is said to have signed a non-compete clause with Merrill. Merrill Lynch did not return a call for comment; Morgan Stanley did not return a call for comment.

And Meredith Whitney, Wall Street’s top bank analyst at Oppenheimer Equity Research, says Citi’s sale of a stake in Smith Barney to Morgan Stanley and its government backstop will not be enough to stabilize what was once the world’s biggest bank, whose market cap has fallen below the market value of Home Depot, Kraft, and UPS. Now the number five bank in the world, Citi may need to raise more capital this year. The bad profit results prompted management to reverse itself and try to split off its Smith Barney brokerage unit. Citi’s board could vote on the deal to sell a 51% stake in Smith Barney to rival Morgan Stanley today as early as today.

Citi is also unloading its retail operation in Mexico, Banamex, with insiders say these combined moves potentially herald the beginning of the breakup of what was once the world’s largest bank. The sale to Morgan Stanley is a painful choice for Citi, as the Smith Barney brokerage provided 40% of the bank’s 2007 profits. The sale also marks a come-uppance for bank executives promulgating the "universal" banking model, whereby Citi believed it could cross sell consumer loans and credit cards to Smith’s high-end clients. A universal banking model that now spells a costly "too big to fail" approach as US taxpayers have had to pay for Citi’s bad bet.

The news came on the heels of Citigroup’s announcement last Friday that its director of the executive committee of the board, Robert Rubin, was stepping down under fire, after getting paid tens of millions of dollars in exchange for a post where he demanded no operational responsibilities or oversight, despite advising the bank to take on more risk during the credit bubble and helping to cause the bank to wade deeper into risky credit problems. Since the third quarter of 2007, Citi has booked $45 bn in writedowns. Its eroding capital forced Citigroup to negotiate a massive $306 bn government backstop on bad loans and securities, with Citi taking the first $56.7 bn in losses and the government taking the rest, $249.3 bn. Citi also has received a total of $45 bn in taxpayer-backed capital injections from the government in the fourth quarter, with the government potentially investing $7 bn more on the way.

The taxpayer rescue has forced Citi to back new, controvesial Congressional legislation that would let bankruptcy judges force mortgage lenders to cut the mortgage principal and interest payments owed on foreclosed houses in bankruptcy.  The government’s November rescue of Citigroup came after the bank’s stock fell to $3.77 a share and its market value plummeted to $21 bn (down from its 2006 peak of $274 bn), putting the government’s initial $25 bn capital injection under water. Citi has $2 tn in assets and $2 tn in liabilities teetering atop a net worth of just around $130 bn. Citi’s assets far surpass troubled insurer American International Group (AIG), which was rescued by the government and has received more than $150 bn in taxpayer aid.

But the board remains firmly behind chief executive Vikram Pandit, although insiders say his position is becoming shakier by the day. On a November 21 company-wide conference call, Pandit had told employees that he had no plans to break up the company, pointedly noting that he wanted to keep Smith Barney. Pandit also is overseeing an estimated 72,000 in layoffs at the bank, which employs more than 370,000 workers. While Pandit’s job seems safe, the rest of the board may not be. Federal banking regulators are pressing Citigroup to shake up its board and replace its chairman, Win Bischoff. Richard D. Parsons, the chairman of Time Warner and a Citigroup director, has emerged as the leading candidate to succeed Mr. Bischoff as Citigroup’s chairman.

Citi’s joint venture with Morgan Stanley, where it would combine Smith Barney with Morgan’s brokerage business, carries a combined deal value that would veer toward $20 bn. Citi would get an upfront cash payment in the Smith Barney deal of $2.7 bn from Morgan Stanley for a 51% stake, and could book anywhere from $5 bn to $6 bn in tangible common equity. But the deal may not be enough to fix Citi’s capital problems, and Citi may have to return to the capital markets to raise more money, says Meredith Whitney, Wall Street’s top banking analyst at Oppenheimer Equity Research. For its part, Morgan Stanley has booked $20 bn in writedowns since the third quarter of 2007, and has raised $19 bn in capital, including $10 bn from TARP, Whitney notes.

However, Whitney, who still rates Citi underperform, and estimates that it will report a total of $3.02 cents in losses for fiscal 2008 and steeper loses of $3.25 this year. Whitney has kept her earnings estimates for Morgan Stanley of $1.95 for 2008 and 2009. Merrill Lynch insiders say one of John Thain’s biggest mistakes was to not only cede too much control of what was once Wall Street’s top brokerage to Bank of America, but also to not do enough to keep the widely respected McCann, Merrill’s top broker and a firm leader. The combined company is expected to lay off 35,000 workers. Gregory Fleming, Merrill’s head of investment banking who championed and brokered the merger with Bank of America, also suddenly quit last week, sending jaws dropping throughout the firm.

Thain, who now leads the combined company’s global banking, securities and wealth management business, took the reins from E. Stanley O’Neal who was pushed out of Merrill after leading a disastrous foray into risky securities and lending businesses. Thain, who ran the New York Stock Exchange, was hired at Merrill because of his expertise in mortgages garnered during a stint at Goldman Sachs but quickly ran into trouble when he touted Merrill’s capital position as being strong right before the firm announced disastrous profit results. Thain signed on for a reported $50 mn a year in compensation, which could have risen to as much as $120 mn a year.

McCann battled with Thain and was passed over for a promotion in the combined company. Indeed, the combined  management team of the BofA-Merrill operation has scant Merrill representation. McCann, head of Merrill’s financial advisory unit, has stepped down from Merrill, but has signed a non-compete clause, believed to be six months. Insiders say he could jump to Morgan Stanley if the price offered is right. Meanwhile, Bank of America is expected to post $3.6 bn in losses in its coming fourth quarter report on January 20. It may also again slash its dividend.

The Imbecile's Ball: Citigroup Dances Around Management Change
What will happen next on Citigroup's board or among the ranks of its senior management involves a guessing game. By several accounts, chairman Win Bischoff is leaving. But, he has been on his way out for months. He still has his job. The earlier rumors must not have been true. The Wall Street Journal reports that the Citi board has given CEO Vikram Pandit a vote of confidence. Even if the firm loses tens of billions of dollars this year, Pandit is getting that public support just the way his predecessor Chuck Prince did, right up until the end.

Bischoff is just a pleasant old man from overseas who was in the wrong place at the wrong time. To look at media reports, the director who did all of the damage at Citi was former Treasury Secretary Robert Rubin. He is gone, but the problems he helped create are not. According to William Shakespeare, "The evil that men do lives after them; the good is oft interred with their bones." If that is true, almost no one on the bank board is likely to have a peaceful passing.

The name which keeps coming up when these announcements or rumors hit the media is Citi's lead director Richard Parsons, former CEO of Time Warner . He may take Bischoff's place as Citi chairman but he did not do a bang up job at the media company. He has also been sitting on the Citi board during most of the period when the decisions were made that nearly brought the bank down. It would be hard to defend the position that he is blameless. Citi is still going through a period when it is important for the government, which loaned the bank money, and investors, who lost most of theirs, to see someone humiliated for the company's missteps. That is a fine way to focus on the past but not on the future. That means the board is compounding its mistakes by continuing to take its eye off the real problems.

U.S. bank earnings may be "frightful"
Government efforts to prop up U.S. banks and savings institutions have only partly cushioned the blow from what may have been the industry's worst three-month period since 1990. "Credit trends are going to be bad," said Gary Townsend, co-founder of Hill-Townsend Capital in Chevy Chase, Maryland. "No one is immune. If you are a bank, and have loans, you will suffer your share." Rising credit losses, poor economic conditions including a surge in unemployment, tighter lending margins and the cost of luring deposits are likely to dampen results at most of the nation's biggest lenders for the just-ended quarter.  Dismal bottom-line results, however, will quickly fade into the rear-view mirror as investors focus on how much lenders plan to boost reserves for soured loans, take new steps to preserve capital, or eliminate more jobs.

Earnings season is set to kick off Thursday when Wisconsin's Marshall & Ilsley Corp is scheduled to report. The largest lenders -- Bank of America Corp, JPMorgan Chase & Co, Citigroup Inc and Wells Fargo & Co -- report later in the month. Results may be "frightful," Sanford C. Bernstein & Co analyst John McDonald wrote. While credit and capital will be critical, he said falling margins will weigh on net interest income, while fee income may be "under siege" because of volatile capital markets and lower spending by customers. Most of the largest lenders are expected to report lower earnings per share than a year earlier, according to analyst forecasts compiled by Reuters Estimates. Citigroup and Alabama's Regions Financial Corp may post losses, while Ohio lenders Fifth Third Bancorp and KeyCorp may come close to breaking even, analysts on average predicted.

Last week, the American Bankers Association trade group said consumer credit delinquencies are at a 28-year high, and are likely to head even higher. Problems for banks are not concentrated only in housing. A weakened economy, with unemployment at a nearly 16-year high, should cause loan losses to bleed beyond housing and further into credit card, commercial, construction and industrial loans. Analysts expect another round of dividend cuts and capital raising, even after the disbursement of much of the first half of the government $700 billion Troubled Asset Relief Program. Citigroup has already gone to the well twice, taking $45 billion from TARP and slashing its quarterly dividend to a penny per share. The bank has entered advanced talks with Morgan Stanley on a joint venture for their brokerage operations, a person familiar with the matter said on Friday.

Oppenheimer & Co analyst Meredith Whitney wrote on January 6 that banks receiving TARP money will report "meaningfully lower" capital levels as of December 31 than they had after they got the infusions. She said banks will need more capital in the face of up to $40 billion of further writedowns as asset prices fall, and credit ratings are lowered on mortgage-related securities. The credit crisis has already caused the demise of many large U.S. lenders whose viability was under threat. These include Merrill Lynch & Co, swallowed by Bank of America; Washington Mutual Inc, which failed and was taken over by JPMorgan; Wachovia Corp, bought by Wells Fargo; and National City Corp, bought by PNC Financial Services Group Inc. Analysts including RBC Capital Markets' Gerard Cassidy expect hundreds of additional lenders to fail in 2009, following 25 failures last year. President-elect Barack Obama is expected to draw down much if not all of the remaining TARP money, despite the widespread belief that banks are not using infusions to lend.

Bank stocks have not done well either. The 24-member KBW Bank Index has fallen 53 percent in the last year. Shares of many banks trade at below book value. Bank of America and Citigroup trade at less than half of book value. Many banks have dividend yields in the high single digits or above. Some analysts believe Bank of America, Dallas-based Comerica Inc and Atlanta's SunTrust Banks Inc may cut their payouts, despite having done so in the last four months. Marshall & Ilsley may also face a cut, analysts said. SunTrust spokesman Barry Koling said that bank historically announces its first-quarter dividend in mid-February, and is "very aware of heightened interest in this issue" now. A Marshall & Ilsley spokeswoman referred to the bank's October pledge to set a payout that would "ensure a strong capital base through this economic down cycle."

Comerica spokesman Wayne Mielke said that bank's board will review its dividend "in due course." Bank of America spokesman Scott Silvestri declined to comment. Townsend said investors may wish to look at lenders such as PNC and U.S. Bancorp, where credit quality may remain better than at peers. But he is cautious on the recent big acquisitions, all announced before, or early in, the quarter. On December 11, JPMorgan Chief Executive Jamie Dimon said on CNBC television that November and the first part of December had been "terrible" for the bank. JPMorgan got some government backing when it took over Washington Mutual on September 25. "No one could have predicted how severe the downturn in the economy would be," Townsend said. "It seems to me that Jamie Dimon has been particularly upfront in his public comments to suggest the WaMu experience could be worse."

Citigroup Comes Undone
For years Citigroup's critics have called for breaking up the company, calling it too unwieldy to manage with its global scope and diversified businesses. Now that likelihood is drawing closer. It's not just that Citigroup crashed into an iceberg under the leadership of chief Vikram Pandit in 2008, with $20 billion in losses and the prospect of at least $4 billion more when it reports fourth-quarter results this month--and perhaps far more. The investment banking business that drove profits in recent years is all but vanished. Meanwhile, delinquencies and losses on everything from credit card loans to auto loans and mortgages tear up the retail banking side of the business.

So like any company under dire straits, it is considering selling divisions, to cut costs and to reap money to make up for losses elsewhere. Smith Barney, its massive retail brokerage operation and one of its few businesses to be making money in recent quarters, is said to be on the block. Its merger or joint venture partner would be Morgan Stanley, a Wall Street company that recently sought the protection of a bank holding company license because it, like every other Wall Street firm still standing in the wake of the credit crisis (Goldman Sachs being the other one), feared being cut off from financing its operations. A joint venture of Smith Barney and Morgan Stanley's retail brokerage operations would create a brokerage juggernaut, with 19,000 brokers, putting it ahead of the 16,000 brokers employed by Merrill Lynch, which just merged with Bank of America.

Pandit was once president of Morgan Stanley's investment bank, but left in 2005 amid management upheaval. He joined Citi in 2007, when it bought his hedge fund for $800 million. Still, the Depression-era laws separating banks from investment banks have all but been obliterated in the credit crisis. Morgan Stanley, now with a bank holding company license, would be taking a bigger stake in the combined company, with the ultimate goal a complete takeover or perhaps a stand-alone company. In an era in which Lehman Brothers went bankrupt and Bear Stearns had to be rescued in a late-night deal with JPMorgan Chase, it's unclear how a stand-alone Smith Barney-Morgan Stanley brokerage could operate without the security of short-term funding that most commercial banks enjoy by virtue of their access to the Federal Reserve.

Ten years ago, Citi's former chief, Sanford I. Weill, set out to prove the supermarket concept to banking was the best approach. He drove a 1998 merger of Travelers Group and Citicorp, which combined retail and corporate banking, a major brokerage house and a substantial insurance underwriting business. When it was conceived, the deal was illegal. It took heavy lobbying and the overturning of 70-year-old laws to make it happen. But even back then there were signs this financial supermarket model wouldn't work. Citi abandoned insurance pretty quickly, spinning off Travelers completely in 2002. So much for the synergies of cross-selling insurance coverage to corporate clients of the bank.

In 2003, the links between the retail brokerage sales force and the investment bank also came under scrutiny, resulting in Citi and 11 other major Wall Street firms collectively paying $1.4 billion to settle charges with New York State and the Securities and Exchange Commission that their analysts were unduly influenced by investment bankers seeking business. In 2005, Citi hived off its investment management division in a swap for Legg Mason's retail brokerage division. That put Citi out of the business of creating its own funds for distribution. When Charles Prince took over the company from a retiring Weill, in October 2003, he joked the only deal that would move the proverbial needle from an earnings and profit perspective was to buy Canada. Citi's era of merging and consolidating was over, he said.

It foreshadowed the problems ahead. Prince's tenure at the top of Citigroup was marred with scandal and embarrassments, including getting kicked out of private banking activities in Japan for alleged infractions and being rebuked in Europe for a rogue trader in London. The biggest scandal was yet to come: Citi's disastrous push into mortgage-backed securities and related derivatives. Since mid-2007, the bank has lost $20 billion in the mess and been forced to scrounge up more than $100 billion of new capital, half of it coming from the federal government in a form of bailout. Citi attempted to salvage itself in October, in a deal to buy the ailing Wachovia, which would have involved the help of the Federal Deposit Insurance Corp. It failed to deliver on that deal, losing out to Wells Fargo.

One big sign that the dream has died is Robert Rubin's decision to leave the company this year. Rubin, the Treasury Secretary under the Clinton administration, was instrumental in getting the Travelers-Citicorp deal approved. He joined the company in 1999 and for a while was the tie breaker in the office of the chairman between Weill and former Citi co-chief John Reed. Rubin's stay was controversial as well. He took in over $100 million in pay over the decade and was part of the reason why Citi pushed so hard into the riskier activities that tripped it up in the credit crisis. On leaving, he says, "There is still much to do, but I have great confidence that Citi will meet the long-term challenges ahead and will emerge successfully from this difficult period as a powerful presence in the global economy." Just smaller.

Citi-Morgan talks seen leading to wave of deals
Citigroup and Morgan Stanley may announce as early as Monday a deal to combine their brokerages, a move analysts say could trigger a fresh wave of consolidation in the troubled and thinning banking industry. The potential deal between Citi and Morgan Stanley underscores the problems still facing the industry after a year in which several well-known financial firms toppled under the weight of rising losses tied to bad mortgages. "This really shows the continued vulnerability of the banking system," said Keith Springer, president of Capital Financial Advisory Services. Morgan Stanley is likely to pay Citigroup between $2 billion and $3 billion for a 51 percent stake in the brokerage Smith Barney, a person close to the negotiations said Saturday. Morgan Stanley would then have the option to buy the rest of Smith Barney over the next three to five years, the person said. The person spoke on condition of anonymity because he was not authorized to speak about the ongoing talks.

During the past several months of financial turmoil, many banks have had to overhaul their business models. Morgan Stanley and Goldman Sachs Group Inc. became bank holding companies shortly after rival Lehman Brothers Holdings Inc. filed for bankruptcy protection and Merrill Lynch & Co. was sold to Bank of America Corp. in an emergency sale initially valued at $50 billion. Investors had grown concerned that stand-alone investment banks would no longer be viable amid continued weakness in the credit markets. A deal to combine the brokerages of Citigroup and Morgan Stanley would not only give Citi much-needed cash, it would also give Morgan Stanley more manpower, analysts said. "If Morgan and Citi get together, they would be able to put together a retail brokerage unit that is larger than Merrill's thundering herd, which could position them well in the marketplace," said Chris Probyn, chief economist at State Street Global Advisors.

"This may be a way of staying competitive." The move would also be beneficial to Morgan Stanley as it looks to build its less-risky, lower leveraged businesses after becoming a bank holding company. The move would also provide Morgan Stanley a greater sales force to build its growing retail deposit based, which has been among the bank's top priorities in recent months, Lauren Smith, an analyst with Keefe, Bruyette & Woods Inc. wrote in a research note Monday. Morgan Stanley has been able to hold up relatively better than other financial firms amid the ongoing credit market turmoil, though it did post a $2.37 billion loss during its fiscal fourth quarter, which ended Nov. 30. Still, Morgan Stanley's woes have not been of the same magnitude as Citi's. Citigroup has been hit particularly hard by the housing and credit crises. Though the bank has received $45 billion in support from the government's $700 billion financial rescue fund, its financial footing remains shaky.

Banking regulators are now pushing Citi to replace its chairman, Sir Win Bischoff, in an effort to restore confidence in the New York-based bank after it needed billions of dollars in government support, according to a New York Times report. The Times and The Wall Street Journal said Monday that Richard Parsons, former CEO of Time Warner Inc. and a Citi director, is likely to succeed Bischoff. Citi has reported four straight quarters of losses totaling $20.2 billion through September 2008 and is expected to post yet another loss when it releases fourth-quarter results on Jan. 22. Citi could report an operating loss as large as $10 billion during the fourth quarter, according to the report in the Journal. About $4 billion of the loss would be offset though by a gain from the bank's sale of its German retail banking operations in a deal that closed late last year, the newspaper said. Citigroup couldn't immediately be reached Monday for a comment on the newspaper reports.

Analysts polled by Thomson Reuters, on average, forecast a loss of $1.14 per share for the fourth quarter. Based on Citi's outstanding share count as of Sept. 30, that would equate to a loss of about $6.21 billion. Analysts do not always include special one-time gains in their estimates. A sale of Smith Barney could provide Citi needed cash to help further offset the mounting losses and help the bank streamline operations to reduce costs amid the ongoing credit crisis. "It looks to me like they are rethinking the business model that Sandy Weill had, which was a one-stop shop model," said Probyn, referring to Citigroup's former chairman and chief executive. "Now they are thinking about maybe going back to a more streamlined division." Weill built Citigroup into the conglomerate it is today through a series of mergers and acquisitions over the past couple decades before handing the reins to Charles Prince in 2003.

The bank has been criticized for years that it had grown too big for its own good, with many investors clamoring for a break-up of its units. But while Citigroup has struggled with its size, its competitors have gotten bigger. Rivals JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. all made acquisitions in the last year to better diversify their businesses. Bank of America bought Merrill Lynch & Co. and mortgage lender Countrywide Financial Corp. JPMorgan, meanwhile, scooped up storied investment bank, Bear Stearns Cos., in March, as well as the lucrative deposits of failed thrift Washington Mutual Inc. And Wells Fargo beat Citigroup in its pursuit of troubled Charlotte, N.C., bank Wachovia Corp.

Time May Be Right for Morgan Stanley
It isn't the obvious time for Morgan Stanley to make an acquisition that will see billions of dollars flow out the door. Months ago its shares were in freefall and it was forced to take $10 billion of capital from the U.S. government. Using some of that to buy control of a merged brokerage operation that incorporates Citigroup's Smith Barney could raise eyebrows. But the planned deal gives a taste of how Wall Street might emerge from the credit crunch.

Morgan Stanley would pay several billion dollars for a controlling stake in what would become the country's biggest operation by number of brokers. Assuming Morgan could buy full control at a later date, it would be diversifying away from its hefty exposure to the risky, capital-intensive trading businesses that mushroomed during the boom. The brokerage business is more stable, client-focused and needs less capital. A risk is that markets remain stressed and clients continue to hunker down, squeezing brokerage cash flows.

Also, the integration could create instability, if the best-performing brokers go elsewhere. Ironically, that's something Citi's aware of. Integration challenges were one reason for excluding Wachovia's brokerage arm from Citi's proposed deal to buy the bank last year. But, after CEO John Mack's attempt to take on more risk during the boom, a brokerage deal would redirect Morgan Stanley towards the more pedestrian model of the old Merrill Lynch -- before it got itself into trouble and sold to Bank of America. Then, the outstanding question for Wall Street would be how Goldman Sachs responds strategically to the new realities.

Citi May Book $10 Billion Gain on Morgan Stanley Deal
Citigroup Inc. may book a gain of as much as $10 billion by selling control of its brokerage to Morgan Stanley, helping to replenish capital depleted by the biggest losses in the bank’s history, a person familiar with the talks said. The pretax gain would come from writing up the value of Citigroup’s Smith Barney unit to a new price set by the deal, said the person, who declined to be identified because the talks are confidential. The gain of $5 billion to $6 billion after taxes would flow into Citigroup’s capital, a loan-loss cushion so eroded that the New York-based bank had to get $45 billion of rescue funds last year from the U.S. government.

"You’re selling out the future to get through the crisis of the present, and unfortunately they don’t have a lot of other choice," David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York, said in a Jan. 9 interview. The worst banking crisis since the Great Depression forced Citigroup Chief Executive Officer Vikram Pandit, 51, to abandon his pledge not to sell Smith Barney. For the past decade, the unit has been at the center of the bank’s plan to provide bond- underwriting, savings accounts and investment advice under a single umbrella. Former U.S. Treasury Secretary Robert Rubin, 70, who joined the company in 1999 and had opposed calls to break it up, said Friday he plans to quit the board.

