Thursday, February 12, 2009

February 12 2009: Redeterminations

G. G. Bain White Rock Table Water 1908
Opening Day at Hilltop Park, April 14, 1908. New York Highlanders and Philadelphia Athletics

Ilargi: Prior to a sudden surge on Wall Street just after 3 PM EST today, US financials were losing a lot of money. Undoubtedly, many "experts" will say the financials are hurting because of uncertainty about the Geithner plan. Me, I would turn it around, and say they drop like stones because of certainty, the sort that says there's no way the largest banks in the US and the UK can be saved. There's no shortage of smart voices declaring that it's so very hard to put a pricetag on toxic assets. In reality, it's very easy. All you need to do is put them on sale and see what offers you get. And there's no excuse or reason for a government to enter the bidding process with money that belongs to its taxpayers. If the people themselves want to buy the paper with their own money, fine. But no-one else should have the right to spend it for them.

Along the same line, US homes should be put up for sale without Fannie and Freddie (re: government) in the picture to buy the mortgages. That would provide very realistic information on what they are worth. Which reminds me of something I noticed in Dan's AshesAshes blog today, about rules for property assessment in Hanover, New Hampshire.
”How Your Property is Assessed:
The Assessor first reviews all the property to be assessed then values it. Finding the market value of your property involves discovering the price most people would pay for it in its present condition...
The assessment leads to a certain level of property taxes, which will in turn be used to pay for services.

What I would like to know -for real- is what "most people" would pay for a property in its present condition if Fannie and Freddie would not be available as backstop for loans. Given their own present condition, most people would not offer anything even if they could get a mortgage, which they won't if the lender cannot sell it on. Which I think means the true value - at least when it comes to market prices- of homes is very close to that of toxic paper assets: pennies on the dollar.

Fannie and Freddie, then, serve only to distort the market, to your - gigantic multi trillion dollar - disadvantage. They not only allow banks to obtain distorted levels of income by writing mortgages on properties that are enormously overvalued compared to market prices, much to the detriment, of course, of buyers, they also allow property taxes to be far higher than property assessment regulations prescribe. To the detriment of those who pay the taxes.

The entire economy is one huge mirage, or one of those Hollywood cardboard remakes of towns in the west. By making you believe it's all real, the people you voted into their offices, and the elites who pay for their campaigns, create the opportunity for themselves to "liberate you from your money". If I were living in Hanover, NH, I would look at the interpretation of the property assessment law that costs all this extra money. I see no reason to believe the laws will much different elsewhere. Ask you councilors to come up with the offers "most people" would make, and make sure they're not some kind of fantasy numbers.

There is a catch, though: you’ll likely bankrupt your communities. And your homes will lose most of their "value" overnight. Still, if I were you, I wouldn't like the idea of paying ten times what you truly owe. You’re already doing enough of that by rescuing the banks.

Adam Smith gets the last laugh
The free market is dead. It was killed by the Bolshevik Revolution, fascist dirigisme, Keynesianism, the Great Depression, the second world war economic controls, the Labour party victory of 1945, Keynesianism again, the Arab oil embargo, Anthony Giddens’s "third way" and the current financial crisis. The free market has died at least 10 times in the past century. And whenever the market expires people want to know what Adam Smith would say. It is a moment of, "Hello, God, how’s my atheism going?" Adam Smith would be laughing too hard to say anything. Smith spotted the precise cause of our economic calamity not just before it happened but 232 years before – probably a record for going short.

"A dwelling-house, as such, contributes nothing to the revenue of its inhabitant," Smith said in The Wealth of Nations. "If it is lett [sic] to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue." Therefore Smith concluded that, although a house can make money for its owner if it is rented, "the revenue of the whole body of the people can never be in the smallest degree increased by it". [281]*

Smith was familiar with rampant speculation, or "overtrading" as he politely called it. The Mississippi Scheme and the South Sea Bubble had both collapsed in 1720, three years before his birth. In 1772, while Smith was writing The Wealth of Nations, a bank run occurred in Scotland. Only three of Edinburgh’s 30 private banks survived. The reaction to the ensuing credit freeze from the Scottish overtraders sounds familiar, "The banks, they seem to have thought," Smith said, "were in honour bound to supply the deficiency, and to provide them with all the capital which they wanted to trade with." [308]

The phenomenon of speculative excess has less to do with free markets than with high profits. "When the profits of trade happen to be greater than ordinary," Smith said, "overtrading becomes a general error." [438] And rate of profit, Smith claimed, "is always highest in the countries that are going fastest to ruin". [266] The South Sea Bubble was the result of ruinous machinations by Britain’s lord treasurer, Robert Harley, Earl of Oxford, who was looking to fund the national debt. The Mississippi Scheme was started by the French regent Philippe duc d’Orléans when he gave control of the royal bank to the Scottish financier John Law, the Bernard Madoff of his day.

Law’s fellow Scots – who were more inclined to market freedoms than the English, let alone the French – had already heard Law’s plan for "establishing a bank ... which he seems to have imagined might issue paper to the amount of the whole value of all the lands in the country". The parliament of Scotland, Smith noted, "did not think proper to adopt it". [317] One simple idea allows an over-trading folly to turn into a speculative disaster – whether it involves ocean commerce, land in Louisiana, stocks, bonds, tulip bulbs or home mortgages. The idea is that unlimited prosperity can be created by the unlimited expansion of credit.

Such wild flights of borrowing can be effected only with what Smith called "the Daedalian wings of paper money". [321] To produce enough of this paper requires either a government or something the size of a government, which modern merchant banks have become. As Smith pointed out: "The government of an exclusive company of merchants, is, perhaps, the worst of all governments." [570] The idea that The Wealth of Nations puts forth for creating prosperity is more complex. It involves all the baffling intricacies of human liberty.

Smith proposed that everyone be free – free of bondage and of political, economic and regulatory oppression (Smith’s principle of "self-interest"), free in choice of employment (Smith’s principle of "division of labour"), and free to own and exchange the products of that labour (Smith’s principle of "free trade"). "Little else is requisite to carry a state to the highest degree of opulence," Smith told a learned society in Edinburgh (with what degree of sarcasm we can imagine), "but peace, easy taxes and a tolerable administration of justice."

How then would Adam Smith fix the present mess? Sorry, but it is fixed already. The answer to a decline in the value of speculative assets is to pay less for them. Job done. We could pump the banks full of our national treasure. But Smith said:
"To attempt to increase the wealth of any country, either by introducing or by detaining in it an unnecessary quantity of gold and silver, is as absurd as it would be to attempt to increase the good cheer of private families, by obliging them to keep an unnecessary number of kitchen utensils." [440]

We could send in the experts to manage our bail-out. But Smith said:
"I have never known much good done by those who affect to trade for the public good." [456] And we could nationalise our economies. But Smith said: "The state cannot be very great of which the sovereign has leisure to carry on the trade of a wine merchant or apothecary".
[818] Or chairman of General Motors.

* Bracketed numbers in the text refer to pages in ‘The Wealth of Nations’, Glasgow Edition of the Works of Adam Smith, Oxford University Press, 1976

The End of the Trade Bubble?
We all know about the housing bubble and the credit bubble. But the latest data suggest that there may have been a trade bubble as well. On Feb. 11 the U.S. government announced that both imports and exports had plunged in December, continuing a trend that started in July. Since that midsummer peak, goods imports and exports are down by more than 25%. Imported goods, in particular, are now down to the level last reached in 2005. On the same day, the Chinese government reported even more dramatic figures.

Measured on a year-over-year basis, shipments from China to the rest of the world are down 18%, while shipments into China are down 43%. This plunge in trade comes after an unprecedented 20-year boom, not just in the U.S. and China but around the world. Since 1988, global exports and imports of goods have more than tripled, after adjusting for inflation. Trade has risen from 18% of global output to an astounding 33%. To put it another way, roughly one-third of all global output is shipped across national borders.

Clearly this dramatic increase reflects real changes in the global economy: the shift of production to China and other developing countries, and the increased willingness of companies to rely on suppliers in other parts of the world. But there's a good chance that the trade boom and the credit boom helped feed each other in all sorts of perverse ways. One example: Huge trade surpluses in China, Germany, Japan, and elsewhere created a pool of mobile capital, which flowed into subprime mortgages and all sorts of exotic securities. That is to say, the rest of the world lent the U.S. an enormous amount of money at low rates, which helped fuel the American housing boom. (It's interesting to note that the growth of housing prices over the past 20 years roughly parallels the rise in trade.)

Another example: Cheap credit made it a lot easier for freight companies to finance new ships and trucks and for airlines to finance new planes. This, in turn, increased the supply of transportation and reduced the cost of shipping goods across long distances. In addition, supply chains that stretch across the ocean mean that more goods are in transit at any time. All of these goods in transit, which have been produced at a cost, but not yet bought by the final user, must be financed by someone. Until recently, such financing was cheap and easy to obtain.

And finally, there's the link between the trade deficit and the financial crisis. As long as the U.S. is still running a trade deficit, we are still borrowing from overseas. And as long as we are still borrowing from overseas, we are piling up debt, and the financial crisis is getting worse, not better. In the end, it may turn out that it really doesn't make sense to buy so many goods from overseas, and ship them such long distances, once the drug of cheap credit has disappeared. The trade bubble may be popping right now; even after the crisis is over, imports and exports may take years to recover to their peak levels.

Why Markets Dissed the Geithner Plan
One of the cool things about being Treasury Secretary is that you get your signature on dollar bills, giving them authority, defending their honor. Timothy Geithner's plan to save the struggling banking system probably does the opposite, throwing good money after bad to a banking system struggling under the weight of its own mistakes. The markets don't like it. The Dow dropped 382 points while bonds rallied as a port in a continuing storm. Mr. Geithner announced a three-point plan yesterday to "clean up and strengthen the nation's banks," and made a vague declaration to use "the full resources of the government to help bring down mortgage payments and to help reduce mortgage interest rates." Unfortunately, those are conflicting plans. Hence the markets' skepticism. The Treasury secretary seems stuck on keeping the banks we have in place. But we don't need zombie banks overstuffed with nonperforming loans -- ask the Japanese.

Mr. Geithner wants to "stress test" banks to see which are worth saving. The market already has. Despite over a trillion in assets, Citigroup is worth a meager $18 billion, Bank of America only $28 billion. The market has already figured out that the banks and their accountants haven't fessed up to bad loans and that their shareholders are toast. Second, Mr. Geithner wants to use up to $1 trillion to back new car loans, home loans and student loans. That's noble, but incredibly market distorting. Who gets these loans? Will banks be forced to loan to those with bad credit? Who sets loan rates? Doesn't this just set up another credit squeeze when government guarantees are lifted? What we need are healthy banks with clean balance sheets and enlightened risk assessment to provide consumer and business loans that will generate returns to shareholders. And to this end, Mr. Geithner wants to create a public-private partnership to buy toxic securities off bank balance sheets. This is a truly worthy goal, but I don't think his plan for doing so will work. Banks are more than able to sell these toxic loans today. They just don't like the price.

The first iteration of the Troubled Asset Relief Program (TARP) last year was to buy these bad loans and derivatives. It didn't work. Nothing was bought when it became clear that paying face value was a taxpayer giveaway to banks, but paying market prices for this stuff would cause huge equity write-downs, wiping out banks which would be left with negative equity and effective insolvency. The next round of TARP injected money onto bank balance sheets first, boosting their equity so they could absorb the write-downs to come when the toxic junk was bought later. It didn't work. The $45 billion to Citi and Bank of America wasn't nearly enough. Instead, $306 billion and $118 billion loan guarantees were extended to cover the bad debt, which unfortunately, the market believes still weighs down banks' balance sheets. Now with TARP 2.0, renamed a friendly Financial Stability Plan, the idea is to entice private capital to buy these bad loans and derivatives in an effort to set the "market price." But Mr. Geithner hasn't solved the dilemma of banks not wanting to sell and become insolvent.

Moreover, no one is going to buy these securities ahead of Mr. Geithner's action with the "full resources of the government" to bring down mortgage payments and reduce mortgage interest rates. Lower mortgage payments means mortgage-backed securities would be worth even less. Six months to a year from now, big banks may still be weak and the ugly "n" word of nationalization will be back. Mr. Geithner should instead use his "stress test" and nationalize the dead banks via the FDIC -- but only for a day or so. First, strip out all the toxic assets and put them into a holding tank inside the Treasury. Then inject $300 billion in fresh equity for both Citi and Bank of America. Create 10 billion new shares of each of the companies to replace the old ones. The book value of each share could be $30. Very quickly, a new board of directors should be created and a new management team hired. Here's the tricky part: Who owns the shares? Politics will kill a nationalized bank. So spin them out immediately.

Some $6 trillion in income taxes were paid by individuals in 2006, 2007 and 2008. On a pro-forma basis, send out those 10 billion shares of each bank to taxpayers. They paid for the recapitalization. Each taxpayer would get about $100 worth of stock for each $1,000 of taxes paid. Of course, each taxpayer has the ability to sell these shares on the open market, maybe at $40, maybe $20, maybe $80. It depends on management, their vision, how much additional capital they are willing to raise, the dividend they declare, etc. Meanwhile, the toxic assets sitting inside the Treasury will have residual value and the proceeds from their eventual sale, I believe, will more than offset the capital injected. That would benefit all citizens, not the managements and shareholders who blew up the banking system in the first place.

Bank of America’s Bernstein Says Bank Plan Won’t Work
The U.S. Treasury’s bank-rescue plan won’t repair the financial system or revive credit markets, Bank of America Corp. strategist Richard Bernstein said as he recommended avoiding the industry’s shares. Treasury Secretary Timothy Geithner pledged up to $2 trillion in government financing yesterday for programs aimed at spurring new lending and addressing mortgage assets that are difficult to value.

The government’s prior measures to prop up financial institutions included backing $118 billion of Bank of America’s assets and injecting $45 billion into the Charlotte, North Carolina-based bank after it bought Merrill Lynch & Co. "Financial stocks are likely to be as toxic to portfolio performance as banks’ assets are to their balance sheets," New York-based Bernstein wrote in a research note. They plunged yesterday, driving the Standard & Poor’s 500 Financials Index to an 11 percent drop, on skepticism the rescue package will work.

Bernstein said the government should increase deposit insurance, seize assets, shut "large" banks and encourage takeovers. "The history of bubbles clearly shows that the significant consolidation of the financial sector is inevitable," the strategist wrote. "The latest Treasury program is simply another attempt to stymie the consolidation process." Financial shares in the Standard & Poor’s 500 Index tumbled 57 percent last year, driving the benchmark index for U.S. stocks to the steepest annual retreat since 1937. Lehman Brothers Holdings Inc., once the nation’s fourth biggest securities firm, filed the largest U.S. bankruptcy in September after its shares lost almost all their value.

Its rivals Merrill Lynch & Co. and Bear Stearns Cos. were forced into takeovers to avoid collapse, while Goldman Sachs Group Inc. and Morgan Stanley converted to bank holding companies as investors lost confidence in firms that depend on debt-market financing. American International Group Inc., Fannie Mae and Freddie Mac were taken over by the U.S. government. Bernstein’s new employer, Bank of America, has plunged 57 percent in 2009. He had worked for New York-based Merrill Lynch since 1988.

Home Prices in U.S. Slid 12% in Fourth Quarter, Most on Record
Home prices dropped the most on record in the fourth quarter as foreclosures dragged down values and the recession pushed buyers out of the market. The median price of a U.S. home declined 12 percent from a year earlier and sales of properties with mortgages in default accounted for 45 percent of all transactions, the Chicago-based National Association of Realtors said today. Prices declined in almost nine out of every 10 cities. The worst U.S. housing slump since the Great Depression is deepening as foreclosures drain value from neighboring homes and the economic recession worsens. The number of Americans collecting unemployment benefits rose to a record 4.81 million in the last week of January as companies such as Caterpillar Inc. and Home Depot Inc. slashed jobs. The U.S. lost 2.6 million jobs last year in the biggest workforce reduction since 1945.

“The housing sector was already weak, and now we are seeing deeper employment reductions,” said Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts. “Every round of job cuts means fewer people who can get a mortgage and buy a house.” Prices slumped in 134 U.S. metropolitan areas, rose in 18 and were unchanged in one, the biggest share of declines in data going back to 1979. The steepest price decline was in Florida’s Ft. Myers metropolitan area, down 51 percent, according to the Realtors’ report. Saginaw, Michigan, was second, with a 41 percent drop. The next five biggest decreases were all in California: Riverside, 41 percent; San Jose, 38 percent; San Francisco and Sacramento, 37 percent; and San Diego, 36 percent.

Home prices and sales are tumbling even as mortgage rates are near all-time lows. The average U.S. rate for a 30-year fixed home loan is 5.16 percent this week, down from 5.25 percent a week earlier, Freddie Mac said. The rate dipped to 4.96 percent during the week of Jan. 15, the lowest ever recorded. U.S. foreclosure filings exceeded 250,000 for the 10th straight month in January as falling prices trapped owners in homes worth less than the mortgage, RealtyTrac Inc. said in a report today. A total of 274,399 properties got a default or auction notice or were seized by banks, the Irvine, California-based seller of default data said. It was the 37th straight year-on- year increase in filings.

A foreclosure reduces the value of each surrounding home by an average $8,667 because it sells at a reduced price which is then used by appraisers to set values for other properties in the area, according to the Center for Responsible Lending in Durham, North Carolina. The world’s largest economy will contract 2 percent this year, half a percentage point more than last month’s forecast, according to the median of 50 projections in a Bloomberg News survey taken Feb. 2 to Feb. 10. The U.S. unemployment rate may climb to 8.8 percent this year, according to the monthly poll.

U.S. Homeowners Will Lose Up to $10 Trillion
John R. Talbott, a former Goldman Sachs banker, calls himself both an optimist and a realist. When it comes to U.S. housing, the realist has the upper hand. His new book, “Contagion,” predicts that prices are only halfway through a potential decline that will see homeowners lose up to $10 trillion. Values will fall for four to five more years, he says, as defaults move from subprime to prime mortgages. When I reviewed the book last week, some readers called the author courageous. Others accused him of being a doomsayer. I put their questions to Talbott, 54, in a telephone interview.