Talks on the plan to combine Smith Barney with Morgan Stanley’s brokerage in a $20 billion joint venture progressed over the weekend, another person briefed on the talks said. The deal may be announced as soon as mid-week, this person said. Under the plan being considered, Morgan Stanley would pay $2 billion to $3 billion to Citigroup to obtain 51 percent of a venture that would combine both firms’ retail brokerage arms, people familiar with the plan said. The new firm, tentatively named Morgan Stanley Smith Barney, would have about 22,000 brokers, exceeding the network created by Bank of America Corp.’s Jan. 1 takeover of Merrill Lynch & Co., which have about 20,000 brokers between them.

Citigroup posted $10.4 billion of net losses in the first nine months of 2008, putting the bank on track to post its worst year since predecessor City Bank of New York was founded in 1812. Beleaguered by writedowns on mortgage-related bonds, losses on commercial real estate loans and costs related to the bankruptcy of chemicals maker LyondellBasell Industries AF, Citigroup probably lost another $5.82 billion in the fourth quarter, Sandler O’Neill & Partners analyst Jeff Harte estimated in a Jan. 9 report. That figure doesn’t include a $4 billion one-time gain that Citigroup expects from the sale, completed last month, of its retail banking operations in Germany. That unit was also sold by Pandit in an effort to free up capital.

Citigroup, which has 352,000 employees and 200 million customers and does business in more than 100 countries, was pieced together through acquisitions during a 17-year span by former Chairman Sanford "Sandy" Weill, who stepped down from a full-time role in October 2003. Pandit, hired in December 2007 following the ouster of Weill’s handpicked successor, Charles O. "Chuck" Prince, vowed to conduct a "dispassionate" review of Citigroup’s business mix, and whether the company was too big to manage, as some analysts and investors contended. Pandit, who turns 52 this week, concluded that while cost cuts were needed and some assets should be sold, Smith Barney should remain united with the bank’s other operations of branch banking, securities trading and underwriting and payment processing.

Pandit told employees on a Nov. 21 conference call that he didn’t plan to break up the company, singling out Smith Barney as a business he wanted to keep. Later that day, the bank’s share price plunged to a 15-year-low of $3.77, and Pandit spent the ensuing weekend huddled in talks with officials from the U.S. Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. over a plan to receive $20 billion of government bailout funds in addition to the $25 billion it had already received, and $306 billion of guarantees on troubled assets. The decision to sell majority control of Smith Barney is an acknowledgement by Pandit that relinquishing responsibility for the unit may simplify the task of managing Citigroup’s remaining businesses, one of the people familiar with the plan said. Citigroup had the worst stock performance for two years in a row among large U.S. banks, as measured by the KBW Bank Index. The stock closed at $6.75 on Jan. 9 in New York Stock Exchange composite trading.

"There’s a growing dissatisfaction with the slowness with which Citi seems to be dealing with its issues, particularly in terms of right-sizing the company," said Bert Ely, chief executive officer of banking industry consultant Ely & Co. in Alexandria, Virginia. That requires "not only substantial downsizing of the balance sheet, but also disposing of and selling off activities that are not crucial to its long-term strategy." Richard Parsons, 60, Citigroup’s lead outside director, told the Wall Street Journal that the board has confidence in Pandit’s leadership. Parsons may be named later this month to replace board Chairman Win Bischoff, 67, the Journal reported yesterday, citing unidentified people familiar with the plans.

Merrill faces challenges on two fronts
Bank of America chief Ken Lewis agreed to pay a hefty premium in September to acquire Merrill Lynch, not because he wanted its investment banking franchise or its proprietary trading desk. Rather, he wanted Merrill's "thundering herd" of 16,000-plus financial advisers, a network of wealth managers who control $1,500bn in assets and that Mr Lewis has described as the bank's "crown jewel". But the possibility that Citigroup might surrender a majority stake in Smith Barney to Morgan Stanley threatens Merrill's dominance in the field. The combined enterprise, under Morgan Stanley's control, would boast more than 24,000 wealth managers.

Still, the size of the financial advisory force doesn't tell the whole story. In terms of assets per adviser, Merrill seems likely to retain its leadership position in spite of Morgan Stanley's move. The more serious challenge for Merrill appears to be internal. The departure of two top executives last week, including Robert McCann, head of its financial advisory unit, suggests the biggest threat to the thundering herd's dominance will not come in the form of beefed-up competition from Morgan Stanley but from Merrill's new owners in North Carolina. John Thain, the former Merrill Lynch chief executive who now heads up the global banking, securities and wealth management business for BofA, moved quickly to replace Mr McCann with Dan Sontag, a well-regarded veteran of the financial advisory unit.

One of Merrill's top financial advisers, who received a lucrative bonus for staying with the combined firm, told the Financial Times last week that Mr McCann's departure would have almost no effect on his loyalty to the bank. Instead, his primary concern was whether BofA would cut back his pay or impose strictures on his operation. The departure of Mr McCann - who had clashed with Mr Thain and was passed over for a promotion - was not unexpected. But the news on Thursday that Greg Fleming was leaving his position as head of investment banking to teach at Yale Law School sent shockwaves through Bank of America as well as Merrill. According to one BofA executive, Mr McCann was perceived as representing the Merrill of the past - -gregarious, back-slapping and street-smart. That element of the Merrill culture is not expected to thrive under the group's new owner.

According to this line of thinking, Mr Fleming represented the Merrill of the future. He was well liked at BofA, in part because he was an early champion of the acquisition of Merrill. BofA executives are wary of Mr Thain who, although he is one of 11 who directly report to Mr Lewis, is perceived as first among equals. Some of these executives viewed Mr Fleming as Ken Lewis's insurance policy on Mr Thain - someone who could step into his shoes if Mr Thain quit or was ousted. So, Mr Fleming's departure strengthens Mr Thain's position in the organisation. Meanwhile, Merrill executives are bracing for the changes about to be handed down from North Carolina. Last week, to their dismay, many Merrill staff received their BofA lapel pins. Worse, many also received identification badges. They came with instructions as to when they should be worn.

Smith Barney Math
I'm trying to work out the mathematics of the proposed joint venture between Citigroup and Morgan Stanley, and what it does for Citi's balance sheet, using stories from the FT and Bloomberg. According to the FT, Citigroup has 15,500 brokers; according to Bloomberg, the companies have 22,000 brokers between them. Let's be charitable to Citigroup and assume that Citi's brokers are worth just as much, on a per-broker basis, as Morgan Stanley's. And let's further assume that the FT is right and Morgan Stanley is going to pay Citi $2.5 billion for a 51% stake in the joint venture. How could that correspond to the $10 billion gain Bloomberg says that Citi would book?

If the joint venture simply merged on an all-brokers-are-equal basis, then Morgan Stanley would own 6,500/22,000 or 29.5% of the joint venture. So if it ends up with 51%, or 11,220 brokers, that means it's essentially buying 4,720 brokers from Citigroup for $2.5 billion. Which values each broker at about $530,000. At that valuation, the entire joint venture would be worth $530,000 times 22,000, or $11.65 billion. Citi will have received $2.5 billion in cash, and would own 49% of the joint venture, worth another $5.7 billion, for a total of $8.2 billion. If that's the case, how on earth can Citi gain $10 billion "from writing up the value of Citigroup's Smith Barney brokerage unit to the new price set by the deal"? Smith Barney might not be worth a lot on Citi's balance sheet right now, but it's surely worth more than $0.

And this puzzles me, too: The gain of $5 billion to $6 billion after taxes would flow into Citigroup's capital... After taxes? What taxes? I thought that Citi had managed to lose so much money of late that it has enormous tax losses which essentially mean it's not going to pay any taxes for the foreseeable future. But now Bloomberg's implying that 40% to 50% of the $10 billion gain on Smith Barney will have to be paid in taxes -- which seems like a ludicriously high tax rate at the best of times. Is there something I'm missing here? Are Smith Barney brokers actually worth more than Morgan Stanley brokers? Are some of the numbers wrong? Or is this just a case of journalists getting different numbers from different sources, and not stopping to ask whether they play nice with each other?

Update: A reader points out that the Bloomberg article does talk about "a $20 billion joint venture", and only "as much as" $10 billion in Citigroup gains. So maybe we can work backwards from the $20 billion number? That would value the joint venture at about $900,000 per broker, on average. But let's say that the Citi brokers are worth only $800,000 each, while the Morgan Stanley brokers are worth $1.2 million apiece. In that case, the joint venture before any cash payment would be worth $800,000 times 15,500 on the Citi side, or $12.4 billion, and $1.2 million times 6,500 on the Morgan Stanley side, or $7.8 billion.

Total: just over $20 billion, with Morgan Stanley having a 39% stake. In order to raise its stake to 51%, Morgan Stanley would need to buy another 12%, and 12% of $20 billion is $2.5 billion. That would explain the $2.5 billion. After receiving the cash, Citigroup would also have 49% of a $20 billion joint venture, worth $9.8 billion. So altogether it would have $12.3 billion, and depending on the current book value of Smith Barney, a large chunk of that might find its way into write-ups.

Vikram Pandit, Dead Man Walking
Remember Jack Flack's five levels of CEO hell? The fourth ("On The Ropes") is when the board starts expressing confidence in the CEO; the fifth ("Dead Man Walking") is "when the corporate flacks, who are typically the staunchest of the palace guard, refuse to comment instead of denying the fragility of their CEO's job". At that point, says Mr Flack, "the game is over".Which brings us, naturally enough, to Vikram Pandit:
"We have confidence in the current management and leadership of Vikram," Richard Parsons, a former CEO of Time Warner Inc., said in an interview Sunday. "There's no truth" to rumors that Mr. Pandit's job is in jeopardy barely a year after he took the reins, he added. Mr. Parsons is expected to be named Citigroup's chairman this month, replacing Sir Win Bischoff, say people familiar with the company. A Citigroup spokeswoman declined to comment.

Citigroup Too Big To Fail, But Just The Right Size To Explode Into Little Bits
Citigroup - the obese, inefficient banking failure that has received over $45 billion in government money since September last year - is set to flog off a massive stake of its global empire in a move to de-merger what was formerly the world’s largest bank. The WSJ reports that Smith Barney, the bank’s major brokerage unit, is to be part sold to Morgan Stanley at firesale prices. Revenue from Smith Barney represented about 16.3% of total earnings for the mega-bank in 2008 ($7.9 billion), yet Morgan Stanley will buy their 51% stake for $2.5 billion.

Felix Salmon even thinks Citigroup might try to take its Mexican super-bank Banamex public, in “what would certainly be the biggest Latin American IPO of the year”. Speculation rippling through the internet seems to point to Fed bailout queen Elizabeth Warren forcing the sale/s, as the US government focuses on reviving specific sections of the banking system (which don’t include retail brokerages for middle class mum’s and dad’s looking to diversify their assets using the clumsy aspersions of screaming televangilist econo-goons).

While this is definitley not the time to be selling any banking assets, we applaud any move to break up Citigroup. Former CEO Sanford Weill’s vision of creating a leviathan bank replete with endless synergies was turned into a laughing stock and a circus under CEO Charles Prince, who showed that once a bank has reached certain proportions the traditional decision making processes of a company will likely break down (to be replaced by an egregious pyramid scheme aimed at making short term profits).

Companies that are too big to fail are also likely to be too disorganised to succeed, and too divorced from normal moral hazards to give a crap about long term stability. It’s not the best time to sell off assets, but to prevent tax payers from having to fork out billions more in the future, mega banks like this should be dismantled. With megalomaniacal banking CEOs ego/power at an all time low, now might be just the time to do it.

France, Germany and fissures in the eurozone
International challenges spell good and bad news for the European Central Bank. On the positive side, the credit crisis has given the independent ECB and Jean-Claude Trichet, its president, unexpected authority on the world stage. Most observers agree the 10-year-old economic and monetary union has so far moderated the direct fall-out of the financial crisis for eurozone members. On the negative side, Europe this year faces probably the worst recession since the second world war. Depending on how Emu members react, latent nationalism within the single currency area may emerge as a disruptive force. Battle lines are being drawn between the “stability first” principles of Europe’s strongest economy, Germany, and the more activist growth policies favoured by France.

Mr Trichet, a veteran of fierce battles with the Bundesbank as head of the French Treasury in the early 1990s, has emerged as heir to the German central bank’s anti-inflation throne. The ECB’s president and decision-making council have come under sporadic pressure from European politicians to soften their monetary stance. After the mid-September collapse of Lehman Brothers, the US bank, the ECB cut interest rates three times between October and December – the first reductions since Mr Trichet took office in 2003. But despite recent signs of further economic weakening, there are strong indications that Mr Trichet will continue to garb himself in a mantle of Bundesbank-like firmness.

Emu has required improbable compromises – notably, that it would work without substantial fiscal transfers between countries of markedly different economic performance. Using a single currency to lash together 16 disparate nations has had effects similar to those among occupants of a life raft on a storm-tossed sea. The euro has provided members with an aura of robustness but also made them more prone to fissures caused by disturbances in their internal balance of forces. A warning signal has come from the sharp rise in the gap or “spread” between yields on bonds issued by heavily indebted Emu countries and those on German government bonds. The crisis has driven up these spreads not only because investors take a less forgiving view of the risks on weaker countries’ debt, but also because of the blockages along what Mr Trichet formerly called the “financial channel” for ironing out discrepancies among member states.

The yield spreads – now 2.3 percentage points for Greece, 1.3 points for Italy and 1.7 points for Ireland – are much less than the differences of up to 6 points before the euro was set up. Weaker southern and western states still derive considerable benefit from membership, but – should spreads widen further – that may fast diminish. A prime reason for the widening spreads is that fixing exchange rates among countries with disparate patterns of prices and productivity has led to changes in relative competitiveness. Since 1999, Germany has gained an overall competitive advantage of more than 10 per cent, while Italy has suffered a loss of nearly 40 per cent, according to Organisation for Economic Co-operation and Development figures based on unit labour costs. During much of the euro’s first decade, the positive impact of generally low, stable Emu interest rates largely outweighed the negative influence of disrupted competitiveness. However, as economies contract, papering over the cracks will become more difficult.

That is exemplified by economic policy differences between France’s President Nicolas Sarkozy and Chancellor Angela Merkel of Germany. Continuing a French tradition shown by predecessors François Mitterrand and Jacques Chirac, Mr Sarkozy has irritated the Germans with his suspicion of central banking independence and has been still more outspoken than Mr Chirac in publicly criticising ECB interest rate decisions. Mr Sarkozy has clashed with Peer Steinbrück, Germany’s no-nonsense finance minister, telling him on one occasion Germany’s strictures spelled “the end of Franco-German friendship”. At the root of France’s carping is the widespread French belief that Germany has gleaned unfair economic advantage from Emu. Germany has swung from a pre-Emu current account deficit of 0.8 per cent of gross domestic product in 1998 to a surplus of 6.4 per cent in 2008, according to the OECD. France, Italy, and Ireland, with surpluses of 2.6, 1.9 and 0.8 per cent of GDP respectively in 1998, registered deficits of 1.6, 2.6 and 6.2 per cent in 2008.

Last year Greece, Spain and Portugal ran deficits of 10 per cent of GDP and more. There has been no sign so far of any overt move to modify Emu’s “no-bail-out” clause, which prevents less well off states from demanding help from stronger members. However, if other Emu countries find borrowing progressively harder, non-German politicians may ask Germany to use its comfortable financial position to alleviate pressures on weaker Emu brethren. The German government, which has rejected forming more demand to help out less competitive euro members, would certainly say no to changing the no-bail-out clause. If bond spreads rise towards pre-1999 levels, speculation may rise that one or more weaker states could suspend their membership. Mr Trichet dismisses such thoughts as “fantasies”. Yet leading European monetary officials stated months ago that precisely such an option – although unlikely – could not be ruled out. If 2008 has been tough for Emu, 2009 could bring still greater tests.

Robert Shiller fears decade of weakness in US
One of the world's leading economists has given warning that the United States is facing a decade of financial misery, with the number of unemployed Americans set to continue to rise for years. Robert Shiller, Professor of Economics at Yale University, who predicted the end of the internet bubble seven years ago, said: "We could have many years of a very weak economy. Big recessions are followed by years of weakness and typically unemployment keeps rising. "To say that this will last years is not a dramatic statement. What is happening now is much worse than 1990. We could be facing a decade of real weakness. "This is no ordinary recession. There are signs that people see this as a different story. People are talking about a depression, something that we haven't seen previously."

Professor Shiller's comments come as the unemployment rate in America is rising astonishingly fast. Last week official figures showed that the US lost 524,000 jobs in December, with the overall unemployment rate rising to 7.2 per cent — the highest level for 16 years. With about 11.1 million people out of a job, the total number of unemployed is about 50 per cent higher than a year ago. Some economists, such as Kenneth Rogoff, the former chief economist at the International Monetary Fund and now a Professor of Economics at Harvard University, believe that America will be lucky if unemployment peaks at 9 per cent of the workforce and that there is a high chance that it will reach at least 10 per cent.

Professor Shiller, who said that he has talked to the incoming Obama Administration about possible solutions to the housing crisis in the US, took a swipe at the Federal Reserve. He said: "This recession is by no means mechanical. People have lost a sense of confidence, a sense of trust in institutions and in each other. It is very hard for a central bank to address that by just cutting interest rates." Professor Shiller, who has recently published The Subprime Solution — How Today's Global Financial Crisis Happened, and What to Do About It, also warned that plans to try to limit foreclosures had met with resistance from those who felt "they had paid their mortgages, they had done everything right, but that they are now being taxed for those who did not".

The housing market in the United States is widely seen as one of the main causes of its economic troubles. Spurred by low interest rates and initiatives to promote home ownership, residential real estate boomed for a decade. Professor Shiller, who co-founded the authoritative S&P Case/Shiller home price index, was one of the first to predict that the housing market would slump and that this could bring down financial institutions. He said: "So far the Government isn't doing much. [President-elect Barack] Obama has not made any announcement. They do not have anything going. I would have thought that Obama would be receptive [to a rescue plan to stem the rate of foreclosures]."

The bond bubble is an accident waiting to happen
The bond vigilantes slumber. As the greatest sovereign bond bubble of all time rolls into 2009, investors are clinging to an implausible assumption that China and Japan will provide enough capital to keep the happy game going for ever. They are betting too that debt deflation will overwhelm the effects of near-zero interest rates across the G10 and nullify a £2,000bn fiscal blast in the US, China, Japan, Britain, and Europe. Above all, they are betting that the Federal Reserve chief Ben Bernanke will fail to print enough banknotes to inflate the US money supply, despite his avowed intent to do so. Yields on 10-year US Treasuries have fallen to 2.4pc – a level that was unseen even in the Great Depression. This is "return-free risk", said bond guru Jim Grant.

It is much the same story across the world. Yields are 1.3pc in Japan, 3.02pc in Germany, 3.13pc in Britain, 3.26pc in Chile, 3.47pc in France, and 5.56pc in Brazil. "Get out of Treasuries. They are very, very expensive," said Mohamed El-Erian, the investment chief at the Pimco, the world's top bond fund, in a Barron's article last week. It is lazy to think that China, Japan, the petro-powers and the surplus states of emerging Asia will continue to amass foreign reserves, recycling their treasure into the US and European bond markets. These countries are themselves bleeding as exports collapse. Most face capital flight. The whole process that fed the bond boom from 2003 to 2008 is now going into reverse. Woe betide any investor who misjudges the consequences of this strategic shift.

Russia has lost 27pc of its $600bn reserves since August. The oil and metals crash has left the oligarchs prostrate. China's reserves fell $15bn in October. Beijing has begun to fret about an exodus of hot money – disguised as foreign investment in plant. The exchange regulator is muttering about "abnormal" capital flows out of the country. China's $1,900bn stash of foreign bonds is a by-product of holding down the yuan to boost exports. This mercantilist ploy is no longer necessary, since the currency is weakening. Beijing needs the money at home in any case to prop up the Chinese economy – now in trouble. Even Japan has slipped into trade deficit. Clearly, the US and European governments cannot rely on Asia to plug the $3,500bn hole in their budgets this year. Asians are just as likely to be net sellers of their bonds. Which implies that central banks may have to "monetize" our deficits.

James Montier, from Société Générale, has examined US bonds back to 1798. Yields have never been this low before, except under war controls in the 1940s when the price was set by dictate. That episode is not a happy precedent. The Fed drove the 10-year bond down to 2.25pc, much as it is doing today with mortgage bonds. It helped America win World War Two, but ended in tears for bond holders in 1946 when inflation jumped to 18pc. Mr Montier said yields have averaged 4.5pc over two centuries, with a real return of around 2pc. By that benchmark, the market is now banking on a decade of deflation. Investors have drawn a false parallel with Japan's Lost Decade, when bond yields kept falling, forgetting that Tokyo waited seven years before resorting to the printing press. Mr Bernanke has no such inhibitions. He has hit the nuclear button in advance. "Today's yields are woefully short of the estimated fair value under normal conditions. There maybe a (short-term) speculative case for buying bonds. However, I am an investor, not a speculator," Mr. Montier said.

Of course, we may already be so deep into debt deflation that bonds will rally regardless. Fresh data suggest that Japan's economy contracted at a 12pc annual rate in the fourth quarter of 2008; the US, Germany, and France shrank at a 6pc rate, and Britain shrank at 5pc. If sustained, these figures are worse than 1930, though not as bad as the killer year of 1931. The UK contraction from peak to trough in the Slump was 5pc. Gordon Brown will be lucky to get off so lightly. The Fed's December minutes reek of fear. The Bernanke team is no longer sure that stimulus will gain traction in time. The Fed's "Monetary Multiplier" has collapsed, falling below 1. This is unthinkable. We are in a liquidity trap. So yes, printing money is not as easy as it looks, but to conclude that the Fed cannot bring about inflation is a leap too far.

The Fed has only just started to debauch in earnest, buying $600bn of mortgage bonds to force home loans down to 4.5pc. US mortgage rates have dropped 150 basis points in two months. My tentative guess is that Bernanke's blitz will "work" – perhaps later this year. Markets will start to look beyond deflation. They will remember that the Fed is boosting its balance sheet from $800bn to $3,000bn, and that it sits on an overhang of bonds that must be sold again. "The euthanasia of the rentier" will wear off, to borrow from Keynes. That is when the next crisis begins.

Financial scoundrels have little to fear from the law
"Justice? You get justice in the next world, in this world you have the law." That opening line of one of my favorite novels, William Gaddis' 1994 legal satire "A Frolic of His Own," comes back to me every time I hear someone call for packing the rich malefactors behind the great financial meltdown of 2008 off to jail. Having watched 40% of our 401(k)s go up in smoke and jobs vanish by the millions, it's natural to want to see the guilty subjected to divine justice. There's no dearth of suspects. There are heads of banks and mortgage companies who invested their capital and made loans without the most cursory due diligence -- Angelo Mozilo of Countrywide Financial and Charles Prince of Citigroup come to mind. Richard Fuld and James Cayne, the bosses of Lehman Bros. and Bear Stearns, who presided over the extinction of their fine old firms. Maurice R. "Hank" Greenberg of AIG, whom I saw last year on CNBC saying that a government bailout of that irresponsible company ($150 billion at last count) was in the "national interest."

These execs collected otherworldly salaries and bonuses for years on the grounds that their institutions could scarcely survive a week absent their wisdom and judgment. We know better now, but they haven't given the money back. Is America's legal system up to the task of delivering the justice they deserve? Experience suggests we're bound to be disappointed. "Before you can punish anybody, you have to determine if there's a crime, and I'm not sure much of this activity is criminal," Clifford Hyatt, a former SEC enforcement lawyer now at Pillsbury Winthrop Shaw Pittman in Los Angeles, told me. As Gaddis understood, the law (in this world) is preoccupied with discrete misdeeds more than with elemental depravity. Kenneth Lay perpetrated the Enron scheme, but he was indicted for such mundane felonies as lying to employees about the firm's health. Criminal cases involving what's often excused as bad "business judgment" are notoriously difficult and complex, and who wants to see a guilty CEO skate on a technicality?

Let's not forget that much of what passes for justice in the public arena is theater. No one appreciates a good perp walk more than I do (except maybe Nancy Grace). Yet the first frisson of excitement never produces lasting nourishment. No. 1 on the perp walk hit parade of 1987, for instance, was the arrest of three Wall Street traders allegedly involved in the big insider trading scandal of the moment. As news cameras rolled, one was led tearfully from his trading floor and handcuffed by agents of Rudolph Giuliani, then the federal prosecutor in Manhattan. The charges against all three were dropped four months later. Who was the net beneficiary of this stunt? Only Giuliani, who gained a political platform that enabled him to infest our national politics for the next 20 years.

And what about those who don't lie or commit outright fraud, but set the stage for disaster? Consider former SEC Chairman Arthur Levitt, who lately has been swanking around lecturing congressmen and the media about the need for rigorous regulation. Levitt deserves credit for his activism at the SEC on behalf of shareholders. But he led a regulatory hit squad in 1998 that killed an effort to reel in credit default swaps and other derivatives. These fancy unregulated instruments helped bring the international financial system to its knees 10 years later. By the way, Levitt was SEC chief from 1993 to 2001, when Bernard Madoff's alleged fraud was almost certainly already in full cry, and his agency never laid a finger on the man. How should we punish him for his dereliction of duty? Indict? Stop giving him airtime? Bill him for his SEC salary?

It's hard to find a provision of the penal law that would cover Levitt, former Federal Reserve Chairman Alan Greenspan or former Treasury secretaries Lawrence Summers and Robert Rubin, each of whom played an important role in cooking up the financial meringue that has cost America, and the world, so much. Rubin resigned Friday as an executive of Citigroup, but Summers has been nominated as head of the National Economic Council in the Obama White House. They all portray the meltdown as something they couldn't have foreseen. "I'm astounded that no one has said, 'I'm sorry,' " said Tamar Frankel, a law professor at Boston University who writes extensively on business morality. She says expressions of shame, guilt and empathy with the victims would go far to restore public confidence in the markets.

But Depression history does give us a template for a public shaming: the so-called Pecora hearings into the 1929 stock market crash. (They were named after the Senate Banking Committee's indefatigable chief counsel, Ferdinand Pecora.) Pecora had no patience for bankers and financiers such as J.P. Morgan, who swore they'd had only the public's interest at heart when they inflated the stock market bubble. He laid out for the world how America's financial institutions, which had stood for "safety, strength, prudence, and high-mindedness" and were supposedly led by men "possessing almost mythical business genius and foresight" had relied instead on "legal technicians and the complaisance of governmental authorities" to cheat the average investor and foment the Great Crash. (The quotations are from his impassioned 1939 book, "Wall Street Under Oath.")

Pecora's chief target was Charles E. Mitchell, chairman of the National City Bank -- precursor of Citigroup, one of the least prudent banks in the current mess. Mitchell was never criminally indicted for his role in the crash, but Pecora made sure his reputation for probity was exposed as a complete sham. National City fired him shortly after the hearings. An inquisition such as Pecora's is the minimum we should have, short of indictment and trial. It will be said that many big financial perps are getting their comeuppance today via the destruction of their personal fortunes, as though being pared back to a seven-digit net from nine digits is tougher on them than three to five in San Quentin would be to a kid from the projects. Does anyone buy that? The notion brings to mind a quote from Willa Cather's 1922 novel "One of Ours": "Even the wicked get worse than they deserve," she wrote. But Cather lived in more indulgent times.

Oil Drops Below $40 on Speculation Slump in Demand Will Outpace OPEC Cuts
Crude oil fell below $40 in New York on concern production cuts by the Organization of Petroleum Exporting Countries will fail to counter a slump in demand. Oil consumption will fall by 1 million barrels a day this year while the U.S., Europe and Japan face their first simultaneous recessions since the Second World War, Deutsche Bank AG predicted last week. U.S. stockpiles have climbed in 13 of the past 15 weeks, according to the Energy Department. OPEC members signaled last week that they would be cutting their sales to refiners in February.

"The health of the global economy is the dominant consideration in the short term, and that is weighing down on prices," said Harry Tchilinguirian, senior market analyst at BNP Paribas SA in London. "OPEC cuts may prove to be supportive in future but it’ll take time for them to take effect." Crude oil for February delivery fell as much as $2, or 4.9 percent, to $38.83 a barrel in electronic trading on the New York Mercantile Exchange. It was at $38.93 a barrel at 10:08 a.m. in London. Prices fell 12 percent last week as economic data showed the economic slump worsening. On Jan. 9, prices in New York dropped 2.1 percent to $40.83 a barrel after the U.S. said it lost 2.589 million jobs last year, the most since 1945. OPEC, supplier of more than 40 percent of the world’s oil, agreed last month to cut production quotas by 9 percent to revive prices as the global recession erodes demand. Oil has plunged more than $100 in the last six months.

Saudi Aramco, the world’s biggest state oil company, sent notices to refiners in Asia on Jan. 9 that it would lower crude supplies to Asia by around 10 percent in February. This was the third month the company had cut sales. "Although OPEC have made substantial production cuts there is an overhang of prompt oil and until that is absorbed the market may not rally substantially," Christopher Bellew, senior broker at Bache Commodities Ltd. in London. OPEC may cut its production further should crude prices continue to decline, Iran’s OPEC Governor Mohammad Ali Khatabi said Jan. 11. OPEC is scheduled to meet next in Vienna on March 15. Iran is the group’s second-largest producer, after Saudi Arabia. Oil for March delivery is at a more than $5 a barrel premium to the front-month contract, while the April future is $9 above February-delivered supplies. The situation where near- term crude is cheaper than later-dated oil is called contango.

"The curve is very steep, which is consistent with the view that the market tightens up in time and we get higher prices down the track," said David Moore, a commodity strategist at Commonwealth Bank of Australia. "It will take a while for those production cuts to eat away at inventories." Oil for February dropped last week as stockpiles at Cushing, Oklahoma, the delivery point for crude traded at Nymex, climbed to 32.2 million barrels, the highest since the U.S. Energy Department started tracking the supplies in 2004. Total capacity in the area is around 47.7 million barrels, according to estimates from Andy Lipow at Houston-based consultants Lipow Oil Associates LLC. Brent crude for February settlement fell as much as $1.61, or 3.6 percent, to $42.81 a barrel on London’s ICE Futures Europe exchange. It was at $42.86 a barrel at 10:10 a.m. London time.

Hedge-fund managers and other large speculators increased their net-long position in New York crude-oil futures in the week ended Jan. 6, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 76,658 contracts on the New York Mercantile Exchange, the Washington-based commission said in its Commitments of Traders report. Net-long positions rose by 12,110 contracts, or 19 percent, from a week earlier.

When Stimulus Doesn't Scale
Barack Obama wants ideas from Paul Krugman, who of course is happy to oblige -- and to make the good point that "we don't have many specifics from the Obama people themselves". But hidden in the respectful joshing is a profound and interesting point of agreement. Here's Krugman:
The Romer-Bernstein report acknowledges that "a dollar of infrastructure spending is more effective in creating jobs than a dollar of tax cuts." It argues, however, that "there is a limit on how much government investment can be carried out efficiently in a short time frame." But why does the time frame have to be short? As far as I can tell, Mr. Obama's planners have focused on investment projects that will deliver their main jobs boost over the next two years. But since unemployment is likely to remain high well beyond that two-year window, the plan should also include longer-term investment projects.

What Obama-Romer-Bernstein and Krugman are all saying here is that stimulus doesn't easily scale. There's only so much money that can be spent immediately, to "jump-start" the economy; beyond that, you're forced to look for longer-range investments. So in terms of immediate bang for the buck, the first stimulus dollar has a lot more effect than the trillionth. Krugman does his best to make the case that the trillionth dollar is still worth spending, but clearly even he agrees that at some point there are diminishing returns.

On the other hand, given that the main metric being looked at by both Obama and Krugman is jobs, I'll just reiterate my point that you can create a huge amount of jobs, very cheaply, with arts subsidies -- and arts subsidies do scale. Yes, it's hard to get Republican support for such things, but we did just elect a Democrat to the presidency.

Obama Team in Talks to Tap TARP
The incoming Obama administration, stymied by political opposition to the Bush administration's financial rescue, is negotiating with lawmakers to avoid a messy political fight as it seeks the second half of the $700 billion bailout. The Obama team would like to ask for the money even before President-elect Barack Obama takes office but is concerned lawmakers would reject the request, handing Mr. Obama the sticky task of vetoing Congress as one of his first acts in office. Members of Mr. Obama's team, including Treasury Secretary-nominee Timothy Geithner, are working to satisfy lawmakers' concerns by proposing using the funds for new purposes, such as preventing foreclosures, and imposing tougher conditions on recipients, according to people familiar with the negotiations.

The political calculations are complicated by the need to navigate around Congress's ire toward the program. Making matters worse is the transition to the new administration, which wants to revamp its predecessor's work. Congress can deny the funds by passing a resolution disapproving of Treasury's plan within 15 days. Such a resolution, which requires a simple majority vote in both chambers, has already been introduced in the House. House lawmakers, led by Financial Services Committee Chairman Barney Frank (D., Mass.), are also advancing legislation that would limit how the money is used, require a foreclosure-prevention program and prohibit banks from using government money to make certain acquisitions, among other things.

It would be more difficult for a similar measure to pass in the Senate. In an interview Sunday, Banking Committee Chairman Sen. Christopher Dodd (D., Conn.) said Mr. Geithner, at his urging, is preparing a "letter of assurances" that would detail proposed improvements to the program. Based on those assurances, Mr. Dodd is trying to find 50 votes to thwart any resolution disapproving the funds. That is "the cleanest way" to end debate on Capitol Hill and clear the way for release of the funds, he said. "That ends the issue." Sen. Kent Conrad (D., N.D.) said Lawrence Summers, Mr. Obama's pick to head the National Economic Council, told lawmakers that the Obama administration would improve accountability and transparency in the financial rescue. Mr. Conrad voiced concern that the outgoing administration didn't embrace "safeguards" on use of the funds, including limits on banks acquiring other healthy institutions.

The Bush administration has been willing to request the funds on Mr. Obama's behalf, but the Obama team has been wrestling with the timing. Mr. Geithner, who as head of the Federal Reserve Bank of New York worked closely with Treasury Secretary Henry Paulson last year, wants the request made now to prevent financial markets from worrying about a vacuum, according to people on Capitol Hill who are familiar with the matter and Bush administration officials. But the level of unhappiness toward Messrs. Bush and Paulson is so high that the Obama team is worried a request from the current administration could complicate the release. A fight over the second half would spook fragile financial markets, transition officials worry.

While Mr. Bush will be in office until Jan. 20, it is unclear whether he would use his veto power to shoot down a resolution of disapproval from Congress. Such a move would then fall to Mr. Obama. If the Obama team can assuage lawmakers' concerns, the money could soon be forthcoming. Sen. John Kerry said he expects the president-elect will likely make a decision shortly and that the issue will come to a head in the "course of the week." Overcoming objections to the bailout is important for Mr. Obama's other immediate priority: his proposed economic stimulus package. Mr. Obama is likely to have to overcome a headwind of public cynicism about the financial-market bailout to win enactment of his costly plan to spur job creation.

Democrats met Sunday and Obama aides signaled readiness to make changes to the stimulus package, including strengthening investments in green energy. Participants said the Obama team is now considering a $25 billion package of tax incentives to promote energy conservation and development of renewable energy, as well as a companion package of spending on energy initiatives that could double the envisioned tax incentives. In making trade-offs, one option would be to scale back Mr. Obama's proposal to give businesses a tax credit for creating jobs, said an individual familiar with the negotiations. On TARP, Mr. Summers made clear the administration intends to revamp aspects of the program, especially its accountability. "He was very strong on it," said Sen. Dodd. "The Obama administration wants to rebrand this process."

TARP's Original Mandate Must be Executed
"This program is intended to fundamentally and comprehensively address the root cause of our financial system’s stresses by removing distressed assets from the financial system."  Treasury Secretary, Hank Paulson, October 2008
Back in October 2008, at the height of the global crash, Treasury boss Hank Paulson provided hope that the United States would finally tackle the clogged mortgage-backed securities crisis affecting global capital markets. Investors demanded the creation of an entity to place bad assets under one roof. But Treasury has since made a U-turn, changing its original plans. Mortgage securitization is largely responsible for this crisis. Since 2001 Wall Street spearheaded a bull market in residential lending through the creation of mortgage-backed securities. Indeed, Wall Street -- and not traditional banking, was indirectly responsible for more than 70% of all real estate loan origination.  
Under TARP’s (Troubled Asset Relief Program) original mandate, the Treasury would apportion a sizable share of the original $700 billion dollars of tax-payer funds to place busted mortgage-backed assets into a separate entity, similar to the 1989-90 Resolution Trust Corporation (RTC) vehicle created to bundle bad loans. The RTC worked to help U.S. banks and Savings & Loans to finally separate bad loans and clear the way for economic recovery following the last real estate bear market. But since October, Paulson has backtracked. Instead of dealing with the crux of the current credit crisis affecting counter-party trust and bank balance-sheet transparency, or the lack thereof, Paulson decided instead to disperse TARP funds directly to banks.

Now most banks that have tapped into TARP won’t lend capital to a credit-starved economy which in some cases has resulted in widespread hoarding whereby financial institutions are using TARP money to boost their balance-sheets’ capital ratios. That’s not what the original plan sought to achieve. Toxic assets include bonds backed by mortgages, including complex mortgage-backed securities, auction-rate securities backed by student loans and potentially a blizzard of other securities tied to commercial mortgages, credit card loans and auto loans. The size of these bad loans continues to grow, compounded by rising defaults made worse by an economy that is rapidly contracting since September.
Meredith Whitney, who ranks as the most accurate bank analyst predicting this credit-inflicted deluge since 2007 predicts banks will be required to fork over even more capital as loan-losses continue to rise. This will only delay any recovery in battered bank balance sheets since the initial TARP objective has been changed. Until the United States finally creates an entity to bundle toxic and mostly illiquid assets, the credit crisis will continue. Thus far, Treasury has simply handed out tens of billions of dollars directly to banks whom remain reluctant to lend as the economy heads deeper into the financial abyss.

To be sure, several segments of credit have markedly improved since late November, including the TED Spread, LIBOR, investment-grade corporate bond spreads and even a series of new corporate investment-grade and junk debt issuance since December. But the bad assets still plaguing the U.S. and European financial systems has not been addressed. Bad assets must be segregated, identified and isolated from the financial system in order to improve institutional counter-party confidence and transparency. The credit crisis remains alive until this primary objective is tackled, if at all, by the next Treasury Secretary.

Mortgage Servicing Loses Luster as Bad Loans Mount
Bank of America Corp., GMAC LLC, and WL Ross & Co. are among mortgage servicers that have endured billions of dollars in unexpected costs and added thousands of workers to handle rising foreclosures, denting a business once viewed as a safe haven from the housing market’s collapse. Loan servicers send out bills, collect debts and keep records, tasks that analysts predicted would provide a steady stream of fees even if home sales dropped. The companies didn’t count on the U.S. push to modify up to 2 million defaulted home loans, and contracts that require them to cover mortgage investors when homeowners miss payments.

Countrywide Financial Corp. lost $2.2 billion on loan servicing during the first half of last year before it was bought by Bank of America. Analysts say billionaire Wilbur Ross, who made a fortune buying bankrupt companies, overpaid when his firm purchased American Home Mortgage Investment Corp.’s servicing unit for $500 million in October 2007 and Option One Mortgage Corp.’s servicing business from H&R Block Inc. for $1.3 billion in May. "It looked pretty cheap and everyone thought Wilbur was really jumping in at the right time, but it doesn’t look cheap today," said Rob Snow, founder of Great Falls, Virginia-based Carillon Capital and former head of lending at E*Trade Financial Corp. "The performance of some of the American Home securities that they are servicing has been absolutely horrific."

WL Ross & Co.’s mortgage-servicing business is "ahead of budget in terms of earnings through November, the most recent figures we have," Wilbur Ross said today in a telephone interview. "We are continuing to bid on servicing portfolios." Ross said he expects to see profits when his servicing business recoups advances to investors. Servicers agree to advance cash to investors when borrowers are delinquent and get repaid when the loans are brought current or through foreclosure sales. Most of the $1.8 billion WL Ross paid for Option One and American Home went to cover advance payments, Ross said, adding that his company bought at a discount. "Advances are very safe in that they become the most senior mortgage, senior even to the first mortgage," he said. "The bulk of our purchase price was for advances, not for the servicing business itself."

Bank of America, Wells Fargo & Co. and JPMorgan Chase & Co. serviced 48 percent of the nation’s $11.5 trillion in mortgages as of Sept. 30, according to Guy Cecala, publisher of the Inside Mortgage Finance newsletter. Citigroup Inc. handled 7 percent. Companies typically charge $250 to $350 a year per $100,000 in loans to cover billing and collection. When less than 2 percent of loans are delinquent, it’s a low-risk business, Cecala said. The model breaks down when overdue payments exceed that threshold and delinquencies reached a record 6.99 percent as of Sept. 30. Servicers take on added costs when they negotiate to modify mortgages so that homeowners won’t default and deepen the housing crisis. Late payments also hurt cash flow because servicers must pay investors holding mortgages every month. When late payments mount, servicers have to draw on their own reserves or credit lines until they conclude the loan won’t be repaid.

GMAC’s Residential Capital mortgage unit, the sixth-largest servicer, has advanced more than $2 billion to investors because of delinquencies. Detroit-based GMAC, which won a $6 billion federal bailout last month, is unable to interest any buyers in ResCap’s servicing unit, which had $1.15 billion of revenue during the first three quarters of 2008. "None of them want to touch it because the losses could be too horrendous," said David Olson, president of the Wholesale Access Mortgage Research Inc. consulting firm in Columbia, Maryland. "The servicing companies weren’t geared to have a lot of contact with customers," said Paul Miller of Friedman Billings Ramsey Group Inc., a top-ranked analyst in last year’s survey by Bloomberg. "They need to pour more money into it, which would help the overall system, but they don’t want to drag their earnings down in the process."

Bank of America doubled its loan-workout staff to 5,600 in the past year because of increasing delinquencies, said spokesman Rick Simon in Calabasas, California, where its consumer real- estate business is based. He declined to elaborate on the rest of the servicing business. New York-based JPMorgan, the second- biggest U.S. bank by market value, hired more than 300 people last year to help modify mortgages, spokesman Tom Kelly said. "It’s like a snowball running downhill," said Bob Caruso, an executive vice president at Loan Processing Services Inc. in Jacksonville, Florida, and a former president of Bank of America’s mortgage company. Bank of America, the No. 3 U.S. bank by market value, became the largest servicer through its July acquisition of Countrywide, which added 9 million customers. Countrywide CEO Angelo Mozilo doubled servicing to $1.48 trillion between 2003 and 2007, with the unit making up almost a third of mortgage banking profits in 2006 and 2007.

Countrywide’s loan-servicing unit had a $2.2 billion pretax loss during the first half of 2008, following a $441 million loss in 2007. Managing the servicing process will require much attention, said Miller at Arlington, Virginia-based Friedman Billings. "They are trying to be quiet, but Bank of America has got major challenges in servicing," said David Lykken, a consultant at Mortgage Banking Solutions in Austin, Texas. Bank of America declined to comment, spokesman Scott Silvestri said. Charlotte, North Carolina-based Bank of America counted on servicing to offset slowing loan originations when it acquired Countrywide, said Gary Townsend, president of Hill-Townsend Capital LLC in Chevy Chase, Maryland. WL Ross bought American Home’s loan-servicing unit after the Melville, New York-based purveyor of Alt-A home loans went bankrupt in August 2007. Alt-A loans included those made to creditworthy borrowers who weren’t required to document their income.

American Home was the second-biggest subprime servicer in the first half of 2008 behind Countrywide, according to data compiled by National Mortgage News in October. Option One ranked among the nation’s biggest lenders specializing in subprime mortgages, made to people with the worst repayment records. Wells Fargo, the second-largest servicer with a portfolio valued at $1.5 trillion, didn’t offer as many subprime loans as rivals, yet is still feeling some pain, said Fred Cannon, an analyst at KBW Inc., who has a "market perform" rating on the San Francisco-based bank. Wells Fargo’s servicing income declined 34 percent to $525 million in the third quarter of 2008. "While the costs and risks are mostly contained through contracts, there is going to be significant pressure on servicing earnings," Cannon said. "They are on the front lines with a lot of customers who are in difficulty."

Ford May Be Forced to Seek U.S. Aid as Economy Imperils Sales
Ford Motor Co., the second-largest U.S. automaker, may have to abandon its plan to forgo federal loans as the weakening economy threatens to drive domestic sales 10 percent lower than the company’s forecast. Ford expects U.S. light-vehicle sales will reach 12.2 million units this year, almost 2 million more than the annualized sales rate over the last 3 months. Chrysler LLC predicts sales may reach 11 million, while General Motors Corp. projected a range yesterday of 10 million to 11 million. "The market will not reach 12.2 million units this year, no way, no how," said John Wolkonowicz, an IHS Global Insight analyst.

The Lexington, Massachusetts-based consulting firm trimmed its 2009 sales estimate last week to between 10 million and 10.5 million. Sales at that level would trigger the need for as much as $13 billion in loans, Ford told Congress last month. That would undercut the company’s attempt to win customers by portraying itself as Detroit’s healthiest automaker, after GM and Chrysler both sought federal financial aid. The U.S. automakers and industry analysts agree that domestic sales will fall again this year after tumbling 18 percent in 2008 to 13.2 million units, short of the annual average of about 16 million over the past decade. The size of the plunge is the only dispute. Citigroup Global Markets Inc. predicts 2009 U.S. sales will be 10.8 million, while Goldman, Sachs & Co. projects an 11- million vehicle market.

Ford’s "game plan is to keep going on our own" and not seek federal loans unless "the world implodes as we know it," Chairman William Clay Ford Jr. told reporters yesterday at the North American International Auto Show in Detroit. Promoting its strength versus domestic peers helped Ford boost market share late last year, as consumers avoided GM and Chrysler out of fear they might go bankrupt, according to a survey conducted by CNW Marketing Research of Bandon, Oregon. As GM and Chrysler teetered on the verge of financial collapse in late 2008, requesting federal aid as they burned through cash, Dearborn, Michigan-based Ford was able to maintain sufficient liquidity thanks to $23 billion in private borrowing in late 2006. Ford is using the loans to pay for developing new models and shutting factories while weathering losses.