Pressley: Are you spreading doom and gloom?
Talbott: While I’ve been an optimist all my life, I’m also a realist. And for the past five or six years, I’ve been painting a fairly ugly story about how bad this might get.

Pressley: One reader suggested that you’re understating the price decline. He says homes that fetched $225,000 to $275,000 in Lee County, Florida, three years ago now sell for about $40,000, which he calls 1970 to 1980 prices.
Talbott: He makes a good point. The national average of home prices is already off 23 percent to 24 percent. But realize that this is an average and that the epicenter is primarily in California and Florida, with Phoenix and Las Vegas thrown in. You are going to see areas that are off at least 50 percent and I wouldn’t be shocked to find cities that are off 60 to 65 percent.

Pressley: You say real prices should return to average 1997 levels, adjusted for inflation. Why 1997?
Talbott: I’m trying to get back to a more normal time -- before the explosive growth in home prices, before the crazy bank financing, and -- oh, yes -- before the Internet bubble.

Pressley: The greatest price appreciations during the boom were in America’s wealthiest cities, you say.
Talbott: It’s striking. Middle-income homes in the middle of the U.S. still sell for $100,000 to $150,000. Louisville barely beat the consumer price index over the past 20 to 30 years. Your wealthy cities -- San Diego, Manhattan, Miami, Beverly Hills --went up three- and four- and five-fold in real terms.

Pressley: You predict homeowners will lose $8 trillion to $10 trillion. How so?
Talbott: There was at the 2006 peak about $25 trillion of residential home value. Today, that’s off almost 25 percent. That takes it down to the $18 trillion range, which is a $7 trillion loss. But in a deep recession, home prices might trade even lower than fair value given the high unemployment that exists.

Pressley: One reader in his 30s bought a home during the peak between 2004 and 2007. What do you advise such people to do?
Talbott: If your mortgage value isn’t terribly different from what you conservatively estimate your home to be worth -- and by that I mean what homes are selling for down the street -- then go ahead, if you’re comfortable in the home, and lock in the interest rates. Make sure you get a 30-year deal at something like 4.5 percent to 5 percent, participate in whatever government plans to lower your principal that Barack Obama and Congress offer, and sit tight. It won’t be the best investment you’ve ever made, but it won’t bankrupt you.

Pressley: One real-estate broker reminds you that housing slumps don’t last forever.
Talbott: When I wrote my first book on housing in 2003, I heard from almost every real-estate broker in the country. They all insisted that housing booms do last forever! They are right that housing busts don’t last. But there’s no way prices are going to bounce back to where they were. The reason is simple: Banks were funding houses at eight and nine times a married couple’s combined income. They were doing that through CDOs and government-guaranteed Fannie Mae and Freddie Mac loans. Those funding sources are gone. Now they are lending at four to five times combined incomes.

Pressley: A reader notes that the Fed has vastly expanded the monetary base. Won’t the resulting inflation work against falling house prices?
Talbott: He’s right in the long term. Governments around the world are printing money to try to save their banks. It’s being masked by real price declines of things like $400 Ralph Lauren sunglasses. And so you’re seeing some deflation. But in the long term we’ll have to pay the piper and inflation will reignite.

Pressley: One reader says the root cause of the bubble lies in inflated real-estate appraisals, in “massive fraud” in the industry.
Talbott: The fraud reached its zenith in the real-estate industry, but it was everywhere. The appraisers couldn’t have done it by themselves. The most massive fraud was by the rating agencies. Dentists were charging $50,000 for $4,000 worth of work. You name the industry, and we were in a funny world in which everybody so valued money and status that they were doing fairly unethical things.

U.S. Business Inventories Fell Most Since 2001, Sales Fell 3.2%
Inventories at U.S. businesses fell more than forecast in December and the most since 2001 as companies responded to slumping sales that reflect a deepening recession. The 1.3 percent drop in the value of unsold goods at factories, retailers and wholesalers followed a revised 1.1 percent decline in the prior month, the Commerce Department said today in Washington. Sales fell 3.2 percent after a 5.7 percent decline in November. Companies had enough goods on hand to last 1.44 months at the current sales rate, the highest since April 2001, after 1.41 months in November, a sign they'll accelerate efforts to slash stockpiles.

President Barack Obama's stimulus plan will be insufficient to avert the longest U.S. slump since 1946, a monthly Bloomberg News survey of economists showed today. "There are still lots of unintended inventories that will need to be worked off," Steven Wood, president of Insight Economics LLC in Danville, California, said before the report. "Inventory liquidation will subtract from first quarter" gross domestic product. A Commerce report earlier today showed retail sales unexpectedly halted a record six-month slide in January, reflecting higher gasoline prices and more spending on items such as food and clothing.

Meanwhile, the Labor Department said the number of Americans collecting unemployment benefits rose for a fourth straight week, reaching a record, as companies accelerated firings, indicating the reprieve for retailers won't last. TJX Cos., the owner of the T.J. Maxx and Marshalls chains, said it offered discounts to shoppers to help clear out last season's merchandise. Inventories were forecast to fall 0.9 percent, after an initially reported 0.7 percent drop in November, according to the median estimate of 50 economists in a Bloomberg News survey. Estimates ranged from declines of 0.2 percent to 2 percent.

Stockpiles at retailers, the only part of today's release not previously reported, fell 1 percent, after a 1.8 percent decrease the prior month. Retail sales fell 3.3 percent in December, as people bought fewer cars and less furniture, clothing and food. Auto dealers cut extra supplies by 1.2 percent as sales plunged 2 percent.Demand for expensive goods is tumbling this year too. Cars and light trucks sold in January at a seasonally adjusted annual rate of 9.6 million, the lowest since June 1982, according to Autodata Corp. General Motors Corp. has said it plans to cut North American first-quarter production by 57 percent, while Chrysler LLC and Ford Motor Co. also are paring back.

Retail inventories account for about a third of all business inventories. Government reports earlier this month showed that factory stockpiles, which also account for a third of business inventories, fell 1.4 percent. Wholesale stockpiles, which make up the rest, dropped 1.4 percent in December. The world's largest economy will contract at a 5 percent annual rate in the first three months of this year, and consumer spending may fall at a 2.7 percent pace, according to the Bloomberg monthly survey, taken Feb. 2 to Feb. 10. The economy shrank 3.8 percent last quarter, the most since 1982.

US Retail Sales Up 1% in January
Sales at the nation’s retailers rebounded in January after six straight months of declines, rising 1 percent as stores slashed their prices and offered freebies and three-for-one deals to unload inventories after a dismal holiday shopping season, the government reported Thursday. The retail upturn came even as the government reported that new jobless claims, while dipping slightly, remained at levels unseen in almost 30 years. The Commerce Department said that retail sales excluding automobiles rose 0.9 percent in January from the previous month, seasonally adjusted, possibly reflecting some resilience in the consumer sector even as the country sinks deeper into recession. The 1 percent increase in overall retail sales was better than economists’ expectations of an 0.8-percent decline.

Even with those month-over-month gains, retail sales were down 9.7 percent from January 2008, reflecting lower gas prices and how drastically consumers have cut back their spending as they worry about pay freezes and mounting job losses. The increase in January follows a downwardly revised 3 percent decline in December that marked the end to a brutal holiday season for most retailers. Profits dwindled as stores offered big discounts to entice reluctant shoppers. Given how far retail sales had tumbled since the summer and downward revisions to prior months’ numbers, economists said the 1 percent increase was not much cause for celebration, and warned that it could easily slip back next month.

“We’re recovering from what looks like a very depressed level,” said Michael Feroli, United States economist at JPMorgan Chase. “While the consumer may be weak, I think the stretch of numbers you got from August to December were probably exaggerated by credit tightening and collapse of the financial system.” In January, spending at motor vehicles and parts dealers rose 1.8 percent. Sales at electronics and appliance stores rose 1.6 percent, while clothing stores saw their sales rise 1.6 percent. Sales at grocery stores rose 2.2 percent, and were 2.6 percent higher at gasoline stations. Economists said that the deep discounts, longer hours and door-buster sales offered by retailers seemed to yield at least some results.

“Consumers took advantage of it and snapped up some of those deals,” said Julia Coronado, senior United States economist at Barclays Capital. “Consumers had cut back so sharply over the previous quarter that there was some pent-up demand on the sidelines.” The government’s report follows an industry group’s assessment that retail sales industry-wide fell 1.8 percent last month, with many big-name department stores like Neiman Marcus, Saks and Nordstrom posting double digit declines. The report by Retail Metrics, a research firm, said that excluding Wal-Mart, sales would have been down 5.6 percent.

In another report released Thursday, the Labor Department said that first-time unemployment claims dropped by 8,000 to 623,000 last week. But the four-week average of jobless claims rose to 607,500 last week, an increase of 24,000 from the prior week, and the figures remain at their highest levels since 1982. The losses came largely from layoffs in manufacturing and construction jobs, the government reported. As the downturn drags on, employers from Caterpillar to Microsoft are slashing jobs by the thousands as they try to control costs amid an uncertain outlook for 2009. The government reported that unemployment reached 7.6 percent last month as the economy shed 598,000 jobs.