The automaker is scrutinizing its forecast, Chief Financial Officer Lewis Booth said in an interview. "The longer the bad months continue, the more we wonder about when the recovery will happen," Booth said. "We look at it every month, and we will very quickly react to the reality." Under its scenario for a U.S. auto market of more than 12 million vehicles, Ford is seeking a line of credit of at least $9 billion from the government as a financial backstop. "We’re comfortable with where we are, but we have asked for a line of credit, just in case," Bill Ford told reporters yesterday at the Detroit show. Ford’s assumptions are based on the belief that President- elect Barack Obama’s economic stimulus efforts will begin bearing fruit by the second half of the year, Booth said.

Emily Kolinski Morris, Ford’s senior U.S. economist and one of the main authors of the company’s sales projection, said most forecasts are "below us right now." Those estimates discount positive effects of the government’s efforts to stimulate the economy, she said. They are "a little extreme," she said. "I don’t want to use the term ‘depression,’ but those forecasts suggest that all these positive things are taking place on paper and that people don’t respond." Americans are likely to start buying again as the average age of cars on the road tops nine years, boosting repair costs, Kolinski Morris said. "There is replacement demand out there that is being put off," she said. "There is an economic cost to operating an older vehicle."

Should the worst-case scenario play out, Ford’s finances may make it complicated to accept government money. Under the terms of the 2006 borrowing, those creditors must be paid off first in the event of a bankruptcy. As part of the aid package for GM and Chrysler, the federal government told the automakers to put taxpayers at the front of the line for payment in that situation. "We could be put in default," Chief Executive Officer Alan Mulally told Congress when asked about what would happen were Ford to take the step required of GM and Chrysler. "But having said that, there just has to be a way -- I’d be committed to figuring out the way -- to get us all together to figure out a way to protect the taxpayer." No resolution to that issue has been found, because Ford hasn’t requested a government loan and doesn’t plan to do so, spokesman Mark Truby said.

GM could seek further loans
General Motors Corp Chief Executive Rick Wagoner said the struggling automaker had enough funding to last through March but could still seek additional U.S. government loans beyond the $13.4 billion it has already been pledged. Wagoner, speaking to reporters at the Detroit auto show, also said GM was still seeking a potential buyer for its Saab brand. "We're still looking," he said. GM had warned that it was at risk of running out of cash before the Bush Administration cleared its request for emergency funding just before the end of the year. In recent weeks, some reports have said GM executives believed the $13.4-billion in U.S. government loans would allow the automaker to survive even under its most dire forecasts for the U.S. market in 2009.

But Wagoner indicated GM could still opt to seek additional funding after a March review with U.S. officials intended to assess its progress in restructuring. "The $13.4 billion is consistent with what we asked for through the first quarter under our downside market scenario, which is the way the market is running," Wagoner said. "We will obviously review the whole plan and at that point we'll see what requirements are. But for now we think we're well covered through the period we asked to be provided," he said. Under the terms of GM's loan, the automaker faces a March deadline to demonstrate to U.S. officials that it can be viable based on winning steep concessions from bond holders and the United Auto Workers union.

GM has set a goal of reducing its debt by almost $36 billion by asking bond holders to swap out of existing debt for shares and by negotiating new terms for its promised $21 billion contribution to a trust fund for retiree health care that will be run by the UAW. The loan program as structured by the Bush administration requires GM to seek to cut its debt by two-thirds and to negotiate sweeping changes to its UAW contract. UAW in 2007 made landmark givebacks to the industry, including GM. This would include making its work rules and wages competitive with non-union U.S. plants run by Japan's major automakers, led by Toyota Motor Corp.

But the UAW has objected to those terms as unfair, and a bill backed by Democratic leaders in the House of Representatives would strip the requirement for steep UAW givebacks from the auto bailout program. GM is set to begin talks with representatives of the UAW this week in Detroit. "I think it's fair to say everyone's attitude has been cooperative," Wagoner said. But the GM CEO stopped short of saying GM would be able to meet the specific targets for UAW concessions as outlined by the Bush administration. "They are defined as targets, and it's indicated the importance of being competitive, and it's my sense that we can do what we need to do," he said.

Wagoner said GM and the auto industry stood to benefit if the incoming Obama administration's plans for fiscal stimulus included some new tax credits or other support for car buyers. "These kinds of things could be helpful and I think this issue of consumer confidence goes well beyond the auto industry," Wagoner said. GM borrowed $4 billion from the U.S. government on December 31 and is eligible for another $5.4 billion on January 16 and a final $4 billion loan installment on February 17. U.S. auto sales tumbled by 18 percent in 2008, and GM's sales dropped 23 percent.

Inventory Traffic Jam Hits Chrysler
After a deep slide in sales in the fourth quarter, Chrysler LLC now faces a new obstacle in its battle to survive: Many dealers are loaded with inventory and aren't ordering new vehicles. Take Bill Rosado, owner of a Chrysler-Dodge-Jeep dealership in Milford, Pa. He says he is resisting the company's requests to add more stock to his already-crowded lot. "We're not ordering any cars in spite of the pressure they give us. We are going to sit tight with what we have," Mr. Rosado said. "We don't see any peak coming up where all of a sudden Chryslers are going to be desired."

Chrysler's financial troubles compound his concerns. Four months ago, Mr. Rosado had to close a Dodge store in Wilkes-Barre, Pa., after sales slowed, and he is still waiting for payment from Chrysler for parts that he returned. "They are so behind paying us," he said. "We're all very cash-strapped at this point. So to build up additional receivables is certainly not attractive to us." An auto maker books sales when vehicles are shipped from its plants to its dealers, so a slowdown in orders reduces a car company's revenue. Chrysler was nearly out of money last month before it got $4 billion in emergency loans from Washington. During the next few months, the company needs to find a way to keep revenue coming in as it scrambles to slash costs. By March, Chrysler has to show the U.S. Treasury Department it is viable as an independent company, or it could be required to pay back the money or be denied further loans.

At the North American International Auto Show in Detroit, Chrysler Chief Executive Robert Nardelli acknowledged the company's cash reserves are dwindling. Chrysler ended 2008 with $2 billion in cash, he told reporters, compared with $11.7 billion in June. The company's cash holdings will hit a low point this month, he added. He added that Chrysler is expecting to get an additional $3 billion in government loans, and said Chrysler doesn't expect a rebound in the market during the first quarter. Chrysler, a private company controlled by private-equity group Cerberus Capital Management LP, expects an annualized selling rate of 10.6 million vehicles in the quarter, in line with the depressed levels of the past few months.

Chrysler's situation is the most extreme example of an inventory glut plaguing all auto makers as a result of the slide in auto sales at the end of 2008. The inventory pile-up is likely to add gloom to the Detroit auto show, which opened on Sunday. Normally, the show provides a swell of enthusiasm that helps spur sales in dealer showrooms. But the mood in Detroit is downbeat after sales slowed to their lowest level in 25 years. AutoNation Inc., the country's largest chain of car dealerships by revenue, estimates that 3.2 million vehicles are now sitting on dealer lots across the country. At the current retail sales pace, that is enough to last more than four months. Mike Jackson, chairman and chief executive of AutoNation, said Sunday that his company will cut new vehicle orders in half for the first quarter.

On average, vehicles that were sold in December had been on dealer lots 92 days before being bought, up from 59 days a year earlier, according to J.D. Power & Associates. Chrysler vehicles sold in December had been on dealer lots for 142 days, the most of any maker, compared with 70 last year. The logjam of vehicles stems from the fourth-quarter slide in U.S. vehicle sales. Total U.S. sales fell 35% from a year earlier in the final three months of 2008. Chrysler's declined 46%, according to Autodata Corp. In reaction, Chrysler has shut down all of its plants for a month until the middle of January, and won't have any revenue coming in until its plants start up and begin shipping cars and trucks. Chrysler is "at a high-risk state," said David Cole, chairman of the Center for Automotive Research. "They will probably somehow be absorbed somewhere in the industry," he added. "Whether they are divided into pieces, it all depends on if there is a policy decision."

Other manufacturers also have put the brakes on production to address mounting inventory. Toyota Motor Corp. this past week said it will idle plants in Japan for 11 more days than it had previously planned in the fourth quarter. Ford Motor Co. is extending its year-end shutdown at 10 North American plants by an additional week. General Motors Corp. has idled most of its factories for much of January. That will have a direct impact on their revenue, said Haig Stoddard, an industry analyst at IHS Global Insight. "At the end of the first quarter we may really find out who is going to make it or not," he said. Chrysler is offering financial incentives to get dealers to stock up. In the fourth quarter, dealers could earn bonuses if they ordered extra vehicles. But many are balking. Greg Simpson, general manager of York Chrysler Dodge Jeep in Crawfordsville, Ind., saw his inventory double after he closed a sister Dodge dealership. He has only seven vehicles on order for January. "Hopefully they are not going to shove anything down our throat," he said.

Toyota shock hits Japan's auto region
Toyota shock has hit Japan's car manufacturing district, leaving factories and small businesses reeling as orders dry up due to a global recession that has put the brakes on car sales worldwide. Toyota is firing thousands of contract workers, causing a rise in the number of jobless and homeless. The greater Nagoya economy is being hit hard with business slowing at shopping malls and taxi drivers complaining that customers are scarce. "When Toyota sneezes, everyone catches a cold," said Toshiharu Nakano, who runs a Japanese kimono fabrics shop in Osu shopping arcade in Nagoya. "You see people walking around in this arcade but their purse strings are tight," he added. Hit by the financial crisis and a crippling rise in the yen, Toyota Motor Corp has forecast its first-ever annual operating loss in its 70-year history and has unveiled an 11-day output suspension that is almost unprecedented in scale.

That's a sharp turnaround from as recently as 2007 when Toyota was riding high after eight years of earnings growth that made it the world's biggest carmaker ahead of General Motors Corp. With Toyota's sales in the United States, its biggest market, declining by 37 percent in December, the pain is being felt all along the supply chain in Nagoya and across the Aichi prefecture, which thanks to car manufacturing is one of the most affluent regions in Japan. At Takeshiro Kogyo Co., a 20-person factory that produces parts for Toyota car air conditioners and headlights, the fax machine used to spit out piles of orders. These days, faxes are rare. "Nowadays, we only get faxes that show a decline in orders," said Sumiko Takeuchi, the company president. She points to virtually empty shelves that were once fully stocked with air conditioner parts. "In the past, we were sure that orders would pick up again. But this time, it feels like they'll keep falling further." Since around November, Takeuchi has been forced to let several employees go, cut overtime, and close factories early. "Right now, we just need to find ways to survive," she said.

Industrial production in central Japan, including Aichi prefecture, sank 12 percent in October from a year earlier as auto exports fell on weak global demand. "In this region, we live on Toyota's business," said Yoshihiko Uchida from Nagoya Chamber of Commerce and Industry. "If Toyota is regarded as the top part of Mount Fuji, it has a wide plain of supporting industries. Now, given uncertainty over future orders (from Toyota), small assembling firms and car parts factories are all worried," he added. Job offers in Aichi prefecture are on the decline, and department store sales in Nagoya fell 15 percent in November from a year earlier. It was the sharpest drop among 10 major cities in Japan. Tax revenues are also declining sharply in the automaker's hometown as well as Aichi prefecture, whose economy accounts for about 7 percent of Japan's overall gross domestic product.

As the world's second-largest economy is threatened by what some fear will be its longest ever recession, many manufacturers, including Toyota, are laying off contract workers, temps and part-timers to cut costs. Many of those contracts came with accommodation in company dormitories so the lost jobs are swelling the ranks of the homeless. The problem has taken center stage in the political sphere as local media outlets zero-in on the plight of the jobless, and lawmakers facing an election later this year struggle to find solutions. About 85,000 contract workers are being laid off across the country in the six months ending in March, of whom more than 10,000 are estimated to lose jobs in Aichi -- the biggest cut among Japan's 47 prefectures, a government survey showed. "People say there are still job opportunities in engineering or nursing care, but those who have been making cars cannot just move to those areas and do the job," said Toru Sakai, chairman of a temp union in Nagoya.

Temporary shelters for the homeless have been quickly filled with newcomers, and food kitchens in Nagoya are attracting more homeless people at night. On one rainy evening in late December, about 250 people lined up under a highway overpass for a warm plate of curry and a cup of hot tea. "I was fired and lost a place to live as well," said Yoshinori Sato, a 42-year-old former construction worker, looking down while finishing his curry. "I am now sleeping in an underground passage." Still, people in the region are proud of their history in manufacturing and craftsmanship, and confident of a comeback. "We may not be able to completely rely on the auto industry in the future," said Takeshiro Kogyo's Takeuchi. "What we have now is a lot of free time ... So we can think about what we can produce by using machines that are used right now."

Gordon Brown's sales tax folly should be a sharp lesson to Barack Obama
US policymakers should learn from VAT mistake, say Rob Arnott and John Tamny. Back in the dark economic days of the late 1970s and early 1980s, truly revolutionary change on taxation improved the economic outlook in both Great Britain and the United States. With demand-driven Keynesian thinking having proved ineffective as an economic stimulant, classical thinkers possessing a greater affinity for the works of Adam Smith and John Stuart Mill successfully filled the gaping policy void. Nigel Lawson perhaps articulated the new/old thinking best when he noted Britain's fundamental economic defect "was not a shortage of demand but a failure of supply."

Under Margaret Thatcher's government, Great Britain reduced tax rates first, and the US soon followed after the election of Ronald Reagan. The economies of both Great Britain and the United States boomed. And, as Mr Lawson expected, demand was plentiful thanks to greater supply created by more robust economic activity. As Mill once wrote, we trade products for products, and with tax penalties against work lower, the words of Mill became a reality on both sides of the Atlantic. The rousing success of the Thatcher/Reagan tax experiment raises pointed questions about the present. Looking to increase demand in a flagging British economy, Gordon Brown is effectively seeking to reverse this successful taxation progress and, in doing so, he is taking the UK back to a less vibrant economic past. As Americans the above concerns us.

Just as the United States followed the trail blazed by Mrs Thatcher in the 80s, we fear that Congress and our new President, Barack Obama, will mimic Mr Brown's mistakes. The new tax plan is to lower VAT for one year from 17.5pc to 15pc in order to stimulate consumption. However, many Stateside supply-side revolutionaries in the 1980s pointed to heavy consumption in Britain as a flawed indicator of economic health. While a reduction in the VAT is not in and of itself a bad idea, it should be remembered that generating consumption is the easy part. Sure enough, large British companies from Vodafone, to GlaxoSmithKline, to BAT could surely stimulate demand by simply passing on more of their profits to their workers. But this corporate largesse would surely come at the expense of the future health of each firm and with that the jobs of each firms' employees.

To stimulate consumption, the answer once again lies on the supply side whereby savings would fund greater growth among today's and tomorrow's companies. The Chancellor, Alistair Darling promises £3bn in infrastructure spending, but we would point to the impressive failure of economic "stimulus" packages Stateside. Two stimulus plans have been foisted on Americans this decade, and neither created any discernible economic growth. Put simply, economic growth is always the result of productive work effort. Governments can only spend to the extent that their citizens engage in profitable activities that are taxable. When governments spend money they must tax the private sector in order to redistribute any funds raised. Basic economics tells us that one can't profit from the same transaction twice (stimulus presumes otherwise), plus when governments raise capital in order to consume it, there's less capital available in the productive economy for new, economy-enhancing innovations.

In order to pay for the infra-structure spending, Mr Brown will raise the income-tax rate on top earners to 45pc. But history says tax increases are rarely the revenue generators that they're presumed to be. As Adam Smith wrote, high taxes "frequently afford a smaller revenue to government than what might be drawn from more moderate taxes". More importantly, history in both the UK and the US shows that the best way to increase tax revenue from top earners is paradoxically to tax them less. The percentage of federal revenues paid by the top 1pc of US earners rocketed (from 15 to 35pc) when the rate of taxation fell. When all's said and done, there is no company formation and there are no wages without capital. Rather than creating false growth through wealth redistribution, the better, more-proven path would be to reduce penalties on work and investment for all. If this were done, the UK economy would boom due to increased productivity and any lack of consumption would quickly become an afterthought.

Bank overnight deposits at ECB surge to record high
Banks deposited a record 315 billion euros at the European Central Bank, figures on Monday showed, after they dumped excess cash they borrowed only a week ago back at the central bank. Banks deposited an all time high of 315.254 billion euros ($422.5 billion) as of Jan. 11 the ECB said, topping the previous record of 297.4 billion euros set back in November. Money market traders said the record level was no surprise as banks had soaked up far more cash than needed at the ECB's most recent weekly hand out of euro funds last week. "It's very much expected because people took plenty of surplus cash at the weekly tender. Now they are just regurgitating it back to the ECB." said one London-based trader who did not want to be named.

Last week the ECB judged there to be an excess of 157 billion euros in the euro zone banking system but banks still took 216 billion euros. Despite signs that money market problems are easing, the amounts flowing through the ECB's overnight facilities remain well above levels when interbank lending markets are functioning properly. The trader added they banks were likely to carry on hoarding rather than lending unless the ECB made it clear it would work to keep overnight rates down. "It is probably dependant on the ECB being predictable and signalling at this week's press conference that they intend to keep overnight rates somewhat low. If they don't people will just continue taking surplus cash."

The ECB added that 1.460 billion euros had been borrowed by banks from its overnight loan facility, down from the 1.837 billion euros previously. Overnight loans currently charge an interest rate of 3.0 percent and deposits pay 2.0 percent, compared with the ECB's main interest rate of 2.5 percent. But the ECB is to make borrowing and depositing cash overnight less attractive in its latest attempt to kick start the bank-to-bank lending market again. From Jan. 21 the gap between its main interest rate and the overnight deposit and lending rates will increase from 50 basis points to 100 basis points. It means that if the bank's benchmark rate was to stay at 2.5 percent, commercial banks would have to pay 3.5 percent to borrow and receive 1.5 percent on deposits. For details of previous ECB overnight lending operations please go to the ECB web site:

Pound eases after record run
The pound retreated on Monday as traders took profits following a strong run last week and as Ireland accused the UK of engineering sterling’s recent slump. Sterling last week put in it best performance against the euro since the inception of the single currency in 1999, while posting its largest weekly gains against the dollar since 1985. But that followed a torrid 2008 which saw the pound plunge 23 per cent against the single currency and lose 27 per cent against the dollar as the Bank of England slashed interest rates. The pound was undermined on Monday by figures released over the weekend by the National Institute of Economic and Social Research, which estimated UK economic output fell 1.5 per cent in the fourth quarter of last year, its fastest contraction since 1980.

Sterling eased 1.5 per cent to $1.4922 against the dollar and lost 1.5 per cent to Y134.46 against the yen. The pound’s losses against the euro were less acute, however, as it fell 0.7 per cent to £0.8956 amid continued concerns that the slowdown in the eurozone was gathering pace. Analysts said negative sentiment against the euro was heightened by worries that the European Central Bank – which thus far has failed to cut interest rates as aggressively as other global central banks in the face of the economic slowdown – was in danger of underestimating the pace of contraction in the eurozone economy. This has raised concerns that the ECB, which makes its decision on interest rates this Thursday, will keep eurozone interest rates too high, exacerbating the negative effects of the financial crisis. The pound’s losses came as Brian Lenihan, Ireland’s finance minister, accused the UK authorities of in effect devaluing the pound by expanding money supply, action that was causing “immense difficulties“ in the Irish economy.

“It is a question for all of us in the EU as to the extent to which a competitive devaluation can be used as any kind of weapon.” The Irish economy has been hit hard by the economic slowdown, with Dell, the US computer manufacturer, pulling production out of the country last week. But Derek Halpenny, an analyst at at Bank of Tokyo-Mitsubishi, said the Irish government’s anger should be directed at the European Central Bank and not the UK authorities. “What is clear is that the scale of the downturn is likely to increase political tensions further in the year ahead,” he said. “Investors are already differentiating countries within the eurozone, so the widely held view that being part of the euro offered protection and cheaper finance may be placed in some doubt.” Indeed, the interest paid on debt by the Irish government over that paid by Germany rose to a new high of 165 basis points on Friday, the widest margin since nearly three years prior to the start of European monetary union in 1999.

Meanwhile, in Austria the spread widened to 95 basis points in December, the largest since 1988. “We maintain that the financial markets remain much too optimistic over the ability of the eurozone authorities to manage the current downturn,” said Mr Halpenny. “Lack of co-ordination on fiscal policy and evidence of strains within the EMU will undermine the euro.” The euro also dropped 0.8 per cent to $1.3375 against the dollar and lost 0.9 per cent to Y120.45 against the yen. Elsewhere, the yen was in demand as weakness in global stocks boosted risk aversion and safe-haven demand for the Japanese currency. The yen rose 0.2 per cent to Y90.05 against the dollar, climbed 2.1 per cent to Y61.67 against the Australian dollar and gained 0.8 per cent to Y80.46 against the Swiss franc.

Savings rates hit record low, says Bank of England
The return on savings dived to a record low last month as figures showed deposit accounts pay average interest of less than 1 per cent. Figures from the Bank of England revealed that the interest paid on notice accounts, tax-free Individual Savings Accounts (Isas) and bonds last month was the lowest since records began in 1995. And the average return on instant access accounts was just 0.81 per cent, it said. It is the latest evidence of how savings rates have fallen drastically following consecutive cuts in the Bank rate.

It comes as The Daily Telegraph campaigns for savers, particularly pensioners, to be offered tax cuts on the income they earn on their savings. The savings rates look set to tumble further, as savings providers typically pass on any base rate reduction on the first day of the following month, meaning that both December's 1 per cent cut and last week's 0.5 per cent reduction have not yet been factored in. Some of the most attractive savings deals have already been withdrawn since the beginning of the year and more are expected to follow this week. One of the best savings deals available was a one year fixed rate bond from ICICI, but the 5.1 per cent rate has been slashed to 4.65 per cent. And last week, Anglo Irish Bank reduced its one year fixed rate bond from 5 per cent to 4.6 per cent.

UK Treasury set to offer new guarantees to get banks lending again
A Government guarantee for bonds backed by mortgages and other types of loan is set to be announced by Alistair Darling, the Chancellor. Mr Darling will move to offer Government insurance on behalf of banks wanting to securitise new mortgages, after being told by sector executives that this is the best way to enable them to increase lending to mortgage borrowers. The scheme could be extended to cover loans to small businesses and other debt. Treasury officials, it is understood, are working on the final detail of the scheme, first proposed in last month's pre-Budget report by Sir James Crosby, the former chairman of Halifax Bank, as a way to encourage lending.