China foreign trade plummets 29% in January
A sharp fall in imports and exports in January, which included a weeklong Spring Festival holiday, has both puzzled and alarmed economists. General Administration of Customs figures released yesterday showed exports plummeted 17.5 percent year-on-year, much sharper than the 2.8 percent fall in December. Imports fell even more dramatically, to 43.1 percent year-on-year. The combined foreign trade in January fell 29 percent year-on-year. Such a major decline in monthly foreign trade is rare in the 30 years of reform and opening up.

Because of the global economic downturn, foreign trade is likely to fall for several more months, the economists said. Su Chang, a macro-economic analyst with China Economic Business Monitor, said it could decline by 10 percent in the first quarter of this year. "It is possible that China's yearly record will be negative as well." But, he said the decline in imports would be largely because of the fall in prices of industrial materials. "Prices of primary goods - China's main imports - are at a low points now, while they were at historic highs just a year ago," he said. Last month, however, was an exception because it had one full week of holiday from January 26. The Chinese Lunar New Year is the most important festival for Chinese but usually it falls in February.

So this year, January had five fewer working days than those in many of the previous years. If that is considered, the Customs said, exports actually rose 6.8 percent year-on-year in January. And compared with December, they increased 4.6 percent. The worldwide deflationary cycle was another problem, the economists said. The sharp drop in imports was caused both because of a fall in global prices (most noticeably of crude oil and farm products) and a drop in demand for electronic components, which reflected the shrinking of the country's manufacturing industry.

Ting Lu, economist with Merrill Lynch in Hong Kong, said there was no good method to adjust for the Chinese New Year effects. "Our first suggestion: ignore them," Lu said in note to clients in the monthly trade figures. When compared with neighboring economies, experts said, China's record is not the worst. Jing Ulrich, analyst with JP Morgan, has written in a report that while the recent export slowdown has been alarming, it has not been as severe in China as in some neighboring economies that rely more heavily on the hi-tech sector. While Jing Wang, chief economist of Morgan Stanley, said China's export structure is more diverse, and as a result less volatile, in the region.

China’s New Loans Rise by Record on Stimulus Efforts
China’s new loans rose by a record in January and money supply expanded more quickly as the government implemented a 4 trillion yuan ($585 billion) stimulus package to revive the world’s third-largest economy. Banks extended 1.62 trillion yuan ($237 billion) of new local-currency loans and M2, the broadest measure of money supply, climbed 18.8 percent from a year earlier, the fastest pace in more than a year, the People’s Bank of China said today on its Web site. China’s government has put pressure on banks to boost lending as the government rolls out a stimulus package to reverse the nation’s economic slide. Loan default risk is the biggest single threat to Chinese lenders, which face "a choppy 2009" because the potential for credit losses is rising, Fitch Ratings said last month.

"We believe China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008, when the financial crisis worsened to a near collapse," said Lu Ting and T.J. Bond, Merrill Lynch economists in Hong Kong. Soaring credit growth "might be at the cost of the future health of the banking system." The new lending is the equivalent of 40 percent of the government’s proposed stimulus spending. The stimulus package announced in November spans spending through 2010 on public housing, railways, highways, airports, power grids and reconstruction work after last year’s earthquake in Sichuan province.

The four biggest state-owned banks, China Construction Bank Corp., Industrial & Commercial Bank of China Ltd., Agricultural Bank of China and Bank of China Ltd., have already met 20 percent of their full-year lending targets, the official China Securities Journal reported Feb. 4. Chinese banks may report an average 12 percent drop in earnings in 2009 as the nation’s policy of reviving growth through lower interest rates undermines profits and loan defaults increase, according to a Feb. 2 Citigroup report. A bailout of Agricultural Bank last year completed a $650 billion clean-up of China’s banks after decades of government- directed lending that sent non-performing loans soaring. "Explosive lending growth is unsustainable and will likely decelerate," said Ha Jiming, Hong Kong-based chief economist at China International Corp. "China may face increased risks going forward if the lending upsurge is coupled with declining loan quality and loosened lending terms."

The increase in money supply compared with the 18.4 percent median estimate in a Bloomberg News survey of 14 economists. M2, which includes cash and all deposits, gained 17.8 percent in December. The central bank is targeting a 17 percent increase in money supply this year. Officials are on alert for the risk of deflation, after consumer prices rose by the least in two years in January and producer prices fell by the most since 2002. . China’s central bank has cut interest rates five times from September and reduced the proportion of deposits banks must hold as reserves. It has also eliminated quotas that limited annual lending by banks. The International Monetary Fund forecasts China’s economy will expand 6.7 percent this year, the weakest pace since 1990. As many as 20 million migrant workers have lost their jobs as a property slump worsens the slowdown caused by plunging exports.

China to stick with US bonds
China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its "only option" in a perilous world, a senior Chinese banking regulator said on Wednesday. China has used the dollars it accumulates selling manufactured goods to US consumers to accumulate the world’s largest holding of Treasuries. However, the increasing US budget deficit and its potential impact on the dollar have raised questions about the future Chinese appetite for US debt.

Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York on Wednesday that China would continue to buy Treasuries in spite of its misgivings about US finances. "Except for US Treasuries, what can you hold?" he asked. "Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option." Mr Luo, whose English tends toward the colloquial, added: "We hate you guys. Once you start issuing $1 trillion-$2 trillion we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."

However, Mr Luo said Chinese officials would encourage its banks to finance domestic mergers and acquisitions rather than provide rescue finance to distressed financial companies in other countries: "There will be no bottom-fishing of financial institutions, particularly in the US, because there is a lot of uncertainty about the quality of the books." Mr Luo said China intends to maintain its separation of investment and commercial banking based on its observations of the US after repeal of the Glass-Steagall Act that enforced a similar division of banking activities.

"To some extent, Glass-Steagall has fuelled the crisis," Mr Luo said. "The separation of commercial and investment banking is likely to stay longer [in China] than before." Like senior financial officials in other developing nations – such as Mohammad Al Jasser, vice-governor of the Saudi Arabian Monetary Agency – Mr Luo also spoke out against what he called America’s laissez-faire capitalism. "Government ownership was viewed as something negative but the pendulum is swinging the other way. Perhaps banking is [no different from] public utilities where government participation is necessary," he said. "Deregulation in the US has gone a little bit too far. The market can’t be omnipotent."

China on the brink
Restaurants in Beijing are fully booked, malls are filled with shoppers. Property prices in the capital are buoyant, defying the historical pattern of a post-Olympic Games slump. Chinese banks are busy lending to allcomers, in stark contrast to their Western counterparts. Even the Shanghai stock exchange, which lost more than 70% off its peak value last year, has something of a spring in its step - the benchmark Shanghai Composite Index has gained 24% this year. On Friday, Wall Street watcher Jim Cramer cited China as number four of his "Top 10 Reasons for Optimism" about the world economy. So what's going on here? Has China escaped the fate of more mortal economies?

Government spokesmen are cagey, but the unofficial line - for the moment - appears to be that China's system of state-influenced markets has proven itself superior to the more "unregulated" Western model. Cleverly insulated from market turmoil, the claim goes, China is poised to surge ahead as the world's new economic superpower. Not so fast. The ripples emanating from the global recession may have seemed tiny at first as they traveled across the Pacific, but they are about to hit China with the full force of a tsunami. And there is real concern among the Chinese leadership that the impact may well surpass anything we've seen in the US or Europe. That's because the economic crisis in China is taking on a fundamentally different shape than in the countries where it originated.

The crisis in Western markets began at the top and worked its way down. When the US property bubble burst, it hurt some homeowners, but the real damage it inflicted was to undermine confidence in complex financial instruments and the banks that owned them. It was essentially a financial panic, and the first people to be laid off were Wall Street MBAs working at investment banks and hedge funds. The effect on the real economy only came later. As big-name banks failed, consumer confidence took a nosedive, and as surviving banks retrenched, credit to consumers and business dried up. Only in the fourth quarter of last year - six to nine months after the first big bank, Bear Stearns, collapsed - did these factors result in significant working-class job losses.

The process unfolding in China is precisely the opposite. The threat comes not from the commanding heights of the economy, but from the grassroots. All along the coast, thousands of small factories that rely entirely on US and European export markets are cutting back production or shutting down. Their margins were thin to begin with, and now their orders are being slashed. The first to be affected aren't the global professionals that populate China's big cities, but the migrant workers that made those factories hum. Last week, Chinese officials admitted that at least 20 million migrant workers - one out of every six - who journeyed back to their hometowns this lunar new year won't have a job to return to. Compare that to roughly three-and-half million American job losses so far.

For the moment, China's army of unemployed seems disheartened rather than angry. Many of them took extended holidays among family back home and only now, out of desperation, are resuming their job hunts in earnest. No one knows how long their patience will last, or how much larger their ranks will grow in coming months. China's government is keenly aware of the problem and has adopted a three-pronged strategy. First, it has directed state-owned banks to extend generous loans to support struggling exporters. Second, it announced a huge package of big-ticket infrastructure projects to sustain employment. Third, it is adopting a variety of measures to boost domestic consumer demand as an offset to failing exports.