The scheme would be the UK's first serious attempt to kick-start the securitisation market, through which wholesale investment institutions such as money market funds, provide lenders with the finance they need to offer loans not backed by deposits from savers. The wholesale market, which provided lenders with £650bn of funds in 2007, has almost dried up, amid fears about banks' creditworthiness worldwide. Sir James argued last year that if the Government stood behind British institutions borrowing from the wholesale market, the logjam could be broken.

One senior banking source said the guarantee was now the single most important action the Government could take to encourage lending, which is seen as a crucial policy objective in the bid to stop the UK's economic recession becoming a full-blown depression. "The official view was that the recapitalisations we saw in the autumn would provide some relief on liquidity," but that was always naïve," he said. "Banks are looking for action on liquidity, where the UK has been slow to act compared to the US and the European Central Bank." Senior bankers used a lunch date with the Prime Minister yesterday to press home their case for Government action. Eric Daniels, the chief executive of Lloyds TSB, Marcus Agius, the chairman of Barclays Bank, and Mervyn Davies, the chairman of Standard Chartered, were amongst Sunday lunch guests at Chequers.

The lunch was planned months ago, with banking sources last night stressing it was not a meeting called specifically to discuss the lending crisis. However, with Lord Myners, the City Minister, and Mr Darling also present, the Government's plans were high on the agenda of topics for discussion. Mr Brown will use today's summit on jobs to again stress his determination to increase bank lending. He will tell an audience of business leaders: "My pledge to you is simple: we will act – together with other leaders – to get banks and business back on the move."

However, bankers have warned the Prime Minister that the detail of the new scheme will be crucial to its effectiveness. In particular, they have expressed concern about fees charged in return for government guarantees. The high cost of the guarantees offered by the Government last year to banks lending to each other, is seen as one reason why that scheme was not widely used. At the end of last year, the Government said it was cutting its charges for banks using this facility. The new scheme will operate alongside other measures intended to bolster the UK's flow of credit, including an expansion of direct help for small businesses such as the loan guarantee scheme. Ministers are also still considering special help targeted at individual industries, such as car manufacturing.

The next stage in the Government's attempts to deal with the credit crunch and its effects on the real economy may prove only an intermediate plan. The Treasury has said quantitative easing, an expansion of the money supply whereby banks swap illiquid assets for government paper, is not yet on its agenda, but the policy, expected by many economists, has not been ruled out. Further measures may be necessary to help banks that run into difficulties. This could include another round of recapitalisations, or a return to the "bad bank" idea, in which institutions' problematic assets would be taken off their hands by a state-run banking vehicle.

Germany set to extend fund for rescue
The German government has agreed to take stakes in any large industrial companies facing insolvency because of credit shortages, according to leaders of chancellor Angela Merkel’s Christian Democratic Union. Ms Merkel, whose government will on Monday adopt a two-year, €50bn ($67bn, £44bn) fiscal package, the largest stimulus in Europe since the start of the financial crisis, said measures would include a €100bn “Germany fund” that would issue credit guarantees to help cash-starved businesses raise debt. The plan to take stakes in industry would extend Germany’s €500bn bank rescue fund to the entire economy. The CDU did not specify which companies it had in mind. But government officials have pointed at the carmaking sector as one of the most vulnerable to the shortage of credit, the plummeting of international demand and potential foreign suitors.

Companies that applied for support would however not face the same drastic conditions, such as executive pay caps, as their counterparts in the financial sector, Ms Merkel said. In an interview published on Sunday, the chancellor stressed that the guarantees would in general not involve capital injections, yet she refused to rule out her government taking equity stakes in industrial champions as a last resort. Asked about this possibility, she said: “It is impossible for us at this stage to describe all possible constellations.” On Thursday, the government took a 25 per cent stake, a blocking minority under German law, in Commerzbank, the country’s second largest bank, to boost its dwindling capital base and protect it against possible hostile takeovers.

China to Tolerate More Bad Loans, Relax Credit Rules
China will tolerate an increase in bad debt this year as it eases rules governing bank lending to revive the slowing economy, the nation’s banking regulator said. The China Banking Regulatory Commission will drop its target of reducing the balance and ratio of bad loans after five years of declines, and instead aim to prevent a "massive and rapid rebound" in soured debts, Chairman Liu Mingkang said in Beijing today. A transcript of his speech was obtained by Bloomberg News. Bank of China Ltd. and Industrial & Commercial Bank of China Ltd. fell in Hong Kong trading today. Looser requirements may fuel concerns about a surge in bad loans, four years after China finished a cleanup of its banking system that cost more than $500 billion.

Lenders will likely face weaker asset quality, rising defaults and "significant" constraints on profits in 2009, Standard & Poor’s said Jan. 7. "What we’re concerned about is whether banks will, after government interference, boost lending without properly recognizing the risks," said Liao Qiang, the rating company’s Beijing-based analyst, in an interview. "Governments tend to relax prudential regulatory requirements in difficult times. The key is how banks react." Measures to boost credit include allowing banks to lend to businesses afflicted by temporary financial woes because of the global recession but with sound fundamentals, Liu said. Lenders can also restructure loans and "scientifically" adjust the types and maturities of debt, and the regulator will support the sale and securitization of loans, he said without elaborating.

Decades of state-directed lending pushed the bad-loan ratio among Chinese banks to almost 20 percent in 2003, prompting a government bailout. Agricultural Bank of China received $19 billion from the nation’s sovereign wealth fund in October, almost four years after the bulk of the banking cleanup was completed. Industrial & Commercial Bank of China, the world’s largest bank by market value, and competitors have said they’ll increase lending as part of the government’s $590 billion stimulus package, announced in November. China’s biggest banks are all state controlled. Bank of Communications Ltd., the nation’s fourth-largest lender by market value, will follow a principle that "safeguarding economic growth is safeguarding banks" themselves, Chairman Hu Huaibang wrote in the central bank-affiliated China Finance magazine Dec. 16. Bank of China fell 6.1 percent to HK$1.84 at the 4 p.m. close in Hong Kong, while Bank of Communications dropped 5.1 percent. ICBC lost 5.2 percent.

Chinese banks extended 740 billion yuan ($108 billion) of new loans in December, the most since January 2008, the Shanghai Securities News reported today, citing unidentified people. "Apparently the government is willing to sacrifice the interests of banks to salvage the whole economy as forcing them to lend against the economic cycle will only lead to bad loans in the future," said Wang Yihuan, a Beijing-based analyst at China Asset Management co., which manages the equivalent of $36 billion.The CBRC encourages lending to fund small and medium-sized businesses, mergers and acquisitions among large companies, as well as credit for automobile and home appliance purchases, according to the transcript. "The downside risk to the Chinese economy is even worse than anticipated," Liu, 62, said in the speech. "The 8 percent growth target is of great importance, but an exceptionally arduous task." Liu last month said expansion of 7 percent or less could trigger social instability.

China’s economy will expand 7.5 percent this year, the slowest pace in almost two decades, as the global financial crisis worsens, the World Bank predicts. Exports probably fell the most in a decade in December even after the government increased rebates, pledged more export loans and stalled currency gains, according to economists surveyed by Bloomberg News. Central Bank Governor Zhou Xiaochuan, speaking to reporters today in Basel, Switzerland, said there are downside risks to the government’s target of 8 percent economic growth this year. The regulator will have a "reasonable tolerance" for rising bad loans, Liu said. Shrinking corporate profits and interference by local governments have "seriously" reduced borrowers’ willingness to repay debts, he added.

Banks cut their average bad-loan ratio to 5.49 percent at the end of September, from 6.3 percent six months earlier. Still, the CBRC will ban companies from taking up new project loans to repay existing ones, and prohibit bundling of non-performing assets into securities, according to the transcript. Banks will not be allowed lend to production projects before investors get relevant approval, Liu said. The regulator will also broaden the channels for banks to boost capital and urge them to increase provisions, Liu said without being more specific.

Ruble Falls to 6-Year Low as Russia Devalues Second Time in 2 Days
Russia’s ruble slid to the weakest level in almost six years against the dollar as the central bank devalued the currency for the second day amid declining oil prices. The ruble fell 1.4 percent to 30.9752 per dollar by 10:47 a.m. in Moscow, from 30.5312 yesterday, extending a 25 percent decline since August. The currency weakened 1.2 percent to 35.7187 versus its target basket of dollars and euros. The range the ruble is allowed to trade within the basket was widened, a central bank official who declined to be identified on bank policy said by telephone today. Official trading began yesterday for the first time this year.

"After the long holiday the central bank’s come back intent on showing they’re still on a devaluation path," said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt, which rates itself one of the top 10 traders of the ruble in the world. "With the oil price shock there is an increased burden on Russia’s current account and that necessitates a rebalancing of the currency." The ruble may retreat 10 percent against the basket this month as companies and banks buy foreign currency to repay more than $80 billion of debt this year, according to Societe Generale SA. Danske Bank A/S in Copenhagen sees a 15 percent drop in the ruble by year end. The ruble traded at 41.5087 per euro, according to Bloomberg data, down 0.9 percent from 41.1317 yesterday, based on figures come from the Micex stock exchange.

Bank Rossii, the central bank, has devalued the currency 14 times since Nov. 11 as Urals crude, Russia’s main export blend, slid for a fourth day to $42.99 a barrel, below the $70 average required to balance this year’s budget. Policy makers also devalued the ruble against the basket yesterday, the official said. The nation, which is the world’s largest energy exporter, has depleted its foreign-currency reserves by 27 percent since the start of August as the central bank sought to mitigate the currency’s slide. Investors have withdrawn more than $200 billion from Russia since then, according to BNP Paribas SA, amid the global credit-market crisis and Russia’s war with neighboring Georgia. Russia’s currency basket is made up of about 55 percent dollars and the rest euros

Nordic Currencies Beaten in Market Slump Lure Goldman
The world’s biggest foreign-exchange traders are snapping up Sweden’s krona and Norway’s krone after they weakened even more than some of the worst emerging market currencies. Current-account surpluses and forecasts by the Organization for Economic Co-operation and Development that Nordic economies will avoid the worst of the global recession made the currencies Goldman Sachs Group Inc.’s top picks for 2009, with potential gains of more than 17 percent. Deutsche Bank AG, the biggest trader in the $3.2 trillion-a-day market, said last week the krone and krona are "well placed" for a rebound.

"It’s pretty clear the Scandinavian currencies weakened excessively last year," said Thomas Stolper, a foreign-exchange analyst at Goldman Sachs in London. "These economies should hold up better than euroland and with improvements in market conditions some of this misalignment will be reversed." The krone plunged 22 percent against the dollar last year as oil, Norway’s biggest export, tumbled as much as 78 percent from its peak in July and investors piled into Treasuries as the credit squeeze sapped demand for currencies that are harder to trade in times of turmoil. The krona slid 17 percent. The declines surpassed even those of some of the worst performers in emerging markets. The Argentine peso lost 8.8 percent as the government nationalized private pensions to shore up the nation’s finances. The Thai baht tumbled 14 percent amid anti-government demonstrations that blockaded the nation’s main airport and as the country changed prime minister four times.

The krone has weakened 1.6 percent in the past five trading days to 7.0566 per dollar, while the krona has lost 2.1 percent to 8.0282. Goldman Sachs predicts Norway’s currency will trade at 5.52 by year-end, and Sweden’s at 6.55. "From a pure fundamental perspective, the krona and the krone have become very cheap," said Thomas Kressin, a Munich- based fund manager at Pimco Europe Ltd., which manages $25 billion. "In the flight to quality, small illiquid currencies like the Scandinavians were losing out" last year, he said. Norway’s current-account surplus, the broadest measure of trade and a gauge of a country’s ability to borrow, will total 13.3 percent of gross domestic product in 2009, the biggest in the developed world, according to the Paris-based Organization for Economic Co-operation and Development. Sweden’s surplus, at 6.5 percent of the economy, will be the fourth-largest among the 30 OECD members.

The speed of recovery may depend on equities and whether investors buy riskier assets, according to Paresh Upadhyaya, a money manager who helps oversee about $50 billion in currency assets at Putnam Investments in Boston. The MSCI World Index dropped 2.5 percent last week. The Standard & Poor’s 500 Index lost 4.5 percent. Norway’s benchmark OBX Stock Index declined 0.61 percent last week after losing 53 percent last year. Sweden’s OMX Stockholm 30 Index fell 1.15 percent following a 39 percent depreciation in 2008. "It is essential that we see some stability in equity markets before these currencies can rally," said Upadhyaya, who says the krona and krone are undervalued by at least 10 percent. The amount of trading in the Scandinavian currencies may make investors reluctant to buy on concern they won’t be able to quickly reverse their bets, he said. They account for 2.5 percent of global foreign-exchange, according to the Bank for International Settlements in Basel, Switzerland.

Stronger exchange rates may hurt exporters already reeling from the global recession by making their goods more expensive. Gothenburg-based Volvo AB said it may cut more than 2,000 jobs, mostly in Sweden, after receiving 115 orders for heavy trucks in Europe in the third quarter, down from 41,970 a year earlier. Oslo-based Norsk Hydro ASA, Europe’s second-largest aluminum producer, said Nov. 10 it may reduce production. The Norwegian economy will expand 1.3 percent this year while Sweden’s will show zero growth, according to the OECD. The U.S. economy will shrink 0.9 percent and the euro region will contract 0.6 percent, the OECD said. Swedish inflation likely slowed to 1.4 percent in December, from 2.5 percent, according to the median forecast of 15 economists surveyed by Bloomberg before a Jan. 13 report from Stockholm-based Statistics Sweden. The unemployment rate may have risen to 4 percent last month, from 3.5 percent, a separate report will show Jan. 16, according to a survey of 10 analysts. Norway is due to publish December trade balance figures Jan. 15.

Based on purchasing-power parity, which measures the relative level of currencies based on the cost of goods in different countries, the krone and krona are the only ones undervalued versus the dollar among their eight most-traded peers, according to data compiled by Bloomberg. On that basis, Sweden’s currency is 20.9 percent undervalued, and Norway’s is 1.74 percent. "If we see a further gradual normalization in the markets, then strong fundamentals and extreme undervaluations will begin to matter," Henrik Gullberg, a currency strategist at Deutsche Bank in London, wrote in the Jan. 8 note to clients. "The Scandinavian currencies look well placed to capitalize." For Goldman Sachs, the Norwegian krone is the most undervalued currency versus the euro, falling short of the bank’s fair value by 42 percent, according to a Jan. 8 research report. At 25 percent, the Swedish krona is the third most undervalued.

The krona ended last week at 10.7646 per euro, a gain of 0.39 percent, while the Norwegian krone finished at 9.42 to the euro, appreciating 1.66 percent. Deutsche Bank sees the krona at 9.5 per euro by March and the krone at 8.4 per euro. The two currencies, together with the British pound, will be the only three to strengthen versus the dollar in 2009 among the 10 most-traded, according to strategists’ predictions compiled by Bloomberg. The krone will advance to 6.68 per dollar, based on the median of 19 forecasts, and the Swedish krona to 7.75 per dollar, the median of 21 predictions showed. Investor bets may also signal the currencies are poised to rebound, according to Boston-based State Street Corp., the world’s second-biggest custodian of assets, with $14 trillion of pension and mutual-fund money. Short positions, or bets on a decline, against the krone have been higher only 4 percent of the time in the past decade, said Dwyfor Evans, a strategist in Hong Kong at State Street. Bets against the krona have been higher only 13 percent of the time. On three of the past four occasions when investors reversed those bets, the currencies rallied, he said.

"Institutional investors are extremely short both currencies," said Evans. "That opens up for a position unwind which may drive the currencies higher." Norway’s Prime Minister Jens Stoltenberg said Dec. 19 that the country will spend more of its $300 billion pension fund, which is supplied by oil revenue, to bolster growth. Norway is the world’s fifth-biggest oil exporter. "We can use more" of the money when needed, Stoltenberg told reporters. Oil prices fell more than 53 percent last year. The National Debt Office in Sweden on Dec. 17 said the krona was "far from the levels that can be justified by more fundamental conditions," and plans to buy as much as 15 billion kronor ($2 billion) in the first quarter. Declines in the currencies are aiding tourism. Occupancy rates are up 10 percent from last year in the 6,300-bed Hemsedal Ski Centre in Norway, according to tourist board director Gunn Eidhamar. In Aare, the second-biggest resort in Sweden, foreign visitor numbers have also increased, said Anna Wersen, marketing manager at Skistar Aare. "It’s expensive to go to the Alps and buy euros and the krone is very cheap to foreigners," Eidhamar said. "Lucky for us."

Cobra takes big bite out of unemployment checks
With unemployment hitting a 16-year high in December, measures such as federal subsidies to help jobless people afford coverage are all the more urgent, argues Families USA, a national advocacy organization for health-care consumers in Washington. Cobra is the acronym for a federal law enacted in 1986 that allows many laid-off workers and their dependents to remain on the employer's group health plan for 18 months as long as they pay the full cost of coverage and a 2% administrative fee. The law was designed to keep people from falling into the ranks of the uninsured when they lose a job -- especially if they have a preexisting condition that would make it hard for them to secure coverage on the individual market. But after a rapid rise in health-care costs this decade, the economics of continuing on Cobra are beyond the reach of many, according to a study released Friday from Families USA. The average monthly Cobra premium for family coverage, $1,069, consumes 84% of the average monthly unemployment check, which is $1,287, the study found.

"If you're subsisting on an unemployment insurance check and 84% of that check is what's needed to continue family coverage, clearly it's unrealistic to expect you can afford to do that and still have money left for food and rent and utilities and other necessities," said Ron Pollack, executive director of Families USA. The mismatch is worrisome after the Labor Department reported Friday that the U.S. unemployment rate leapt to 7.2% in December, its highest level since January 1993. Employers shed a total of 2.6 million jobs last year, with the bulk of the losses coming in the last four months of the year. More than 11 million people are without work. Read more on December job losses. "We haven't had this kind of pressure of more and more people being laid off and the prospects of that getting worse since Cobra was established," Pollack said. While he's optimistic that the incoming Obama administration will provide some health coverage relief in a promised stimulus package, Pollack considers it a temporary fix to a chronic and growing problem. "Long term, this really points to the need for systemic health-care reform."

In nine states -- Alabama, Alaska, Arizona, Delaware, Florida, Louisiana, Mississippi, South Carolina, and West Virginia -- average premiums for family coverage under Cobra equal or exceed total income from unemployment insurance, the study found. For single coverage, an individual would have to allocate 30% of his or her unemployment check to continue on Cobra. The national average cost of employer-provided coverage for an individual plus the 2% fee comes to $4,656 a year, or $388 a month. For family coverage, the cost jumps to $12,823 a year. Research has shown that for every one percentage point rise in the unemployment rate, the number of uninsured Americans rises by about 1.1%. Pollack advised married workers who lose their jobs and the health insurance that goes with them first to see if they can get coverage through their spouse's employer. But they have to act quickly, typically within a month or two.

The same rule applies for checking out your options under Cobra. Don't delay or else you may lose eligibility, he said. "Most people don't understand this is time-limited." For people with children who balk at the cost of family coverage under Cobra, it pays to determine whether the kids may qualify for the state children's health insurance program or Medicaid, Pollack said. Looking for coverage on the individual market is better than going uninsured, but he recommends it as a last resort, especially for people with health conditions that either price them out of policies or prevent them from attracting any offers. Despite its costs and limitations, Cobra coverage has advantages such as uniformity and guaranteed issue, he said. "There isn't underwriting to charge you a different premium based on your health status."

Fixing US economy's health is a boon for DC region
When the nation's in pain, Washington often gains. Whether it's a buildup of Civil War troops, Depression-era bureaucrats or defense contractors after Sept. 11, the region has prospered in times of crisis. Today, the financial meltdown is delivering a jolt of its own. Lawyers, lobbyists and public relations experts -- many of whom live and work in Virginia and Maryland suburbs -- are benefiting as companies from Wall Street to Motor City seek a piece of Washington's $700 billion financial bailout, and try to influence any regulatory strings attached. Business is also percolating as President-elect Barack Obama prepares an economic stimulus package comprised of infrastructure spending and tax breaks that could exceed $800 billion.

"There will be a mad rush to have influence on where that money should go," said David Rubenstein, co-founder and managing director of The Carlyle Group, the Washington-based private-equity firm whose partners include former high-ranking U.S. and foreign government officials. Far from struggling, the Washington region could be on the verge of "boom times," Rubenstein said. At the very least, the expanding federal government -- which has added more than 7,500 jobs in the Washington region over the past decade -- is helping to insulate the area's economy and its 4.5 million residents from the worst effects of the recession. Annual military and homeland security spending has risen sharply since Sept. 11, leading to years of prosperity for the region's consultants and contractors, including well-known defense companies such as Lockheed Martin Corp., of Bethesda, Md., and General Dynamics Corp., of Falls Church, Va.

Now, as Uncle Sam mounts a multitrillion-dollar effort to rescue the country from its worst financial crisis since the Great Depression, some companies based outside the region are beefing up their Washington offices. Local business leaders say the influx of influence-peddlers, combined with leadership changes in the White House and Congress, could provide a small lift to the region's commercial and residential real estate markets, which are hurting like everywhere else. To be sure, the region is not immune to the recession. Retailers are struggling, tourism is flat, unemployment is on the rise (particularly within D.C.) and municipal budgets are strained. Washington is facing a $127 million budget gap, while neighboring Virginia and Maryland face even steeper shortfalls.

Some well-known companies based in the region, including Sunrise Senior Living, XM Satellite Radio, the Carlyle Group and the Washington Post Co. have been forced to lay off staff or ask workers to take early retirement. However, the mood among many business leaders -- especially those connected to federal lobbying and contracting -- is upbeat compared with the rest of the country. The Washington offices of companies seeking bailout money will be transformed into "mini headquarters," said Stanley Collender, managing director at Qorvis Communications, a consulting firm. "There's a sense of unprecedented realignment" thanks to the turnover in the White House and Congress, said Beth Solomon, a recruiter who works for lawyers and lobbyists. Washington and its suburbs gained 31,000 jobs over the 12-month period that ended in November, according to the Bureau of Labor Statistics. Losses in construction and retail jobs are being offset by gains in federal government positions as well as health and business services, according to senior fellow John McClain of George Mason University's Center for Regional Analysis.

Those gains come as most major metropolitan areas shed thousands of jobs. McClain predicts positive job growth for the Washington area in 2009, too -- though he expects it will weaken to about 20,000 new jobs. The region's unemployment rate of 4.4 percent in November, while edging upward, is the lowest among metropolitan areas with a population of at least 1 million, tied with Oklahoma City, according to the most recent Labor Department data. Nationally, the unemployment rate was 7.2 percent in December. With government workers and contractors accounting for roughly one-third of the job force, Washington tends to prosper in times of crisis. During the Civil War, the modest city grew as the government swelled to administer the war and soldiers arrived to protect the capital. The federal work force expanded again during the Great Depression under President Franklin Roosevelt's New Deal, and the Pentagon was constructed during World War II. The Department of Homeland Security was created after Sept. 11, leading to another burst of hiring, and the wars in Iraq and Afghanistan expanded the Pentagon's budget to $612 billion in 2009, compared with $310 billion in 2001, before the attacks.