But the hoped-for results may be limited. Infrastructure-focused stimulus will take time to implement and benefits only certain industries, such as steel and construction, leaving textiles and other major sources of employment untouched. Even worse, analysts are underestimating the degree to which domestic Chinese demand is driven by all the remittances sent by migrant workers to their extended families in the interior - income that will now disappear as job losses mount. Contrary to popular belief, domestic demand is in the process of being undercut, not strengthened. All the cheap loans in the world won't replace lost customers, at home and abroad.

The fact that China's slowdown is originating from the bottom up, rather than the top down, carries important implications. The first is the visibility of the problem. Today, China's high-income urban areas are experiencing a false dawn as banks churn out easy cash to prop up the economy. But quietly, behind the scenes, Chinese companies are revising their profit estimates downward, by as much as 50% for 2008. The bad news just hasn't hit home yet. The second difference is the solution. Unlike the West, China does not face a liquidity problem, where financial markets have frozen and the government can thaw them out with easy money. China faces a breakdown in real demand due to an over-reliance on external markets, a core element of its growth model that will require a wrenching structural shift in the economy to correct.

Of greatest immediate concern are the social implications. Job cuts are starting to bite in the US and Europe, but at least there the working stiff had the (somewhat ephemeral) satisfaction of seeing the so-called "masters of the universe" get their comeuppance first. Pain has been felt both high and low. China's slowdown, in contrast, threatens to drive a wedge between the rural have-nots, who are bearing its entire brunt, and the urban haves, who are still living it up. It's a worrisome vision that is giving top Chinese leaders some long sleepless nights, and ought to have the world's attention.

Japan’s Economy Probably Contracted Most Since 1974 Oil Crisis
Japan’s economy shrank at an annual pace of more than 10 percent last quarter amid an unprecedented collapse in exports and production, a report next week may show. Gross domestic product for the three months ended Dec. 31 contracted an annualized 11.7 percent, the sharpest slowdown since the 1974 oil crisis, according to the median estimate of 24 economists surveyed by Bloomberg News. The Cabinet Office will release the report on Feb. 16 at 8:50 a.m. in Tokyo. Exports plunged a record 23.1 percent in the fourth quarter as global credit markets seized up and world growth sputtered.

Toyota Motor Corp., Toshiba Corp. and Hitachi Ltd. -- all of which are forecasting losses for the current fiscal year -- have fired thousands of workers, heightening the risk a slump in household spending will prolong the recession. "External demand has collapsed," said Takahide Kiuchi, chief economist at Nomura Securities in Tokyo. "Japan is doing the worst among advanced economies." Japan’s economy probably shrank 3.1 percent from the third quarter in the first set of GDP data made available since the aftermath of Lehman Brothers Holdings Inc.’s bankruptcy in September, economists said. That would be almost triple the pace of contractions in other major economies -- the U.S. shrank 1 percent quarter-on-quarter and a report out this week is expected to show the Euro-zone GDP fell 1.3 percent.

Lehman’s collapse triggered a credit crisis that erased more than $10 trillion from global equity markets, hobbling U.S. consumers and paralyzing global trade. The meltdown also spurred a 15 percent surge in the yen against the dollar, reducing earnings for Japanese exporters already coping with weak demand. Net exports -- the difference between exports and imports -- accounted for 2.3 percentage points of Japan’s contraction last quarter, according to economist forecasts. Domestic demand, which includes household spending and capital investment, probably subtracted 0.9 percentage points from growth, they said. In contrast with the U.S. and China, where governments are moving forward with a combined $1.4 trillion in stimulus spending, policy makers in Japan are providing little help.

Parliamentary gridlock has blocked the passage of a 10 trillion yen ($111 billion) stimulus package intended to encourage consumer spending. The Bank of Japan, which in December cut its key rate to 0.1 percent and has started to purchase shares and corporate debt from banks in order to spur lending, has little means to address what analysts say is the economy’s central problem: a lack of overseas demand. "Most of what ails the economy is something out of their control, namely that exports have gone down by a third," said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. "Given that they can’t even agree on what color curtains to hang up in the Diet, it seems pretty unlikely they’re going to be able to agree on any meaningful policy stimulus."

The global fallout has started to ripple through Japan’s economy as exporters from Toyota to Sony Corp. fire workers. The jobless rate surged to 4.4 percent in December from 3.9 percent, the biggest jump in four decades. The firings have intensified in the last two weeks, with Nissan Motor Co., NEC Corp. and Panasonic Corp. announcing a combined 55,000 job cuts. The reductions may have pushed the recession into a "new phase" in which consumers become more defensive and spend less, according to Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo. "You’re getting mass unemployment," said Schulz. "It’s really scaring the households." Household sentiment is close to the lowest level in at least 26 years. Their spending accounts for more than half of the economy.

U.S. to weigh if more needed for bank bailout-Geithner
U.S. Treasury Secretary Timothy Geithner said on Wednesday he would inform Congress as soon as possible if more taxpayer money were needed to salvage the banking sector as part of the effort to reinvigorate the economy. Testifying for a second day on a financial stability plan he sketched out on Tuesday, Geithner said bold action now to halt the deep financial crisis would prove less costly to taxpayers over the long haul than acting too timidly.

"If we are not forceful now, ultimately it will be harder for us to get our fiscal position back into a sustainable position ... and all those challenges will be more difficult to solve," Geithner told the Senate Budget Committee. Committee Chairman Kent Conrad, Democrat of North Dakota, said it was incumbent on Geithner to tell Congress soon if more money beyond the already approved $700 billion (488 billion pound) financial rescue fund was neeed. Geithner said a supervisory review of banks would help determine whether more money would be needed.

"If we believe that we think there's a compelling case for additional resources and authority, we will come to you and lay that out as quickly as we can," he said. "We're going to move forward very quickly to come out with detailed design elements on these proposals I outlined yesterday," Geithner said, adding that should take several weeks." Geithner's bank rescue plan was criticized for lacking detail and clarity, particularly with respect to how public-private partnership would buy up bad assets, and U.S. stocks plunged on Tuesday when he unveiled it.

The plan would use an unspecified amount of money from the bailout fund to set up a public-private partnership to mop up as much as $1 trillion of bad assets clogging bank balance sheets. The hope is that would make it possible for banks to renew lending, which, in turn, should help ease a U.S. recession that is likely to be the longest since the Great Depression. The plan will also use $100 billion in taxpayer funds to expand a Fed program to support up to $1 trillion in consumer, small business and commercial real estate lending.

Geithner told lawmakers the crisis would take a long time to resolve and promised to consult closely with Capitol Hill as details of the plan are established. "I completely understand the desire for details and commitments, but we're going to do this carefully, consult carefully so we don't put ourselves in the position again where we're laying out details ahead of the care and substance necessary to get it right," he said.

Vague U.S. toxic asset plan aggravates credit crunch
Global credit markets are unlikely to revive as long as the U.S. government continues to dangle the vague prospect of a toxic asset purchase plan in front of distressed banks, some lawmakers warned on Wednesday. The chance that taxpayers could be made to overpay for underperforming assets is making bankers, whose balance sheets are saddled with them, reluctant to sell to lower bidders, suggested Texas Republican Rep. Randy Neugebauer. "People are afraid to buy and afraid to sell because they're afraid the government is going to sweeten the deal," he told Reuters in an interview. "The markets are just waiting to see when we're going to be done."

Uncertainty about the government's strategy for toxic assets props up their value above what private investors might pay for them and delays potential resolution of the problems they pose, said California Democratic Rep. Brad Sherman. "As long as there's the prospect the federal government will overpay for the toxic assets ... these banks would be insane to sell" in the private market, Sherman told Reuters. "As long as they hold the toxic assets, they have regular value, plus a politically enhanced value that you may be able to sell it to Uncle Sam for more than it's worth. Why dispose of an asset where it has politically enhanced value?" The nub of the global credit crunch -- toxic bank assets and their real value -- surfaced only briefly at a U.S. congressional hearing on Wednesday, then vanished amid questions about corporate jets and CEO bonuses.

The House Financial Services Committee grilled eight chief executives of the nation's largest banks at the hearing, with no coherent line of inquiry, reflecting lawmakers' struggle to come to grips with the complexity of the financial crisis. But Neugebauer hit on the toxic assets issue in questioning of Goldman Sachs Group Inc's Lloyd Blankfein and Citigroup Inc's Vikram Pandit. Both CEOs told Neugebauer they could sell some of the worst toxic assets on their balance sheets, but they won't because the price private investors would pay is too low. "That low price is generated by the fear in general ... and the lack of risk capital," Blankfein said. Similarly, Pandit said: "When we look at some of the assets that we hold, we have a duty to our shareholders. The duty is that if it turns out they're marked so far below what our lifetime expected credit losses are, we can't sell them."

Toxic assets are at the core of the world credit market paralysis. Dealing with them is crucial to reviving bank lending, restoring trust in the financial system and giving the economy a firm footing from which to climb out of recession. The assets consist mostly of debt instruments backed by subprime mortgages that are now worthless or worth much less than expected due to the collapse of the home price bubble. Banks have already taken heavy losses on these assets. But many are still being carried on their books, aggravating doubts in the market about the banks and sowing mistrust. Two administrations -- Bush and Obama -- have been unable to find a way to wipe these assets off the books of banks and get credit markets moving again.

Four months into a $700 billion bank bailout program, uncertainty about the government's approach is perpetuating the problem posed by the toxic assets, lawmakers said. Former Treasury Secretary Henry Paulson proposed in September that the bailout money be spent on buying up toxic assets. But then he abandoned the idea and shifted the program toward injecting capital by buying preferred shares in banks. Paulson walked away from a toxic-asset purchase plan after being unable to fix on a price for the assets that was high enough to help the banks, but low enough to prevent taxpayers from having to hand over a massive subsidy to the banks. On Tuesday, current Treasury Secretary Timothy Geithner proposed a public-private venture to address the toxic assets issue. But his plan was greeted as too vague by the markets.

Will the Sequel Pack a Bigger Punch?
Early reviews panned Treasury's latest plan. But sentiment could change if the Obama Administration's public-private plan to buy up bad assets takes off. Is Financial Rescue 2.0 better than the original? It was hard to believe following Treasury Secretary Timothy Geithner's vaguely worded unveiling on Feb. 10 of the newest bailout plan for the banks. Obama Administration officials had pledged to restore confidence with a more aggressive effort than the rescue hatched by Henry Paulson, Geithner's predecessor. Instead, investors disappointed by Geithner's lack of specifics sent stocks tumbling. "There's not enough there," says Thomas Gallagher, head of policy research for institutional broker ISI Group. Now the market, which had hoped Treasury's new plan would directly buy up the banks' bad assets at inflated prices, must figure out whether Geithner's proposals will work as he fills in the details. Here are key questions investors will be asking.

Will "Stress Test" Winnow Out Weakest Banks?
Daniel Alpert, managing director of Westwood Capital, will be closely watching the enhanced "stress tests" that Geithner says all banks with more than $100 billion in capital must undergo. Regulators will comb through the banks' books far more closely than before to see if they have the capital to endure worsening conditions. The key issue is what regulators will do if that testing shows that many banks would be insolvent if the troubled assets they hold were properly valued. Alpert believes Geithner will force banks to mark their assets down and let all but the most important fail, be restructured, or get acquired if they lack enough capital. R. Christopher Whalen, managing director of Institutional Risk Analytics, is far less convinced that Treasury is ready to clean house. Both agree that bank failures would be a painful yet needed step to avoid a long, Japan-style slump. "I'd look to see if that scenario plays out over the next six months," Alpert says. "If it does, that will cure the banking system."

Will Private Money Get in the Game?
Geithner must sign up hedge funds and other private investors to the new public-private partnerships he's proposed to acquire the banks' toxic assets. Getting a few deals swiftly under way could boost investor sentiment. Details about the partnerships are few. Analysts believe the government might provide, say, the first 20 percent of the equity, with private investors coming up with the rest. The government would then lend the fund more money so that its seed capital, using a modest amount of leverage, could be stretched. It's unclear, though, why private investors would sign on. They can buy bad assets now on their own. Treasury hopes its willingness to boost investors' returns with some leverage will entice them. "Financing is so tight, it's difficult for private investors to find leverage," says Jacob Benaroya, managing partner of Biltmore Capital Group in Rochelle Park, N.J.

Will They Get the Pricing Right?
This will be the hardest task of all -- and the most crucial. The inability to agree on the value of the soured mortgage-backed assets -- even as steady declines have eroded the banks' capital -- has been at the heart of the crisis. Treasury fears the politically treacherous course of overpaying, which would essentially subsidize the banks at taxpayers' expense. But if they pay too little, they could force the banks into a new round of write-offs. Geithner hopes to get around the dilemma by letting the private partners determine prices for the securities they jointly buy. "The private sector will be better at [pricing these assets] than we are," says one official. But until Treasury and its partners come up with a pricing mechanism, no one knows if the idea will work. This approach may not be a panacea: "What happens when there are reasonable disagreements over the value of those assets?" asks Bert Ely, a banking industry consultant.

Will Foreclosures Slow Down?
Treasury won't unveil how it plans to use the $50 billion allotted for foreclosure relief for another week or more. Any sign the government is finally doing a more effective job of slowing foreclosures would go a long way toward restoring confidence. Such restructuring has proved difficult to pull off, given the reluctance of banks and mortgage servicers to adjust loans to affordable levels. But with the Democrats threatening to let judges modify mortgage terms in bankruptcy court, Geithner may finally have the stick he needs to force lenders to be more lenient. Ultimately, simultaneous progress on the housing market, the banks, and the recession will be needed. "Executing this is like riding a unicycle on a dental floss tightrope over a sea of razor blades," warns Lawrence R. Creatura, a portfolio manager for Federated Investors. "It's difficult to do well."

The Unmentionable Bank Solution
Tim Geithner didn't use the words "regulatory forbearance" yesterday in his banking bailout presentation. In fact, no one in Washington uses those words, which are seriously out of fashion. Yet regulatory forbearance is the most important item in the government toolkit, and the giant raspberry Mr. Geithner received from the market yesterday should be his signal that the market understands this and worries he doesn't. When you hear critics complaining about mark-to-market, they're in effect calling for regulatory forbearance. Banks are required to report holdings of securitized loans at market prices, though market prices are severely depressed right now -- perhaps more so than justified by the performance of the underlying assets. Is mark-to-market the best of all possible disclosure regimes for investors? Maybe so, but that's no reason for regulators to tie their own hands when flexibility about bank solvency would better serve the public interest. That's regulatory forbearance.

Let's not kid ourselves, either, that banks haven't already received a few nods to avoid accounting write-downs that would endanger their capital adequacy. Mr. Geithner would have done himself a favor simply to embrace that fact rather than issue the catalog of hand-waving he issued yesterday, which we fear will just extend the government's record of confusing and destabilizing markets. Regulatory forbearance got a bad name during the drawn-out S&L mess, when it became an excuse for letting institutions gamble on turning themselves around. Equally true, however, is that congressional refusal to recapitalize an insolvent federal deposit insurance agency drove regulators to resort to accounting tricks to prop up failing S&Ls, when they would have preferred to shut them down. Even so, hundreds of thrifts that benefited from regulatory forbearance didn't end up collapsing at taxpayer expense. By one count, some 40% of the 952 institutions that were given leeway eventually were acquired by stronger banks or recovered on their own.

Regulatory forbearance, curse word though it has become, was also used to good effect in the early 1990s, when many of the nation's biggest banks were dragged down by New England and Texas real estate -- a situation more directly comparable to today's, where so-called toxic assets are concentrated on the balance sheets of a handful of the biggest banks. Sadly, much of what Mr. Geithner offered yesterday was, in fact, redundant. Banks "too big to fail" already are effectively backed by government and don't need trillion-dollar capital injections or taxpayer-financed toxic asset relief. What markets really could have used was a guiding word about regulatory forbearance and also its corollary: Stepped-up enforcement to make sure bank managements don't take crazy risks while digging out. Instead, Mr. Geithner offered that Washington now would "stress test" banks to find out their true condition. Huh? Aren't our multiple regulatory agencies already doing this? And does viability mean on a cash-flow basis or mark-to-market basis? Either way, all he's done is put the market in suspense once more about which banks will be allowed to live and die and what standard the government will apply in deciding.

Mr. Geithner also alluded to a plan to use the Fed to subsidize vulture purchases of toxic assets. That might help -- or might just put more pressure on banks to sell at prices they believe are giveaways. The larger difficulty of yesterday's plan is the idea that government somehow can solve the problem of thousands of idiosyncratic, out-of-favor assets on bank balance sheets. Banks are much better suited to that work, given time and relief from the pressure of regulatory writedowns. In time, too, the market for such assets will recover based on real confidence and risk appetite, not government bribes, especially if spared fears of accounting-induced firesales. Dropping mark-to-market is no miracle cure, but it would reduce the pressure on banks and regulators to make irrational choices about the disposition of questionable assets. Banking might even regain some of its appeal for equity investors, who might see an attractive bet that bank-held assets are oversold -- that is, if they don't have to worry about unpredictable regulatory actions. Real confidence is organic: not something that can be conjured from Mr. Geithner's promise that Mighty Mouse is here to save the day.

One more thing: Talk about "moral hazard" is fantastically beside the point right now. Our biggest banks have already been comprehensively guaranteed by the federal government, and they need comprehensive monitoring to make sure they aren't rolling the dice. Regulatory forbearance doesn't make this moral hazard worse; at this point, it simply represents the least-cost approach to finishing the job the government has taken on of holding the banking system's hand while it steps back from the abyss.

Bank Test May Expand U.S. Regulators’ Role
Nearly 100 federal banking regulators descended on Citigroup in New York on Wednesday morning. Dozens more fanned out through Bank of America, JPMorgan Chase and other big banks across the nation. It was just another workday. For years, regulators have embedded themselves inside the nation’s major banks to monitor their financial health. But now these regulators could become the arbiters of American finance. Treasury Secretary Timothy F. Geithner is empowering them to decide which banks are strong enough to survive on their own — and which must be compelled to accept new bailouts from Washington, along with any strings that might be attached to them.