Booz Allen Hamilton Inc., a large consulting firm based in McLean, Va., expects to end the fiscal year more than 15 percent ahead of last year's revenue, in part because of growing demand for financial services experts as regulators and Congress pursue banking reforms, spokeswoman Jennifer Rogers said. Jon Wohlfert, with the corporate housing company BridgeStreet Worldwide, said he has seen a recent upswing in bookings from consulting companies such as Ernst & Young and Deloitte that are looking to bring workers to the area. While preliminary data from the city's tourism bureau indicates the number of visitors to the nation's capital was essentially flat in 2008, the city is anticipating a population burst of at least 1 million for Inauguration Day, Jan. 20. "This is our Olympics," said Jim Dinegar, president and chief executive of the Greater Washington Board of Trade. Yet even these advantages only go so far in a downturn this severe.

Foreclosures and declining home values have plagued portions of Washington's suburbs. And while the real estate market in Washington and its close-in suburbs has been more resilient because of limited building space and the lure of easier commutes, demand has cooled. Even so, the city's office vacancy rate is only about 7 percent, a strong number in good economic times, according to Neil Albert, D.C.'s deputy mayor for planning and economic development. Albert, like others in the business community, said being so closely linked to the federal government is a good place to be these days. "They're not going to pick up and move overnight," he said.

Budget woes prompt states to rethink prison policy
Their budgets in crisis, governors, legislators and prison officials across the nation are making or considering policy changes that will likely remove tens of thousands of offenders from prisons and parole supervision. Collectively, the pending and proposed initiatives could add up to one of biggest shifts ever in corrections policy, putting into place cost-saving reforms that have struggled to win political support in the tough-on-crime climate of recent decades. "Prior to this fiscal crisis, legislators could tinker around the edges - but we're now well past the tinkering stage," said Marc Mauer, executive director of the Sentencing Project, which advocates alternatives to incarceration.

"Many political leaders who weren't comfortable enough, politically, to do it before can now - under the guise of fiscal responsibility - implement programs and policies that would be win/win situations, saving money and improving corrections," Mauer said. In California, faced with a projected $42 billion deficit and prison overcrowding that has triggered a federal lawsuit, Gov. Arnold Schwarzenegger wants to eliminate parole for all offenders not convicted of violent or sex-related crimes, reducing the parole population by about 70,000. He also wants to divert more petty criminals to county jails and grant early release to more inmates - steps that could trim the prison population by 15,000 over the next 18 months. In Kentucky, where the inmate population had been soaring, even some murderers and other violent offenders are benefiting from a temporary cost-saving program that has granted early release to nearly 2,000 inmates.

Virginia Gov. Tim Kaine is proposing early release of about 1,000 inmates. New York Gov. David Paterson wants early release for 1,600 inmates as well as an overhaul of the so-called Rockefeller Drug Laws that impose lengthy mandatory sentences on many nonviolent drug offenders. "These laws have neither curbed drug use nor enhanced public safety," said Donna Lieberman of the New York Civil Liberties Union. "Instead, they have ruined thousands of lives and annually wasted millions of tax dollars in prison costs." Policy-makers in Michigan, one of four states that spend more money on prisons than higher education, are awaiting a report later this month from the Council of State Governments' Justice Center on ways to trim fast-rising corrections costs, likely including sentencing and parole modifications.

"There's a new openness to taking a look," said state Sen. Alan Cropsey, a Republican who in the past has questioned some prison-reform proposals. "What we'll see are changes being made that will have a positive impact four, five, six years down the road." Even before the recent financial meltdown, policy-makers in most states were wrestling with ways to contain corrections costs. The Pew Center's Public Safety Performance Project has projected that state and federal prison populations - under current policies - will grow by more than 190,000 by 2011, to about 1.7 million, at a cost to the states of $27.5 billion. "Prisons are becoming less and less of a sacred cow," said Adam Gelb, the Pew project's director. "The budget crisis is giving leaders on both sides of the aisle political cover they need to tackle issues that would be too tough to tackle when budgets are flush."

In contrast to past economic downturns, Gelb said, states now have better data on how to effectively supervise nonviolent offenders in their communities so prison populations can be reduced without increasing the threat to public safety. Safety remains a potent factor. In California, for example, the state correctional officers' union contends Schwarzenegger's proposals will fuel more crime. In Idaho, a combination of budget cuts and prison overcrowding contributed to an uprising Jan. 2 in a former prison workshop that was converted into a temporary cell block. Inmates who engaged in vandalism and arson had been placed there as part of a cost-cutting effort to move other prisoners back to Idaho from more expensive quarters at a private prison in Oklahoma. Thomas Sneddon, a former Santa Barbara, Calif., prosecutor who is now executive director of the National District Attorneys Association, said he and his colleagues support reappraisals of corrections policies yet worry constantly that dangerous criminals will be released unwisely.

"I don't think the public at large has any idea of who's in these prisons," Sneddon said. "If they went and visited, they'd say 'My God, don't let any of these people out.'" He noted that many states are seeking to send fewer offenders back to prison for technical violations of parole conditions. Some of these violations are indeed relatively minor, Sneddon said, but often they are accompanied by more serious criminal behavior that warrants a return to prison. As budgetary pressures worsen, some advocacy groups are concerned that spending cuts will target the very programs needed to help inmates avoid re-offending after release - education, vocational and drug-treatment programs. "The idea that we'd cut programs and then release inmates early is a toxic combination," said Pat Nolan, vice president of Prison Fellowship. "Just opening prison doors and letting people out with no preparation - that's cruel to the offender and dangerous to public."

However, Nolan, a former California legislator who served time in a federal prison on a racketeering charge, sees the current climate as ripe for the kind of reforms Prison Fellowship has advocated with its Christian-based outreach programs. "It's forcing the legislators to see the actual costs of imprisonment, because it's coming out of the budget for schools, roads, hospitals," he said. The Council of State Government's Justice Center has been working with 10 states to develop options for curbing prison populations without jeopardizing public safety. Tactics used in Texas and Kansas have included early release for inmates who complete specified programs, more sophisticated community supervision of offenders, and expanded treatment and diversion programs. "There's an unprecedented level of interest in this kind of thinking," said the Justice Center's director, Michael Thompson. "It's a combination of fiscal pressure and a certain fatigue of doing the same thing as 20 years ago and getting the same return." In Florida, where prisons are so crowded that the state has acquired tents for possible use to house inmates, officials say 19 new prisons may be needed over the next five years.

As an alternative, Corrections Secretary Walter McNeil told lawmakers they should re-evaluate the state's hard-line sentencing policies and look at ways to help released inmates avoid returning to prison. One important variable is the role of private prisons, which some advocacy groups consider less accountable that state-run prisons. Elizabeth Alexander of the American Civil Liberties Union's National Prison Project expressed concern that fiscally struggling states would rely increasingly on private operators. The largest private prison firm, Nashville, Tenn.-based Corrections Corporation of America, operates in 20 states and says some of them have asked if CCA can expand its capacity so more beds don't need to be added to the state-run system. "Of the states we do business with, none have made prison construction a priority in this economic environment," said Tony Grande, CCA's executive vice president. "Our partnership with the states will become even stronger. ...We want to be a part of their financial solution."

Deutsche Bank Trading Losses Reveal Record Setback for Securities Industry
Anshu Jain, who helped generate about half of Deutsche Bank AG’s earnings in 2007 as co-head of investment banking, is winding down buying and selling debt for the bank’s own account after at least $1.5 billion of losses. As Jain retreats from what was the most-profitable part of Wall Street during the past six years, the securities industry is preparing to report its worst quarterly trading results. Germany’s largest bank lost about $1 billion from bad bets involving bonds hedged by credit-default swaps, plus $500 million trading equities, two people with knowledge of the matter said. The Frankfurt-based company may post a fourth-quarter loss, partly as a result of the trades at Jain’s unit, analysts estimate.

Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase & Co. and Credit Suisse Group AG also have reported trading losses after the September bankruptcy of New York-based Lehman Brothers Holdings Inc. All the banks, except Goldman Sachs, have said they are shutting down some proprietary-trading operations. "The financial crisis has caught up with Deutsche Bank," said Lutz Roehmeyer, who helps manage about $17 billion at Landesbank Berlin Investment in Berlin, including Deutsche Bank shares. "The bank needs to reduce risk and scale back prop trading to adapt to changing conditions. After the collapse of Lehman, even the best hedging in the world doesn’t help." That Deutsche Bank, which made more money trading debt than all competitors except Goldman Sachs in 2007, could wind up reporting the first annual loss at its securities unit in at least nine years, as analysts estimate, shows how the company failed to fully skirt dire trading conditions. Jain, 46, declined to comment ahead of the release of fourth-quarter results on Feb. 5.

Goldman Sachs and JPMorgan of New York, which along with Deutsche Bank mostly sidestepped the meltdown of the U.S. subprime mortgage market, face losses as investment-grade bonds had the worst performance in at least 35 years and stock markets headed for their biggest rout. Deutsche Bank Chief Executive Officer Josef Ackermann, 60, said in late December that he underestimated the severity of the crisis. His counterpart at JPMorgan, Jamie Dimon, called November and December "terrible" for businesses including trading. Goldman Sachs, the world’s most profitable securities firm last year, had a fourth-quarter loss of $2.1 billion, its first since going public in 1999. The firm’s fixed-income, currencies and commodities unit posted negative revenue of $3.4 billion, "indicative of a tough trading environment," Keefe, Bruyette & Woods Ltd. analyst Matthew Clark wrote in a Dec. 17 report.

Credit Suisse, the second-biggest Swiss bank, said Dec. 4 it will eliminate 5,300 jobs after about 3 billion Swiss francs ($2.7 billion) of losses in the previous two months. The Zurich-based company said the investment bank posted a "significant" pretax loss in October and November. "The markets in which these instruments are traded are essentially closed," said William Fitzpatrick, an equity analyst at Optique Capital Management in Milwaukee, which oversees $1 billion. "It’s not like you could take the other side of a position or make a good call. There’s no market to participate in. I have a hard time seeing any meaningful revenue coming out of the prop-trading desks of any of the major banks." The world’s biggest banks and brokerages have reported more than $1 trillion in writedowns and credit losses since the beginning of 2007, forcing them to raise about $946 billion of capital, data compiled by Bloomberg show.

Deutsche Bank lost $1 billion from proprietary credit bets in the fourth quarter in a unit led by the New York-based co-head of global credit trading, Boaz Weinstein, people familiar with the matter said on Dec. 12. Weinstein plans to leave the firm with about 15 of his colleagues in the second quarter to start a hedge fund, the company said on Jan. 9. The departure comes as Deutsche Bank shut down the proprietary credit desk, known as Saba, and combined the remaining investments with the regular trading operations. Weinstein, 35, has been with the bank 11 years, and his team earned between $600 million and $700 million in 2007, said two people with knowledge of the matter. The losses in the equity proprietary-trading unit, which will be scaled back, were outside Weinstein’s group.

The fourth-quarter deficit occurred after a 1.26 billion-euro ($1.7 billion) loss trading credit and equities for the firm’s account in the third quarter. Ackermann, in a letter to employees on Nov. 21, said he’ll "recalibrate" the business, moving costs and assets away from areas unlikely to recover in the near term, and certain propriety trading activities. Deutsche Bank follows JPMorgan in scaling back proprietary trading. The second-largest U.S. bank shut down its 75-person global proprietary trading desk during the fourth quarter. Credit Suisse has said it will reduce operations in complex products and exit some proprietary trading. "In the current environment, where every asset class is under pressure, it’s almost impossible to not have trading losses," JPMorgan analyst Kian Abouhossein said in an interview last week. "But prop-trading losses are worse than hedging losses because management made a conscious decision on taking risk positions."

Deutsche Bank’s investment banking division, which Jain oversees with Michael Cohrs, 52, generated 28 percent of total revenue in the first nine months of last year, hurt by writedowns and lower trading, compared with 54 percent in the same period in 2007. Consumer banking generated the most revenue of any unit in the first three quarters of 2008. A decline in revenue from structured products has been partially offset by gains in foreign-exchange and commodities trading, areas in which Deutsche Bank is investing and hiring. Jaipur, India-born Jain is forgoing his 2008 bonus, along with Ackermann and other company executives. His global markets unit plans to shed about 900 employees, or 15 percent of the division’s workforce of about 6,000, people familiar with the matter said in November. "In the past, Jain’s business was making the most money for the bank, and he was considered a possible heir to Ackermann," said Konrad Becker, a Munich-based analyst at Merck Finck & Co.

The financial strains may force Deutsche Bank, the most leveraged of Europe’s largest banks, to ask investors for more funds, said Morgan Stanley analyst Huw van Steenis, who recommends selling the company’s shares. Ackermann aims to shrink Deutsche Bank’s assets and reduce the company’s dependence on borrowed money to avoid raising funds from investors or taking a handout from the government. Deutsche Bank set a goal of cutting the bank’s leverage ratio -- total assets divided by shareholder equity, using U.S. accounting principles for derivatives -- to 30 times by the end of the first quarter from 38 times at the end of June. Deutsche Bank’s leverage ratio is more than double the level at Goldman Sachs, the world’s No. 1 adviser on mergers and acquisitions, and London-based Barclays Plc, according to a Dec. 16 note from Van Steenis.

The bank improved its tier 1 ratio, used to assess a bank’s ability to absorb loan losses, to 10.3 percent at the end of the third quarter. "We do recognize Deutsche has outstanding management and has managed risks far better than most banks," Van Steenis said. "However, with such widespread asset deflation, illiquid credit markets and little appetite for cheap capital raises, we think the risks of expensive dilution remain high." Van Steenis, who’s based in London, forecast a capital increase of at least 6.5 billion euros, adding that Deutsche Bank also may cut the dividend and shrink its balance sheet. That’s only a little higher than what JPMorgan’s Abouhossein said the company may need to raise. "The share price implies it’s not a question of if, but when," Abouhossein said. Deutsche Bank dropped 69 percent last year in Frankfurt trading. The company’s market value is now 13.9 billion euros.

Ackermann reiterated on Nov. 21 that the company doesn’t need capital from the country’s bank-rescue fund, called Soffin, and instead will rely on "internal measures" such as selling stock. The plan not to seek government aid is unchanged, a person close to the matter said last week. Commerzbank AG, Germany’s second-biggest lender, announced Jan. 9 that it will get a second bailout of 10 billion euros from the government, which will take a 25 percent stake. Deutsche Bank moved on Dec. 17 to pass up an opportunity to redeem 1 billion euros of bonds indicates funding conditions for banks remain tight, according to Credit Suisse analyst Daniel Davies in London. The company said at the time that the decision was made because "replacement costs would be more expensive." The company is "pulling all levers" to avoid the need to raise capital, said Dirk Hoffmann-Becking, a London-based analyst at Sanford C. Bernstein & Co.

The bank marked down assets less aggressively than many U.S. banks and Swiss rivals UBS AG and Credit Suisse, according to Abouhossein. Deutsche Bank may book 3.9 billion euros of fourth- quarter writedowns, the most among European banks, based on mark- to-market valuations of all structured credit assets, as commercial property and assets backed by bond insurers tumble, he said. The markdowns may vary because of new accounting rules that ease requirements for reducing the value of investments such as leveraged loans and commercial real estate, Abouhossein said. Deutsche Bank posted net income of 435 million euros in the third quarter, helped by the accounting regulations. The German bank so far has reported writedowns of about 8.5 billion euros. That compares with $49 billion at Zurich-based UBS and $67 billion at New York’s Citigroup Inc., according to Bloomberg data. "Deutsche Bank started out in an excellent position, but could have been more aggressive at marking down assets and raising capital," said Abouhossein.

Ackermann, speaking in an interview with Germany’s ARD television on Dec. 29, said he "absolutely" underestimated the severity of the crisis and had expected markets to improve. "This was abruptly ended by the collapse of Lehman, and since then it’s been really, really bad," he said. Ackermann, who declined to comment, has been expanding the company’s so-called stable businesses. He bought a 30 percent stake in Deutsche Postbank AG, Germany’s biggest consumer bank by clients, to cut dependence on the securities unit. Still, pretax profit from consumer banking, asset management and global transaction banking fell by almost half in the third quarter. Jain, at a Euromoney conference in London in July, said he believed the financial industry needed a repricing of risk after the "very rapid" accumulation of leverage bloated the price of assets. The subprime mortgage collapse was the "trigger" for the reversal, Jain said at the time.

Deutsche Bank’s credit rating was lowered by Standard & Poor’s on Dec. 19 to A+ from AA- on expectations of "weak" trading results in the fourth quarter and a potential "significant" reduction in 2009 pretax profits compared with 2007 levels. Less than a third of the 43 analysts who cover Deutsche Bank recommend investors buy the stock, with the rest split between hold and sell ratings, according to Bloomberg data. By comparison, almost 40 percent of analysts covering UBS and Credit Suisse recommend investors buy the stock.

Ilargi: A new verse from the incomparable Dmitry Orlov. Two remarks from me:
  1. W. is not a stupid man. Calling him that goes nowhere. You might want to go for morally stupid, but that's murky land.
  2. "A nationalization of the private sector can indeed be called socialist, but only when it is carried out by a socialist government. In absence of this key ingredient, a perfect melding of government and private business is, in fact, the gold standard of fascism. But nobody is crying "Fascism!" over what has been happening in the US. Not only would this seem ridiculously theatrical, but, the trouble is, we here in the US have traditionally liked fascists."

No, actually, Dmitry, I have talked about that, about Mussolini, on numerous occasions. For Americans, socialism is an easy way out swear word. Handing the people’s money to the richest 0.5% of the population has nothing to do with socialism, and everything with Benito. So we agree, but not on the fact that no-one has ever cried.

That Bastion of American Socialism
Over the past few months the American mainstream chatter has experienced a sudden spike in the gratuitous use of the term "Socialist." It was prompted by the attempts of the federal government to resuscitate insolvent financial institutions. These attempts included offers of guarantees to their clients, injections of large sums of borrowed public money, and granting them access to almost-free credit that was magically summoned ex nihilo by the Federal Reserve. To some observers, these attempts looked like an emergency nationalization of the finance sector was underway, prompting them to cry "Socialism!" Their cries were not as strident as one would expect, bereft of the usual disdain that normally accompanies the use of this term. Rather, it was proffered with a wan smile, because the commentators could find nothing better to say – nothing that would actually make sense of the situation.

Not a single comment on this matter could be heard from any of the numerous socialist parties, either opposition or government, from around the globe, who correctly surmised that this had nothing to do with their political discipline, because in the US "socialism" is commonly used as a pejorative term, with willful ignorance and breathtaking inaccuracy, to foolishly dismiss any number of alternative notions of how society might be organized. What this new, untraditional use of the term lacks in venom, it more than makes up for in malapropism, for there is nothing remotely socialist to Henry Paulson's "no banker left behind" bail-out strategy, or to Ben Bernanke's "buy one – get one free" deal on the US Dollar (offered only to well-connected friends) or to any of the other measures, either attempted or considered, to slow the collapse of the US economy.

A nationalization of the private sector can indeed be called socialist, but only when it is carried out by a socialist government. In absence of this key ingredient, a perfect melding of government and private business is, in fact, the gold standard of fascism. But nobody is crying "Fascism!" over what has been happening in the US. Not only would this seem ridiculously theatrical, but, the trouble is, we here in the US have traditionally liked fascists. We had liked Mussolini well enough, until he allied with Hitler, whom we only eventually grew to dislike once he started hindering transatlantic trade. We liked Spain's Franco well enough too. We liked Chile's Pinochet after having a hand in bumping off his Socialist predecessor Allende (on September 11, 1973; on the same date some years later, I was very briefly seized with the odd notion that the Chileans had finally exacted their revenge). In general, a business-friendly fascist generalissimo or president-for-life with no ties to Hitler is someone we could almost always work with. So much for political honesty.

As a practical matter, failing at capitalism does not automatically make you socialist, no more than failing at marriage automatically make you gay. Even if desperation makes you randy for anything that is warm-blooded and doesn't bite, the happily gay lifestyle is not automatically there for the taking. There are the matters of grooming, and manners, and interior decoration to consider, and these take work, just like anything else. Speaking of work, building socialism certainly takes a great deal of work, a lot of which tends to be unpaid, voluntary labor, and so desperation certainly helps to inspire the effort, but it cannot be the only ingredient. It also takes intelligence, because, as Douglas Adams once astutely observed, "people are a problem." In due course, they will learn to thwart any system, no matter how well-designed it might be, be it capitalist, socialist, anarchist, Ayn Randian, or one based on a strictly literal interpretation of the Book of Revelation. However, here a distinction can be drawn: systems that attempt to do good seem far more corruptible than ones that have no such pretensions.

Thus, a socialist system, inspired by the noblest of impulses to help one's fellow man, quickly develops social inequalities that it was designed to eradicate, breeding cynicism, while a capitalist system, inspired by the impulse to help oneself through greed and fear, starts out from the position of perfect cynicism, and is therefore immune to such effects, making it more robust, as long as it does not become resource-constrained. It seems to be a superior system if your goal is to keep the planet burning brightly, but when the fuel starts to run low, it is quickly torn apart by the very impulses that motivated its previous successes: greed turns to profiteering, draining the life blood out of the economy, while fear causes capital to seek safe havens, causing the wheels of commerce to grind to a halt. It could be said that an intelligently designed, well-regulated capitalist system could be made to avoid such pitfalls and persevere in the face of resource constraints, but the US seems laughably far from achieving this goal.

Taking intelligence itself as an example, if having more of it is a good thing, then a bit of socialism could have helped a lot. Let us start with the observation that intelligence, and the ability to benefit from higher education, occur more or less randomly within a human population. The genetic and environmental variation is such that it is not even conceivable to breed people for high intellectual abilities, although, as a look at any number of aristocratic lineages will tell you, it is most certainly possible to breed blue-blooded imbeciles. Thus, offering higher education to those whose parents can afford it is a way to squander resources on a great lot of pampered nincompoops while denying education to working class minds that might actually soak it up and benefit from it. A case in point: why exactly was it a good idea to send George W. Bush to Yale, and then to Harvard Business School? A wanton misallocation of resources, wouldn't you agree? At this point, I doubt that I would get an argument even from his own parents. Perhaps in retrospect they would have been happier to let someone more qualified decide whether young George should have grown up to incompetently send men into battle or to competently polish hub caps down on the corner.

Many countries, upon achieving a certain level of collective intelligence, or upon finding themselves blessed with a sufficiently intelligent benevolent dictator, followed a similar line of reasoning, and organized a system of public education that meted out educational opportunities based on the ability to learn, not the ability to pay. In countries where such reforms were successful, society benefited from the far more efficient allocation of resources, becoming more egalitarian, better-educated, and more stable and prosperous. The United States is one such country, where, following World War II, the GI Bill did much to mitigate against the oppressive social stratification of American society during the Great Depression, giving it a new lease on life. In a politically honest country, this achievement would have been touted as a great socialist victory. Here, instead of building on this success, it was allowed to ebb away, until now fewer and fewer qualified candidates can shoulder the high cost of higher education, and even these have to forgo education proper in favor of vocational training, in order to be in a position to pay back student loans.
More, much more, here......