At the center of this effort, part of the Obama administration’s plan to shore up the nation’s financial industry, is a new stress test for banks that federal officials are devising. Details are scant. But exams for 18 or so of the biggest banks are set to begin immediately, and the first results could arrive within weeks. They are not expected to be made public for every institution. Regulators were also discussing whether to apply the stress test to small and midsize banks, according to an administration official. The new test is likely to be more stringent than the standards used to determine which banks would receive money under the first round of the federal rescue. And unlike in the government’s initial investments, the amount of capital that banks receive will be based on the depth of their problems.

Regulators plan to assess the potential losses a bank could face over the next two years, rather than the typical one year, according to government officials close to the situation. They are also expected to look at banks’ exposure to derivatives and other assets normally carried off their balance sheets, and make sure that banks also carry an additional capital cushion. Their assumptions will be guided on a “worst case” basis. The exams could be used not only to determine which large banks would receive additional aid but also to help weed out small, unhealthy banks, hastening consolidation in the industry. Analysts said the program hints at a creeping nationalization of the banking industry. “There is no way you can survive the failure of the stress test without having the government inject large amounts of taxpayer money,” said Jaret Seiberg, a policy analyst at the Stanford Group in Washington. “That means the government will own a majority of the bank.”

Paul J. Miller, a longtime banking analyst with Friedman Billings Ramsey, said the test might provide the government with political cover to take a more heavy-handed approach. “It gives them the mechanism they need to take giant steps with capital infusions,” he said. “Maybe the thought is that we will put in so much capital that even under these stringent circumstances, this bank will not fail,” added Martin Lowy, a banking lawyer who advised the Federal Deposit Insurance Corporation on troubled banks during the savings and loan crisis of 20 years ago. “That will take a huge amount of capital if they are going to do it honestly,” he said. “Why that is different from nationalizing, I don’t know.” If a bank fails the test, its regulators will demand that it raise additional capital. But with few investors willing to put in fresh funds, the bank may be forced to return to the government.

The government could inject capital into the bank without declaring it insolvent, since it may meet other industry standards. It might also require that the bank have enough common equity to start lending again, something investors increasingly demand. According to a government official close to the situation, regulators will continue to require that banks maintain a minimum 6 percent Tier 1 capital ratio, a common measure of financial health. Regulators are also expected to insist that at least half of that figure, or 3 percent, come from common stock. As part of the new program, firms that receive new preferred equity investments from the government can convert them into common shares. Senior administration officials are also considering allowing the Treasury’s original investments under the Troubled Asset Relief Program, or TARP, to be converted into common equity, but no final decision has been made.

The government’s new investments will carry several additional restrictions. They will bar banks from paying quarterly dividends in excess of a penny, repurchasing their shares or pursuing acquisitions. Senior executives will be subject to a $500,000 cap on annual cash compensation until the government is repaid. It also means the government could become the largest shareholder of many of those banks, setting the stage for it to play an even more powerful role. Some analysts questioned whether the approach would work. “What you are left with is that we are going to nationalize banks that fail the stress test,” Mr. Seiberg said. “How many big companies are going to want to do business with government-run banks?”

Lawmakers Urge Geithner to Let Citi Keep Mets Deal
Six members of Congress from New York urged U.S. Treasury Secretary Timothy Geithner to disregard a call by other lawmakers to force Citigroup Inc. to end its naming-rights deal for the New York Mets’ new stadium. "This would set a terrible precedent of unfairly singling out a specific company and a particular form of advertising for a politically popular reason," the members of the House of Representatives said in a Feb. 10 letter.

Ohio Democratic Representative Dennis Kucinich and Texas Republican Representative Ted Poe sent a letter to Geithner two weeks ago demanding that the $400 million agreement to name the stadium Citi Field be broken because the bank received $45 billion in government rescue funds. The New York lawmakers include Eliot Engel, Joseph Crowley, Steve Israel, Yvette Clarke, Gregory Meeks and Anthony Weiner, all Democrats who represent districts in New York or Long Island.

The six argue that Citigroup is one of several companies that have received funds from the Troubled Asset Relief Program and also have naming-rights deals for different stadiums and arenas. "It is dreadful and unreasonable to single out Citigroup for an agreement signed several years ago, without referencing the many other companies who have stadium naming rights deals and also received federal assistance," the representatives wrote. The lawmakers’ letter was reported earlier today by CNBC.

Time to break up the banks?
The Obama administration has promised to fix big financial firms with a helping of "tough love." But even stronger medicine -- such as breaking up troubled banks and starting new ones -- may be necessary. Treasury Secretary Tim Geithner said Tuesday that the administration seeks to restore the flow of credit in the economy by offering $1 trillion in financing for consumer and business loans, a $500 billion plan to induce private investors to buy troubled assets from banks and $50 billion for foreclosure relief. But some investors and economists are urging policymakers not to pour more scarce resources into troubled banks that are still run by the executives who got them into trouble in the first place.

Instead, they say, the government -- confronting a deteriorating economy and a cast of financial executives that's largely unchanged despite the near collapse of their industry -- should be setting up incentives to create a healthier and more sustainable financial system down the road. That means finding a way to cut the too-big-to-fail crowd down to size. "Without a tough government-imposed framework, intervention on this scale will be hard for people to swallow," said Richard Ferlauto, director of corporate governance and pension investment at AFSCME, the biggest U.S. public worker union. "They're going to need to be quite tough."

The key to devising a workable financial rescue plan, economists say, is to draw in new capital for troubled banks while creating incentives for their investors to exert real control over management. This can be done by forcing troubled firms to attempt to raise capital in the markets, including from their existing owners. If the banks aren't successful in doing so, the government should pour in new capital while taking appropriate compensation -- in common stock rather than preferred, for instance -- that would then be sold off as soon as is practical. Ross Levine, an economics professor at Brown University, said if the government starts buying common stock in banks, it will show that it is serious about taking control of troubled institutions and protecting the taxpayer. "If you go refilling the bank accounts of the architects of this crisis, people are going to have an emotional reaction," said Levine. "You can't make the recovery plan a direct gift to the existing owners and managers of these enterprises."

If the government actually owned common stock in banks, it would allow regulators to have more of a say in how the banks are managed going forward. That could make it easier to break up the big banks, which some experts think makes sense. The near collapse over the past year of Citigroup and Bank of America shows that the so-called financial supermarket model doesn't work for anyone but executives, Ferlauto said. Shareholders, bank customers and taxpayers have all been short-changed in the creation of these dysfunctional institutions, he said. Shares of Citi and BofA are trading near their levels of two decades ago despite receiving of some $400 billion in government support. "You need to find a way to break these banks into pieces with a business focus," said Ferlauto. "You need to find a way to get retail banking going again."

Forcing big banks to downsize may not be enough to end the crisis, though. Some think that the scope of the problems confronting all the big U.S. financial firms -- including healthier banks like JPMorgan Chase and Wells Fargo -- will make it more difficult for Geithner's bank rescue effort to work. With the economy expected to weaken further this year, more heavily indebted companies will probably be forced into default. Falling home prices and rising unemployment will also likely lead to increased losses in banks' mortgage and credit card portfolios. "The banks are impaired by declining asset prices, particularly in real estate, and that isn't going to change any time soon," said Igor Lotsvin, who runs Soma Asset Management in San Francisco. "The solvency problems are only going to get worse, because delinquencies in a number of asset classes are going to rise sharply this year."

With this in mind, Lotsvin and partner David Chu, whose Soma Isosceles fund returned 34% in 2008 thanks in part to successful short bets against big bank stocks, said there's a need to start new banks to lend in the place of the troubled existing firms. They aren't alone in advocating that concept: Paul Romer, an economist at the Stanford Institute for Economic Policy Research, wrote in an op-ed piece last week in the Wall Street Journal that the government could support $3.5 trillion in new lending capacity by using the remaining TARP funds to seed new banks instead of fixing the old ones. Not everyone is sold on this notion, though. Levine called the idea "impractical," saying banks are repositories of information and business connections as well as conduits for money. "These institutions -- even the troubled ones -- are immensely valuable to society," Levine said. "Trying to go around them won't work." Nonetheless, the debate highlights what Geithner and his colleagues most certainly realize: the banking problem won't be fixed quickly. "There are no obvious decisions here," said Chu. "No one is saying this is going to be easy."  

Roubini: Nationalizing Banks Is The Best Way To Go
Nouriel Roubini lays out the four ways to fix insolvent banking systems. Then he explains why the first three--the ones we're using--are lousy:

There are four basic approaches to a clean-up of a banking system that is facing a systemic crisis:
  1. recapitalization together with  the purchase by a government “bad bank” of the toxic assets;
  2. recapitalization together with government guarantees – after a first loss by the banks – of the toxic assets;
  3. private purchase of toxic assets with a government guarantee and/or – semi-equivalently - provision of public capital to set up a public-private bad bank where private investors participate in the purchase of such assets (something similar to the US government plan presented by Tim Geithner today for a Public-Private Investment Fund);
  4. outright government takeover (call it nationalization or “receivership" if you don’t like the dirty N-word) of insolvent banks to be cleaned after takeover and then resold to the private sector.