Anonymous said...

Don't ya jes luv Bruce's New Joisey accent, gol darn don't it just reminds me of Bobby having a derivative day.

Anonymous said...


@ SanderO

Am not sure what ICK means. Looked and found:
Ichthyophthirius multifiliis, a single-celled parasite.
Institute of Christ the King Sovereign Priest

Concerning masonry and steel frames, why would you do that? The only advantage I see would be the thermal mass in the masonry parts. Plus here (in the Alps), the steel frame would be very unusual, so probably expensive. As for open (at least the general living quarters) and compact, yes, definitely.

About passive houses, again a definite yes. All sorts of interesting things happening in Switzerland, Germany, Denmark, Sweden and now France. Can ICF (insulating concrete form) qualify for passive?

@ RC

I assume AAC is what the Germans call "Porenbeton" or "Gasbeton" (brands Hebel, Ytong) and the French "béton cellulaire" (have also seen "aircrete"), i.e. lightweight, white blocks that go up fast and easy. I have used it extensively in my home. It is great stuff. If you need to cut out a notch, just saw it with a (special) handsaw!

@ Stoneleigh

The Simondale house is fantastic.


Bigelow said...

Porn industry seeks federal bailout CNN

Anonymous said...

How many US banks failed in 2008 [one of the articles here says 25?]and what has been the typical average number of annual bank failures?

How much did US FDIC use up in 2008 on deposit insurance payouts and how much do they have left?


Anonymous said...

I love what Citi is doing ... They are doing a shell game ... where are the documents for bad decissions hidden?
Now, not only will you never find those documents but they have been hidden into the archives of another company and nobody who rented those offsite storage sites will be employed to tell anyone who might be looking for those records.
Who would be able to supenae/look at Morgan Stanley if they are investigating Citi?
You got to admit ... they are good at what they do.

Ilargi said...

Two things from yesterday's thread:

Wild Gypsy,

I don't know what you mean by enforced conformity. In my mind, it's very clear why there are topics we don''t discuss here. There are a zillion other threads that do, and none lead to a conclusion. It would make this site unreadable. But that's nothing to do with enforcement, might as well turn that around 180, and say allowing it is an enforeement on those who'd rather leave it be for now.

Anon Iceland,

We'll report on it as it comes in. There's not been that much in the English language press lately.

willnotbill said...

Funny how all the worlds gov't had a hard time coming up with an extra 50 billion to help to help the poor countries even during the good times. How much has been spent helping the worlds poor banks Citi et el;. Yep no problems getting the funds released to the most deserving. Although I live in central B.C. I have hoped not to feel the cold waters from this economic titanic wreck, until the summer anyway. Starting to think everyone will feel an ill wind before then.

Stoneleigh said...


Here's an English update on Iceland, written by an Icelandic observer (not a finance expert). It's from a blog called the Iceland Weather Report that has been offering regular observations on the situation.

Monument to megalomania

by alda on January 9, 2009

OK, so Christmas is over, and we’re into the period that everybody was dreading, post-Yule, when the awful kreppa would finally dig in its claws and we’d really start to feel it.

And as a nation, I guess we are. The news are pretty depressing - hospitals are closing, potentially 3,500 companies going bankrupt by the end of this year, hundreds of people lined up at the unemployment offices at the beginning of the month, etc. A number of people I know were laid off last October and November, but it seems this was preemptive by a lot of employers … many have since been hired back, albeit usually at lower wages than before. A few people I know have not been hired back, but all of them seem to have found something else to do.

Chez YT, meanwhile, things are much the same as ever - we get up, EPI goes to work, AAH goes to school, and YT sits down at the computer. I’m still getting assignments in, although I have noticed a change … in the past I was pretty much inundated with translations and copy editing work and people weren’t too concerned about price … these days people ask for quotes and are concerned with budgets. Some of them back out, don’t get in touch again, or look for alternatives - despite the fact that I’ve lowered my rates, as have most freelancers I know [and wage earners in general]. Whether there will be an ongoing reduction in the number of assignments still remains to be seen - there are seasonal trends in my line of work and Christmas and the beginning of January are always a bit slow.

Meanwhile, construction of the new Concert Hall and Conference Centre in downtown Reykjavík, aka Da Big Eyesore, has ground to a halt and may very well stay that way. It is half-finished and construction was stopped at the beginning of this year because the contractor overseeing the job hadn’t been paid for three months. If construction stops, that malformed embryo of a concert hall will remain there for the next several years as a bleak testimony to the megalomania that characterized this society in the past few years - it was supposed to have been largely funded by Landsbanki bank and the Björgólfurs....

....All things considered, though, most of us Nicelanders are doing OK. Everything is going up up up in price and who knows where it will end, but we still have plenty of food in the stores and warmth in our homes and nobody has died from the kreppa. And with daily news reports about the horror taking place in Gaza, our current predicament seems like the lap of luxury.

Anonymous said...

I seem to be the first to have pointed out that in this problem between Russia and Eastern Europe the number of people affected is enormous. I added them up, and leaving out Russia and some others it is at least 356.5 million. It is much more than the population of the USA and Canada put together, in a very small area lacking in natural resources.
In Bulgaria people cut trees from the parks to keep warm. In Ukrania the situation is horrible, but no one want to say anything against the 'orange' revolutionaries and the Oligarch Timoshenko, the Queen with the golden braid and their meek slaves.
In my site. I'm sorry it is in Spanish.

Honest John said...

From now on I take all my investment advice from this man...


Strange...I was just the Woody Guthrie official site this morning...weird

el gallinazo said...

The late, great Richard Pryor's wife walked into their bedroom and found him in bed with another women. Pryor, in accordance with the behavioral imperatives of any political leader, simply denied it. In the argument that ensued later, Pryor turned to her and demanded angrily, "Are you gonna believe me, or are you gonna believe your lying eyes."

Most American are simply afraid to believe their lying eyes. It is simply too frightening to come to terms with the fact that the leaders of this country are every bit the criminals that one found in Stalin’s Soviet Union or the Third Reich. If the average American could, just for a moment, deal with reality, the “bank casinos” could sell their casino toilet paper for a hundred cents on the dollar - there simply would not be enough TP to go around. Ain’t gonna happen though.

BP 11:27, I nominate you for the Blanche DuBois Memorial Prize.

el gallinazo said...


Re the Simondale House.

So where are all the Hobbits?

Anonymous said...


Awesome "hobbit" home in Wales.

Tiny houses in Vermont; permit and tax free! I think my husband and I could live in one. :)

Anonymous said...

"Are you gonna believe me, or are you gonna believe your lying eyes."

An old variation, germane to the times:

A man comes home early and suspects his wife is sleeping with another man. He searches the house and finally opens a door to find a naked politician standing in the closet. He demands an explanation as to why he is in there and the politician says, "Everybody has to be some place some time."

We are going to hear alot of similarly composed excuses in the coming days from the financial terrorists who have ushered us all to the Brink.

We will see who can still maintain a sense of humor.

Bigelow said...

“Same-o Summers / How Spinning is Winning
Back when the Bankster Bailout/Coup was just getting started, the word "bailout" was being used in financial stores about 82% of the time and the word 'rescue was being used in 18% (and less).

If you doubt the 'top down' control exerted on neutered media middle management, consider that this morning, Google's news engine returns 100,666 hits for 'rescue' while 'bailout' returns a mere 65,888.

You see how the thought control process works? The word 'rescue' is now used 60.4% of the time while bailout is used 39.6%. Lemme see: We made fun of the Soviet's rewriting of history? This is absurd!!!

The solution? Finding editors who will 'out' the corpgov spin artists who do it all with 'suggestions' that aren't committed to writing...just a friendly phone call from upstairs.”

Honest John said...

Another great song...
North Sea Bubble
Billy Bragg 1991

I went out drinking with Thomas Paine
He said that all revolutions are not the same
They are as different as the cultures
That give them birth
For no one idea
Can solve every problem on earth

So don't expect it all to happen
In some prophesied political fashion
For people are different
And so are nations
You can borrow ideas
But you cant borrow situations

In Leningrad the people say
Perestroika can be explained this way
The people who told us
That two and two is ten
Are now trying to tell us
That two and two is five

Were living in a north sea bubble
Were trying to spend our way out of trouble

You keep buying these things but you don't need them
But as long as you're comfortable it feels like freedom

My American friends don't know what to do
But they'll wait a long time for a Beverley Hills coup

War! what is it good for
Its good for business

Bigelow said...

Anon 3:36,

"financial terrorists"

Now that is a descriptive phrase that just rolls off the tongue!

Anonymous said...

For a country going bankrupt, Iceland seems positively nice. People still seem to have jobs, lots of food and no one has died as pointed out.

It's true that the people of Gaza are suffering terribly. The news is shocking to say the least, 300 children have died I believe and 4,500 injured.

Iceland has the luxury of EU support and there is no way they are going to let it go down. 20 years later it might be a different story, when we'll be in full decline with regards to oil.

On a side note, Britain seems to be coming up with one crazy idea after another on a daily basis. I think they really want to dislocate their bond markets ASAP.

Dr J said...

A traveling salesman suspects his wife of having an affair. He fakes a trip and returns home unexpectedly. His wife has used the security chain on the apt door so he has to wait for her to open it from the inside. He yells, "I know he's here, where is he?" as he rushes around the apartment. Then he looks out the window and, sure enough, sees a man leaving the building while putting on his shirt. In a fit of rage, he grabs the nearest heavy object, the fridge, and hurls it out the window.

Cut to the Pearly Gates where St. Peter is interviewing the queue of newly deceased. He asks the first man, "how did you die" and he says, "I am the caretaker of an apartment building and I was getting too much sun while mowing the lawn and when I went to get my shirt I was hit by a falling fridge". Same question to the next man. He says, "I was worried my wife was unfaithful so I threw the fridge out the window and had a heart attack". Same question to the third man. He says, "Well, I was inside this fridge ...".

Greyzone said...

I read the comment by Dave Fairtex yesterday and I see nothing but denial. He says "I don't see..." and that's exactly the problem. He cannot envision where this is going. It's too much for him. It's too much for many, even most of those around us. They are fish in a great sea and soon the water may all be gone. They'll have to learn to breath air instead, if they can even make that leap.

I know, I know... too doomerish. It can't happen here. It won't get that bad. Fine, believe whatever you want to believe, Mr. Fairtex. That's one less competitor in a much harsher world.

By the way, world oil demand is down over 3 million barrels per day in just the last few months of 2008. While I am a firm believer in the peak oil thesis, this drop in consumption clearly pulls us a ways back from the edge of that problem. Further, the scope of this drop, in just 3 months time, confirms the thesis that Ilargi and Stoneleigh have been preaching for a year and a half at least - to wit, that the economic catastrophe, in the near term, will far outweigh the resource catastrophes that are forming around us. It's interesting though, as Stoneleigh once noted, that the economic and political nonsense will make us all poorer and the scarcity of resources will keep us there.

That is the future. Get used to it.

Anonymous said...

Greyzone I see a 1.4 million barrels per day drop in this article. Where did you find the 3 mpd amount?

EBrown said...

Indeed Greyzone, I agree with your sentiments as expressed. I've recently had an e-mail exchange with teh husband of one of my cousins. We mostly went over the probabilty/timing of a US bond market dislocation - and now I've moved on to environmental and resource constraints as one of the reasons (among others) I think long bonds are a bad idea.

We are going to all get poorer and stay that way. Especially if we can arrange things along the lines of Orlov's most recent piece (in the debt rattle). I thought he made compelling argument for why we should institute socialism. Though I think Ilargi hits the nail on the head in his lead in to the piece where he likens the current bailouts to fascism. I think fascism is where we're headed, or perhaps, have already arrived at...

Anonymous said...

I am fortunate to live in a rural setting and have for some time been preparing for difficult times ahead. Education is the best asset we can have in our arsenal when tested by severe circumstances. It is likely we will have to face concerns regarding water quality from lack of staffing and or needed supply availablity for treatment systems. This link provides a inexpensive way to insure some safety to our drinking water, as well as some other interesting self sufficiency items.
Good Luck, aarroozz.

Anonymous said...

Bernie Madoff plead his case this afternoon, in an effort to stay out of jail after violating his bond terms, he plead "Chutzpah"

Judge : "Tell me why you violated bond and why I shouldn't revoke your bail and send to to await trial in jail"

Bernie Madoff: "Your honor, I have stolen so much money, I have caused my entire family so much shame, its nearly the death of you see your honor...Iam nearly an orphan"

RAS said...

I really like this post, and that is an incredible song. Springsteen did an incredible job.
Ilargi and Stoneleigh, I found this site about 6 months ago and have really enjoyed it. It's the best financial site going.

Re: hobbit houses. They weren't all small. Bag End was big enough for Sam and Rosie to raise 13 kids, and Brandybuck Hall housed an entire clan -hundreds.
(Yes, I am that much of a geek.)

Stoneleigh said...


Personally I'd love to live in a hobbit hole. I think I'd read the whole LOTR series about 5 times before I hit 15 years old. I was that much of a geek too ;)

Anonymous said...

Hot off the Google:

"bank rescue" = 355,000

"bank bailout" = 89,400

"financial terrorists" = 8,140

We have a ways to go kids.

Anonymous said...

Control the language,
control the message.

"mistakes were made"

"no one could have foreseen this event"

"unavoidable collateral damage"

Euphemisms to cover crimes.

Obama's signal not to even review the "Bush Agenda" for illegalities, collaborations, racketeering, cronyism....

The financial meltdown's only tiny scrap of 'Light at the End of the Tunnel' lies in the restoration of trust and an Honest Accounting.

'Not gonna Happen' as Dana Carvey's impersonation of Bush Daddy said.

Obama is driving the wagon into the ditch before he even gets into town the first time.

scandia said...

I've been pondering the implications of the possibility that the state will prohibit spending money internationally, that one will only be allowed to spend domestically. I can imagine a trade of assets based on word agreement. For instance I own a valuable painting in Canada. You own a comparable asset in Italy. It is held as collatral backing you pay my expenses when I am in Italy, I cover yours when you are in Canada.
Also if the restriction of spending domestically is imposed will expats still get their pension money transfered to their new , non domestic location? That, of course, assumes that the int'l banking system continues to function.

Anonymous said...

Some remarkable images on this blogsite. Very few in the current era would espouse child labor, but what a juxtapose the child cutting sardines for a living provides against the 2009 American child playing video games from the comfort of his upstair bedroom.Or the child working the coal mines in contrast to the pampered youth sport player chauffeured to practice and games. The kids in these haunting photos became the prime of life men and women who tolied and survived the depression. I believe the S.A.I.D principle(specific adaptation to imposed demand) is about to rear an ugly head--and put a far less tough and wily generation through the ringer. One way or another adaptation will occur, but it may look like a pile of snow falling on Jeremiah Johnson's first sucessful wilderness fire-- at least in the initial stages.

el gallinazo said...


They have already started in the good ole USA. The last Iraq Fiasco Spending Bill included a sub-bill which I refer to as the Ex-Patriot Act. If you leave the USA they give you a $600k deductible and then tax the shit out of anything else. This is just not for liquid assets. Houses, paintings, sex toys, the whole enchilada. And the IRS evaluates the holdings.

RAS said...

Stoneleight, me too. ;-) I would love to live in a hobbit hole or someplace like the Shire. I was really sick with bronchitis for the first two weeks of December, and I holed up and read the books again.

Anonymous said...

FB is correct about Hebel Block being AAC.

*** said...

hobbit commune, anyone?

Anonymous said...

Two nights ago, we watched the 1976 biographical film Bound for Glory about Woody Guthrie by Hal Ashby. Here's it's link at IMDB: HERE. Excellent account of life in the Great Depression and Woody's maturing as an artist outraged by people's greed. It was nominated for an Academy Award for Best Picture, but now is generally forgotten (Rocky won that year). We Americans don't like to be portrayed as greedy capitalists.

Re: LOTR: It's always struck me that Frodo, after carrying a terrible burden, fails his task and then loses his place in the world. My experience is that those who carry the real burdens ultimately fail, lose their sense of home--and yet are oddly content.

scandia said...

el gallinzano, did the legislation say anything about pension checks?

Anonymous said...

Stoneleigh/Ilargi --

How many years do you think it will be before the US experiences widespread fuel and food shortages?

el gallinazo said...


I didn't read "the fine print" but simply the NY Times article about it, for the simple reason that my net assets are less than USD600k and unlikely to cross that threshold in a deflationary/depression environment. I do not have any pension funds as well. I would imagine that as long as a pension fund is owned by a separate party (as opposed to an IRA or a 401-k) only the distributed income would be counted. But I am not very good on tax law details. When I start to get into it, I become enraged with the corruption of it and it affects my concentration.

Anonymous said...

Hi Ilargi and Stoneleigh,

I'm sure you must get a hundreds of theories concerning the financial crisis and may have even seen the one outline below. Anyway, I'd appreciate your criticism.

The idea basically revolves around volatility in the price oil and how it led to the recent unfortunate behavior of the financial industry. A hypothetical sequence is imagined as follows:

1. Global oil production peaks in yr 2000 as predicted by Hubbell.

2. A new pattern of volatility in oil prices emerges shortly thereafter and this pattern continues to build through the present (and into the future).

3. This type of volatility is in the nature of being on the production down slope of a finite resource in great demand (i.e., oil). Variance and occasional very large movements were certainly evident in the upslope of the production curve. However, the frequency and severity of oil price movements that characterize the new pattern on the downhill side of the production bell curve are envisaged to be of a different order of magnitude.

4. Owing to the singular role of oil to the economy, volatility in its price begins to propagate in variable degrees into the volatility of the price of nearly everything else.

5. A general increasing volatility in prices translates into increases in risk of investment - indeed, due to unknowns in future prices and most especially of oil itself, real financial risks across the board are probably rising exponentially relative to price volatilities.

6. A smart, knowledgeable and initially small number of financial insiders begin to intuit the implications (as outlined
broadly in 1 through 5) of being on the downslope of the global oil production 4-5 yrs earlier than the rest of us. These people don't need to know each other, but do need to have specialized knowledge and be capable of uncommon insight. Certain extraordinary minds may even foresee the unwelcome consequences of price volatility for risk prior to peak oil in yr 2000.

7. With financial risk increasing and a still small, but growing number of insiders coming to understand what is going on, their incentives shift rather quickly from protecting shareholders interests, to figuring out how to quickly cash out (hence Greenspan's confusion).

8. The behavior of the primary few spreads within the financial industry. Most of these secondarily affected individuals are probably oblivious to the ultimate cause (i.e., oil price volatility) of their actions. Greed and/or stupidity do the rest.

How the "cashing out" occurred is where the story goes fuzzy. Unfortunately, I am not up on the mechanics of fraud. But the story does seems to conclude with hundreds of trillions dollars in worthless assets in the "shadow banking system". We know the rest - credit crisis , stock market crash, ill conceived bailouts and more than likely economic ruin.

In summary, the hypothetical mechanism posed above imagines an ultimate cause for our financial disaster beyond human failings and the ineffable workings of complex systems. It also does not require an organized conspiracy, The hypothesis simply poses that increasing volatility in the price of oil following its global peak in production as the necessary and sufficient factor . All else, bad behavior included, self organizes and flows downstream from this.

Best wishes and (please) keep up the good work,


Anonymous said...

Theramus: My 2 bits. The recent spike in oil prices wasn't due so much to peak oil but rather fallout from the "shadow banking system".

A lot of new entrants with huge bankrolls descended on the oil market, looking to place bets. So much so that the usual crowd was relegated to the peanut gallery.

It was classic leverage and flip in action.

It doesn't strike me as a coincidence that oil crashed as the derivatives market was going down. I think this is a much bigger player than any effects of peak oil, so far.

Anonymous said...

In defense of Springsteen for backing Obama in the recent campaign -- BO is one slick liar who fooled a lot of people.

Anonymous said...


I thought Fairtex made a good point. Trade will continue. The real question is in what form and how?

One thing is pretty darn certain. If trade doesn't continue like Fairtex suggests, it will be of the form I & S are predicting.

So far, I see things just continuing to unravel. While there are natural forces pushing to maintain trade as we know it, I personally don't see how it can keep up unless things turn around. Where's the bottom? I think we're still towards the top of the cliff.

I sure hope he's right. But I'm putting my resources on what I see.

Anonymous said...

Your article about the lack of consequence for those who are responsible for the majority of the disaster we are now witnessing is most of the reason I have to minimize the time I spend thinking about it.The blind rage is gone,most of whats left is the sick realization that a lot of my dreams for the remainder of my life will remain unfulfilled.
I suppose that at some point I will see the disaster thru different eyes,and simply be happy that I have a better chance at keeping me and mine warm and fed for the next few years.This will be best accomplished by worrying less about what I can no longer do,and focusing on the task at hand.
Remembering,at the most appropriate time the true history of why we fell,and who was really the ones responsible may be the only chance that any of us have of being a voice that will make a difference in the coming times.It will be personal communication of the truth to those who will be listening,[and many many will be looking for the reason their life fell apart]as well as any ways you know to make your fellow man/woman stronger,wiser or feel better about what we are going to face in the coming years,and probably for the rest of our lives.Its what Woody Guthrie sang about,and a good piece of what make a "good" person.As much as you can,help your fellow man...


Anonymous said...

Tesco just announced today that they are going to increase jobs by 10,000 through the year.

I wonder if that doesn't turn into 10,000 cuts by the end of the year?

The best shorts for the next few months could well be walmart and tesco in the UK. As consumers cut back even more, the sales are sure to disappoint.

Japan's trade surplus was down a whopping 66% and sony's going to make it's first loss in 14 years. Guess people don't want to buy their over priced and over hyped playstation 3

Gourdier said...

Dear Anon (My Two Bits),

"The recent spike in oil prices wasn't due so much to peak oil but rather fallout from the "shadow banking system"....."

My question is, if we accept a causal linkage between these two phenomena - which came first ? The oil price crashed because the derivatives market went down or anticipation of future oil price volatility (of which the recent oil price crash was a symptom) led to collapse in the "shadow banking system". Alternately, maybe looking for causality between the two is a wild goose chase.

I'm trying to keep an open mind. I'm not an economist - though I do undertake empirically oriented research professionally. If the oil price volatility idea has merit, then unfortunately for someone who works like me, there are too many open questions and too little data. Among the easier to frame questions are: Has peak oil occurred ? If so, how does oil price volatility compare before and after ?

Time will tell. However, here is something else that is concerning me. If Hubbell's prediction of ~ yr 2000 for peak oil was the correct, then we are now on the flattest part of an increasingly perilous downward sloping production curve. In turn, if price volatility scales with curve steepness, then we may be in for a bumpy ride indeed.


jewishfarmer said...

For those who would like to live in a hobbit hole, I recommend Mike Oehler's classic building book _The $50 and Up Underground House_ - his building method is very, very inexpensive (there has certainly been some price increase since the 1970s), nearly fireproof, and there are folks living in Oehler underground houses who have been there quite some time, including the people here The houses are not dark, damp and dank - they are truly hobbit holes in the sense of being very pleasant and cozy, and quite bright.

If we ever built a house, it would be earth sheltered and hobbitty, using many of Oehler's techniques. And given the arctic temps coming my way (lows of -30 expected here), would be a lovely thing in my climate.


Ilargi said...


I've said a few times in the past months that peak oil has become an afterthought. Demand falls so fast that any peak there might otherwise have been no longer has no importance.

I've had a running "squabble" with Jeffrey Brown, Westexas at The Oil Drum, who seeks out oil as the driving force behind the collapsing financial markets. I have always maintained that these markets needed no help in their collapse.

The only connection I have talked about is the purely hypothetical, for entertainment purposes only, one that says those who have the power in America (and that's not Bush or Obama, real power doesn't rhyme with visibility) have decided upon realizing M. King Hubbert (not Hubbell) was right in 1956 when he predicted the downfall of global oil production around 2000-2005, and decided the US economy had to be liquidated in order to prevent oil supply -and hence price- from becoming a predicament to the operations of the armed forces.

But as I said, that's for entertainment purposes only. There is no other link between the two issues.

el gallinazo said...

I think that there was a minor link, in the sense that the collapsing banking and equities markets created a short term commodities boom - oil chief among them. Da Boys just didn't know where to stash their cash. $147 crude somewhat accelerated the collapse into depression of the global economy. But this is just a rate thing. May have sped up the inevitable by several months.

Anonymous said...

-the US economy had to be liquidated in order to prevent oil supply -and hence price- from becoming a predicament to the operations of the armed forces.

Wearing my tinfoil hat, this is what mike rupert has been talking about on his blog. The simultaneous tanking of the global economy has been done in such a manner that no country has been spared. The global effect means that no major power country will be better off than the other.

Thereby dampening the desire for war. Paulson and co are damn smart, they have the data in real time, they know the math, they didn't reach where they did being clueless, even W is 40 IQ points smarter in private according to the press. they know what they are doing. It's like a power down for the US and world economy. People are going to be shocked into changing their ways to a much lower standard of living. (Naomi Klein anyone?)

The richest 1% will retain their power. The rest of us debt slaves will carry on working for them, only much harder and longer, like it was for much of history.

Taking off my tinfoil hat now.

Anonymous said...

Hi Ilargi,
Thanks for weighing in:

My bad on getting Dr Hubbert's name wrong.

It is not peak oil per se that has me thinking - but the potential and implications of unexpected fast up and down swings in the price of oil post peak. If such volatility persisted, then its seems to me it would have the potential to be very disruptive to the global economy.

In my own state over the last 8 years, I have seen gas prices move from 79c per gallon to $4.59, now (suddenly) back down to $1.50. Early on, when gas was 79c I, this seems to be an inexplicably low price. But, if one shifts perspective, then maybe this anecdotal 79c makes sense as an early symptom of a new and longer term pattern of variance. Because of this possibility, I now wince a little when I hear people talking about one of the "few benefits" of the downturn is having gas back down to a buck fifty.

Anyways... growing up a kiwi and because it often turns out my ideas are wrong, I try stay away from squabbles. I'm also not much on conspiracy theories - except for "entertainment purposes". I do nonetheless enjoy pondering, data and self-organizing processes. Consonant with what the "Automatic Earth" evokes it is my belief that the ultimate explanation of what we are observing will turn out to be more about the laws of nature than the machinations of human kind.

best wishes,


Anonymous said...

From the Irish Times:

Warning that house prices may fall by 80%

Some are just now starting to catch up to you two.

el gallinazo said...


"If such volatility persisted, then its seems to me it would have the potential to be very disruptive to the global economy."

Do bears shit in the woods?

"I'm also not much on conspiracy theories - except for "entertainment purposes".

Hold onto your seat. You are about to be entertained beyond your wildest dreams (which apparently are not too wild).

Anonymous said...

Hi El Gallinazo,

Greenspan said: "I have found a flaw. I don't know how significant or permanent it is. But I have been very distressed by that fact...."

Greenspan was jumped on by a reflexive media and commentators for saying this for the usual depressing reasons... but it seems to me that Greenspan was getting at something quite interesting. My read is that he may have been implying not so much that he thought he was wrong about how markets operate in "normal" times, but there had been an unexpected and fundamental shift in the incentives of market players.

Pondering on the underlying cause for this shift in incentive (from "playing nice" to "bad behavior") is why I'm asking questions about the implications of oil price variance and whether these implications might have been anticipated.


*** said...

Yoyo, meet string.

Bernanke may talk like a yoyo but it should be interpreted that he is "shocked, shocked."

el gallinazo said...


"Pondering on the underlying cause for this shift in incentive (from "playing nice" to "bad behavior") is why I'm asking questions about the implications of oil price variance and whether these implications might have been anticipated."

The investment banks all went public in the last couple of decades (or more recently). They gambled "nicer" when they were gambling with their own money. It's easy to place a billion on Horseturd in the 5th at 60 to 1 when someone else takes the hit for losing :-)

Capitalism, like cancer, must grow in order to survive. When unlimited growth hits a finite physical world, something had to give. The only way capitalism could survive was by producing bigger bubbles with an expanded credit supply (which derives from greater debt in the fractional reserve system), and compensating for reduced profits by expanding leverage with the now giant credit supply. It had to pop and here we are with the world's population left with nothing but a wad of putrid, over-chewed bubble gum on it's face.

I wouldn't waste much time pondering over Greenspan. First, he was simply a water carrier for Da Boyz. Second, he really isn't even that smart. He was a one trick pony - re-inflate the bubble. He loved to talk in Delphian Gibberish and all the lemmings hung on his every word and pronounced him "the Maestro." Probably the best part of the Debacle is that it occurred while he was still (vaguely) alive.

Weaseldog said...

GreyZone said, "By the way, world oil demand is down over 3 million barrels per day in just the last few months of 2008. While I am a firm believer in the peak oil thesis, this drop in consumption clearly pulls us a ways back from the edge of that problem."

It does? Like eating less cures a famine? Or reducing inventory cures lagging sales? Or cutting spending cures a drop in income?

Periodic demand destruction is a symptom of Peak Oil. We are struggling to continue an era of economic growth, as industrial decline is forced upon us by depletion effects.

This will naturally generate oscillations of little boom and big bust cycles on the down slope of Peak Oil. Periodic demand destruction events are the norm now, interrupted by periods where we can almost see recovery.

Economics and Peak Oil are intertwined. They feed back on each other. You can't separate them.

Anonymous said...

El Gallinazo,

Nice post. Need to think it over some.

I agree Greenspan has nearly always talked nonsense... but that's not to say he did not say something interesting this one time.

This tom needs to lick his wounds for a while.... turns out saliva has natural healing properties.

Best wishes,


el gallinazo said...


I think your differences with Greyzone are simply semantic. The collapse of the world economy in an L-shaped depression will make the immediate effects of peak oil less pronounced and extend it more into the future. Reduced eating does cure a moderate famine if everyone is grossly obese :-)

As Stoneleigh points our repeatedly, the collapse will result in less investment in oil extraction which will increase its price eventually in the real terms of typical krill income.

Weaseldog said...

Ilargi said... "I've had a running "squabble" with Jeffrey Brown, Westexas at The Oil Drum, who seeks out oil as the driving force behind the collapsing financial markets. I have always maintained that these markets needed no help in their collapse."

Our economic system needs infinite growth to stay healthy. To maintain it, it needs infinite industrial growth.

Now, because growth is exponential, even if we assume that growth to infinity is possible, then a healthy economic climate is dependant on industry and finance being in a healthy sync.

If one falters, the other is forced to correct.

This is a feedback loop. If one insists on growing faster than the other, then booms and busts, become cyclic. It oscillates.

Now industry is limited by the quantity of energy available to it. It can't grow faster than it's energy supply. (The analogy of manufacturing following computer processing power is just plain false, or we'd be making billions of cars a year for pennies by now.)

So any interruption to the energy supply (ie: oil), will force an economic correction. In 2001, World Oil supplies spiked and went into decline. It triggered a market crash. A correction that we can argue was due, but could've been accounted for by dramatically increasing oil production (keeping prices low), and the increased manufacture of cheap plastic crap.

So price rose, until it triggered bankruptcies, leading to a domino effect of crashing a variety of economic sectors.

Then oil got cheap again, industry recovered. The Saudis temporarily, increased production, through massive investment. The economy seemed poised to recover.

Then in 2005, World oil production faltered again. Oil prices rose. Demand destruction was put off by the creation of more easy credit, allowing debts based on expensive fuel to pile up.

2005 does appear to be the Final Peak of Conventional Oil.

Demand destruction kicked in. Bankruptcies, unemployment and foreclosures took center stage. Prices dropped.

In 2008, The All Liquids, production appears to have peaked. It is the end of cheap oil.

Now oil production is permanent decline. We'll have cyclic false recoveries. But we've seen the last of growth.

Energy drives the entire universe. Everything that we are, and everything we do is bound by it's limits. Economics exists as a bubble inside of these limits. Economics can't perform magical supernatural feats. So it's clear that every economic action and reaction is in accordance with the Laws of Thermodynamics.

We don't generally see this, because have been trained to think in magical terms when it comes to economics. And when the magic doesn't function, our training and education gets in the way of understanding that the physical world, does in fact drive our economic world, and defines it's boundaries.

Anonymous said...

I think you and I are at a similar place on the edge of this abyss.

I'd be curious to hear whether or not you have thoughts on possible linkage between the post-peak boom-big bust cycles you describe and my attempts earlier in this discussion to understand factors contributing to the "bad behavior" financial industry since yr 2000 ?

I agree oil and economics is probably a tightly interwoven strand (or yoyo string-apologies Adios Babilonia). But its the sequence of events at the highest magnifications I'm curious about ?


Weaseldog said...

El Gallinazo, I see what you're getting at.

I don't think that I see 'Peak Oil Effects' quite the way others do.

That leaves me appearing very pessimistic, as compared to other 'Peak Oil Doomers'.

What troubles me, is that I never seem to be pessimistic enough to keep up with reality.

I was writing and arguing about this mortgage bailout/rescue in 2005. I figured out in 1998 that no matter what happens as an effect of Peak Oil, our owners will always try to print money to keep us on the path to infinite growth. Further, they will, in the face of the downturn struggle with all of their might to centralize all business, while they entertain the illusion that lack of control, is causing all of this pain.

I don't believe that they actually have a plan that works. And now that their plans are failing, they are frantically trying anything in their limited tool set to return to the good times.

What they are doing to the USA, is really just a desperate effort to return to the glory days. The banks must grow again. They will sacrifice everything to make this happen.

Weaseldog said...

Theramus, the ideas you presented, fit neatly into this cyclic view of boom and bust.

Weaseldog said...

Theramus, when energy supplies are growing, growth has the illusion of being boundless. Every dream that can be imagined seems possible.

Even Ponzi Schemes grow with abandon, and without fear of failure during these periods.

One little hiccup in the energy supply chain, and it all falls apart.

el gallinazo said...

To be simplistic, I see it as sort of a relay race where peak oil and deflation/demand destruction take turns carrying the contraction baton. I think we all agree that peak oil started the collapse, is the most fundamental factor, and forced Da Boyz to blow their bubbles to buy as much time as they could. I think right now, Depression is carrying the baton and peak oil can take a breather for a while.

Of course, if we were not such a perverse species, a very comfortable sustainable world could have emerged from our enhanced technology until such a point as the sun turned red giant and engulfed us.

Anonymous said...

Theramus, I tend to see these matters more or less as you, and Weaseldog, suggest. Why? Because I believe there are material, ie, real, foundations for our systems, always, in all cases, even if we pretend to ourselves that we have transcended such mundane matters as earth, air, fire, and water.

I also more or less tend to, while maintaining my uncertainty, agree with the time line you laid out. Why? Again, because it corresponds to the basic analysis of us hitting material limits to growth (as in the Club of Rome report) at about 1985, the start, that is, of this bubble, where, in other words, capital was forced to begin to seek increasingly speculative and unreal methods to continue its growth.

In other words, the formation of the bubble. Or in even other words, the vaunted drop in per capita energy consumption here in the west was not in fact anything other than an indication that we have now reached a limit, and growth in any real sense has stopped.

As to what our host believe, I believe that both Stoneleigh and Ilargi are right in terms of what they focus on, ie, when I see Stoneleigh say she believes x, and Ilargi believes y, I just see x and y as two parts of a whole. I primarily believe that nothing trumps matter and energy, no matter what we want to pretend as animals that think far too much for our own good.

I'd like to thank you for putting that case so succinctly.

If you remove all of this fake growth from the last 20 years, and look at what remains, including per capita income adjusted for this removal, we can get a fairly clear view of where we will end up. As to China, the picture becomes somewhat more distressing, since they have long since left behind even the most remotely sustainable life.

On thing that I found very funny when studying such things as Marx was how utterly non-materiastic such allegedly 'materialistic' analysis actually was, for all its other good points. Ie, he ignored everything except humans in his ideas.

Anonymous said...

We are constrained by our behavior evolved over billions of years. Without a predator most species overshoot until there is a change in the environment I believe.

It's hardwired into us genetically and unfortunately for us we are a plague species. There's a nice book that is usually displayed under stoneleigh's favorites that says it all, "stupid till the last drop".

Monkey buy McMansion, Another monkey buy McMansion. Monkey invest with Madoff, second monkey invest with Madoff. Monkey see female monkey, monkey go gaga and forget all. Monkey buy 4000 kilo car and most monkeys go "ooohhh"

Those of us who have cared to inquire and learn see the slow motion train wreck heading our way but passing that message along is incredibly difficult and even planning for such an event though possible is so full of uncertainty and scratch your head type stuff that it boggles my little mind.

Anonymous said...

Mugabe said...

"In defense of Springsteen for backing Obama in the recent campaign -- BO is one slick liar who fooled a lot of people"

Like all politicians Obama said and did what he had to in order to get elected. Promises made, promises broken. Works every time.

Anonymous said...

Some very good discussion here today. I am intrigued by the Theramus Thesis, though my line of thinking has always been more aligned with what Uncertain said, i.e., as material limits started to matter more the natural tendency of the financial system was to "innovate" into ever more disconnected-from-reality financial products. This allowed the illusion of growth to continue with only minor input from the physical world. Eventually even this was not possible, the difficulties and costs in the real world were too great, and here we are knee-deep in the shite.

Anonymous said...

Re behavioral constraints, this month's Scientific American has a good overview of a range of current Evolutionary theory, including a large section on pop psychology as it relates to our understanding of human behavior.

I suggest taking a look at that before deciding what does or does not form the cornerstones of human behavior, at least as far as best current scientific understanding is concerned.

It's fairly easy to read that part, it wasn't something I'd really given much thought to, but once I read it, or, to be fair, skimmed it, I recognized quite a few beliefs I read on sites like this fairly often, which frequently pass unquestioned. I know I saw a few things in there I assumed to be true. But that's how the pop stuff works, it seeps in, it's popular, it doesn't challenge prevailing views, it's easy to digest, so it's quickly absorbed, and rarely questioned.

Check it out, I'm going to reread that section just so I can learn to spot the differences between actual best current understanding and pop manipulations and distortions.

Weaseldog said...

Uncertain, picking out pop psychology from what is currently accepted, is a slippery slope...

What is currently accepted, varies according to who you ask.

Ilargi said...


We. as in Stoneleigh and me, do understand energy, coming over from the Oil Drum and all. That said, I still think it's essential to comprehend that the financial collapse we see today has zilch to do with peak oil. Other than the hypothesis I reiterated earlier, that is.

A Ponzi this big would have blown up even in the best of times. The attempt to make a connection with peak oil is a false flag, one that will prevent you from understanding the issues.

You can turn it on its head and ask: if we'd had plenty oil, would the economy have kept going as it was? And the answer is: no, there's no way, because the overall leverage is way too high.

el gallinazo said...


I agree with your last comment. But I think that peak oil and diminishing natural resources "inspired" the miscreants to create the giant bubble / Ponzi Scheme because they could no longer "grow" in real terms.

el gallinazo said...

Anyone else notice that the Euro is collapsing against the USD and the yen?

Weaseldog said...

I'm afraid I agree with El Gallinazo.

The effects of Peak Oil fueled their desperation. Ten years ago, I was arguing that this was a logical outcome of Peak Oil. That the Fed and the government as a whole would work in a frenzy to drive the economy forward. That they would effectively open the presses to produce money at ever faster rates to stimulate the economy.

Every nation does when it runs out of resources. Now, the whole world works on that model.

Before the world peak, increasing the petro-money supply, did stimulate economies, by increasing industry. Increased industry, drove demand for oil higher, and more straws were stuck in the Earth to deplete the oil faster.

Economies recovered. Growth continued.

Now economies cannot be stimulated by simply pouring money on the problem. But it always worked before. And didn't it seem to work after the crash in 2001?

Well if it does always work, then clearly the problem is that money isn't being printed fast enough.

If you believe that money is the fuel that drives everything, then you really only have one solution to the problem of chasing infinite growth. And that's chasing after infinite money creation.

Greenspan, Bernanke and Paulson, only have one tool in their toolbox.

As Oil Production continues to decline, they will continue to print money ever faster in and effort to blow another bubble.

They've all made it clear in speeches that their goal is to restore healthy economic growth, that nothing else matters, no sacrifice is too small.

Anonymous said...


Am I understanding your analysis correctly?

So the economic collapse we're having today is independent of Peak Oil. Nevertheless, Greenspan, Cheney, the Project for the New American Century and others who have been aware of Peak Oil for some time thought that it was necessary to create a housing bubble for the sake of the elites (reap profits and steal from taxpayers) and to reduce demand for oil or destroy demand for oil. In other words, the corporate and government powers have been aware of Peak Oil for many years and had to fabricate the destruction of demand for oil?

The elites, I gather, planted the seeds of their own destruction. So much could have been done in terms of sustainable energy and sustainable lifestyles and living in harmony with nature since the time of "Limits to Growth" and Hubbert's research.

willnotbill said...

Wow,been reading all these comments and I must say I'm totally amazed at the high level of discourse on display here. It's great flying with you people.

Weaseldog said...

Ilargi said... "You can turn it on its head and ask: if we'd had plenty oil, would the economy have kept going as it was? And the answer is: no, there's no way, because the overall leverage is way too high."

If the industry can grow as fast as the money supply, then yes, these Ponzi Schemes would continue.

It's because natural resources are finite, and growth is exponential, that these schemes must fail.

Once energy can no longer match the pace of money creation, then the bubbles must burst.

Our entire economic system is based on bubbles and Ponzi Schemes.

The Stock Market for instance, only grows so long as suckers are putting in money faster than it comes out. It's a variation of the Ponzi Scheme.

The plateau this time around, from the 2005 Conventional Peak, to the 2008 All Liquids Peak, gave our financial gurus some time to build momentum. As oil prices rose, they had to cover higher and higher costs. The bubble had time to grow huge, before the net energy decline really kicked in.

Anonymous said...

I do believe peak oil is linked to the financial crisis, the high oil prices led to the acceleration of the current crisis.

I remember a Michael Panzner Interview on financial sense recently where he said what he thought would unfold in 5 years happened in 18 months! This from a bloke whose written a book called Financial Armageddon. Most bloggers are surprised with the speed and severity of unfolding events.

I think net energy is the key to the great acceleration of this crisis. The world's net energy has been declining steadily since 2005. The "Wealth boom" was just a side show masking the decline in net energy. Instead of being able to create infrastructure and manufacturing, TPTB let asset prices inflate to sky high levels. The same thing kept being valued higher and higher, giving the illusion of greater wealth and progress while masking the decline in NET energy and allowing TPTB to accumulate massive wealth to protect themselves.

Or TPTB are really really foolish, are pretty clueless about net energy and just wanted a debt induced orgy and net peak energy just snuck up on their big party and crashed it! And if peak oil didn't have a role to play in this current crisis, it sure will in 5-6 years time when a 6.1% decline rate or higher is going to cause some serious headaches.

Anonymous said...

Hi Weaseldog and El Gallinazo,

So its interesting to read your thinking in sequence.


"...natural resources "inspired" the miscreants to create the giant bubble / Ponzi Scheme because they could no longer "grow" in real terms."

My alternate take on the mechanism prompting the "miscreants" as posted earlier in the thread focused on rising investment risk occurring as a result of increasing oil price volatility. Business and finance folks hate surprises. Perhaps constraint on (profit) growth and increasing risk (cost) of investment are manifestations of the same process.

Hi VK,
My personal focus is on the consequences of VARIANCE in the price oil post peak. But as you suggest net level may be a factor here as well...

Hi Ilargi,
Disclosure - I have never heard of the Texas Oil Drum. To be honest, this is the first time I've contributed to a blog of this type - though I do occassionally participate in discussions over on the morningstar TIAA-CREF site.Now I know why I have to stay off in future - I'll never get any work done !

I wish I could agree with you that this whole thing is like every "bubble" in history - inflated by normal human failings (e.g, greed, magical thinking, theivery etc) and eventually collapasing under its own weight However, what if the bubble metaphor is too narrow, simple or just plain wrong. We have a joke about buidling graphical models to explain mechanism in my line of science - "don't make it too pretty, you might start believing its true".

Warm regards and keep up the stellar work,


Anonymous said...

Weaseldog, I'm referring to best currently accepted scientific understanding when I use the term 'currently accepted', and when I use the term 'pop' I'm referring to a misreading and misunderstanding of the current best scientific understanding, which itself largely has no actual scientific foundation, but pretends it does.

I posted that last comment as merely a suggestion of something that is worth reading in order to clarify some common misuses of this material, not to start a debate here. So I'd again suggest that it's worth reading, before posting any comments on the substance of the points raised in that article. Ie, this is about an article in Scientific American, not about my views on that article, so the only way to have further meaningful discussion on that article is to read it.

Anonymous said...

two points:

1. I think I tend towards stoneleigh's view of the fundamental irrationality of the market, and I'd expand that irrationality to cover human nature in general. In other words, I really don't think we have much of a clue at all about why we do anything. We certainly think we do, but that's another story.

Sometimes people might get ideas that end up working out, which creates the impression of foresight and planning, but in any larger scenarios, I really don't see humans as having much of a clue about anything at all, it's more like stumbling along blindly than anything else, though day to day we might be excused for believing differently.

2. Re peak oil. Since the latest IEA is looking at 7% declines of existing oil fields, that means x million new barrels per day need to be added to stay at current levels.

It's unclear to me how we can pretend that this 7% new production yearly which would be required to stay at current levels could be covered by a relatively small decline in total demand this year. And that decline, it's important to note, already includes 2nd and 3rd world countries being priced out of the market, as well as the low hanging fruit of discretionary consumption demand destruction in the industrial countries.

Once this decline sets in for real, we're not talking about a decline of 1.5 to 3 million barrels per day in demand, we're talking about 5 to 7 million barrels per day decline in supply every year. The math doesn't work out. And this situation is made worse by the current credit collapse.

Well, let me rephrase, nothing better long term could happen than humans being forced to leave some of the oil in the ground, though they seem unable to grasp the simple notion of saving for your future needs.