Of the four options the first three have serious flaws: in the bad bank model the government may overpay for the bad assets – at a high cost for the taxpayer - as the true value of them is uncertain; and if it does not overpay for the assets many banks are bust as the mark-to-market haircut they need to recognize is too large for them to bear. Even in the guarantee (after first loss) model there are massive valuation problems and there can be very expensive risk for the tax-payer (an excessive guarantee that is not properly priced by the first loss of the bank, the fees paid and the value of equity that that the government receives for the guarantee) as the true value of the assets is as uncertain as in the purchase of bas assets model. The shady guarantee deals recently done with Citi and Bank of America were even less transparent than an outright government purchase of bad asset as the bad asset purchase model at least has the advantage of transparency of the price paid for toxic assets.

In the bad bank model the government has the additional problem of having to manage all the bad assets it purchased, something that the government does not have much expertise in.  At least in the guarantee model the assets stay with the banks and the banks know better how to manage and have a greater incentive than the government to eventually work out such bad assets... Thus all the schemes that have been so far proposed to deal with the toxic assets of the banks may be a big fudge that either does not work or works only if the government bails out shareholders and unsecured creditors of the banks. So much for all the plans put forth so far, including Tim Geithner's latest brainstorm.  Now on to the solution.

Note that Nouriel is not recommending the alternative that Geithner and Summers always invoke when someone suggests this route: permanent government ownership and operation of the banks. We all agree that would be a disaster.  What Nouriel is talking about is temporary receivership and restructuring.
Thus, paradoxically nationalization may be a more market friendly solution of a banking crisis: it creates the biggest hit for common and preferred shareholders of clearly insolvent institutions and – most certainly – even the unsecured creditors in case the bank insolvency hole is too large; it provides a fair upside to the tax-payer. It can also resolve the problem of avoiding having the government manage the bad assets: if you selling back all of the assets and deposits of the bank to new private shareholders after a clean-up of the bank together with a partial government guarantee of the bad assets (as it was done in the resolution of the Indy Mac bank failure) you avoid having the government managing the bad assets.

Alternatively, if the bad assets are kept by the government after a takeover of the banks and only the good ones are sold back in a re-privatization scheme, the government could outsource the job of managing and working out such assets to private asset managers if it does not want to create its own RTC bank to work out such bad assets. Nationalization also resolves the too-big-too-fail problem of banks that are systemically important and that thus need to be rescued by the government at a high cost to the taxpayer. This too-big-to-fail problem has now become an even-bigger-to-fail problem as the current approach has lead weak banks to take over even weaker banks. Merging two zombie banks is like have two drunks trying to help each other to stand up.

The JPMorgan takeover of insolvent Bear Stearns and WaMu; the Bank of America takeover of insolvent Countrywide and Merrill Lynch; and the Wells Fargo takeover of insolvent Wachovia show that the too-big-to-fail monster has become even bigger. In the Wachovia case you had two wounded institutions (Citi and Wells Fargo) bidding for a zombie insolvent one. Why?  Because they both knew that becoming even bigger-to-fail was the right strategy to extract an even larger bailout from the government. Instead, with nationalization approach the government can break-up these financial supermarket monstrosities into smaller pieces to be sold to private investors as smaller good banks.

This “nationalization” approach was the one successfully taken by Sweden while the current US and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze. Japan ended up having a decade long near-depression because of its failure to clean up the banks and the bad debts. The US, the UK and other economies risk a similar near depression and stag-deflation (multi-year recession and price deflation) if they fail to appropriately tackle this most severe banking crisis.

Fed Says Merrill Lynch Is No Longer a Primary Dealer
The Federal Reserve Bank of New York said Merrill Lynch & Co. is no longer a primary dealer, shrinking the number of firms that handle government bond sales to the lowest amount since the network was formed in 1960. Merrill Lynch was acquired by Bank of America Corp., which remains a primary dealer, the Fed said on its Web site today. The network originally was comprised of 17 firms. There are 16 dealers remaining, down from a high of 46 in 1988. The withdrawal is the fourth since the beginning of the global financial crisis triggered in mid-2007 by the collapse of the subprime mortgage market.

Countrywide Securities Corp. was also bought by Bank of America. Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, and Bear Stearns Cos. agreed to be acquired by JPMorgan Chase & Co. on March 16 after the Fed committed $29 billion in financing to facilitate the transaction. The decline in dealers comes as the Treasury will likely borrow a record $2.5 trillion this fiscal year ending Sept. 30, almost triple the $892 billion in notes and bonds sold in fiscal 2008, according to Goldman Sachs Group Inc. The New York-based firm is one of the 16 primary dealers. The U.S. Senate approved a $789 billion economic stimulus package, clearing the way for negotiations with the House over a compromise plan that President Barack Obama wants lawmakers to send him within days. This week, the Treasury is selling $187 billion of bills, notes and bonds.

Primary dealers serve as counterparties in so-called open market operations, the central bank’s mechanism for maintaining its target rate for overnight loans between banks. Primary dealers also are expected to bid when the Treasury sells bills, notes and bonds. The designation is coveted by some firms because central banks and certain pension and endowment funds will only do business with operations that have it. Firms had exited the dealership business beginning in the 1990s as the large number of dealers and the increased transparency of electronic trading reduced the spread between offers to buy and sell debt, curtailing the profitability of trading.

Fed in Talks to Add Four Primary Dealers as Treasury Sales Rise to Record
The Federal Reserve Bank of New York is in talks with at least four firms to expand the network of dealers that underwrite government-bond auctions as the U.S. prepares to sell more than $2 trillion in debt this year. MF Global Ltd. and Nomura Securities International Inc. are in discussions to join the 16 so-called primary dealers that trade directly with the central bank and are required to bid at auctions, officials at the companies said. RBC Capital Markets, the investment-banking arm of Canada’s biggest bank, and Jefferies & Co., a brokerage for institutional investors, are in negotiations, according to people familiar with the process.

Treasury Department and Fed officials want to ensure there are enough firms bidding at auctions to keep borrowing costs low after the total number of dealers dropped last year to the lowest amount since the network was formalized in 1960. The Treasury Borrowing Advisory Committee, a market group that works with the central bank, wrote in a memo released Feb. 4 that more dealers would reduce "the possibility of an undersubscribed auction." "With the contraction in primary dealers in the marketplace over the past year, clearly there’s a need to replace some of them, especially with the increased issuance coming out of the Treasury," said Donald Galante, a senior vice president in New York at MF Global, which he said is in talks with the central bank about a dealership position.

Nomura, a unit of Japan’s largest securities firm, has applied to the Fed, said Ralph Piscitelli, a New York-based spokesman for the firm. The collapse of Lehman Brothers Holdings Inc. and the disappearance of Bear Stearns Cos. and Countrywide Securities Corp. in mergers in the past year has reduced liquidity and removed bidders as some auctions have doubled in size. The Fed said yesterday that Merrill Lynch & Co. was no longer a dealer. Data from Stone & McCarthy Research Associates in Skillman, New Jersey, show that yields on 10-year notes sold in 2008 through August averaged 1 basis point higher than in pre-auction trading, compared with no difference in 2007. In the three years before 2007, such sales drew a yield just below the pre-auction rate. One basis point, or 0.01 percentage point, spread over $2.5 trillion represents $250 million in annual interest.

U.S. lawmakers are cutting a proposed economic stimulus package to $789 billion and may be able to send it to President Barack Obama’s desk by the end of this week, Senate Finance Committee Chairman Max Baucus said yesterday. To help pay for the plan the Treasury will likely borrow a record $2.5 trillion this fiscal year ending Sept. 30, almost triple the $892 billion in notes and bonds sold in fiscal 2008, according to Goldman Sachs Group Inc. The New York-based firm is one of the 16 primary dealers. This week, the Treasury is selling $187 billion of bills, notes and bonds. Primary dealers serve as counterparties in open market operations, the central bank’s mechanism for maintaining its target rate for overnight loans between banks. Primary dealers also are expected to bid when the Treasury sells bills, notes and bonds. The designation is coveted by some firms because central banks and certain pension and endowment funds will only do business with operations that have it.

Firms exited the dealership business beginning in the 1990s as the large number of dealers and the increased transparency of electronic trading reduced the spread between offers to buy and sell debt, curtailing the profitability of trading. The number of dealers peaked at 46 in 1988. Nomura was a primary dealer from 1986 through November 2007, when it cut 400 jobs in the U.S. after its first quarterly pretax loss in four years, following a $656 million loss on U.S. home loans. Lehman Brothers filed for bankruptcy on Sept. 15, and shareholders of Bear Stearns were nearly wiped out when the firm agreed to be acquired by JPMorgan Chase & Co. on March 16 after the Fed committed $29 billion in financing to facilitate the transaction. With the departure of those firms, and Merrill Lynch’s purchase by Bank of America Corp. on Sept. 14, the Treasury market began to suffer from more frequent and persistent episodes of illiquidity, traders and investors said.

That has produced "a wider bid-offer" spread, said Tom di Galoma, managing director of U.S. government bonds at Jefferies. "There’s money to be made in Treasuries. There’s dislocations in the government bond market that we probably haven’t seen since probably the early 1980s." The last time the government added more than one firm to its roster of primary dealers was 1988, when three firms joined. Cantor Fitzgerald & Co. was the last new dealer in August 2006. From 1970 through 1988, as the U.S. budget deficit increased to $155.2 billion from $2.8 billion, the number of primary dealers also rose, to 46 from 20. Obama has projected a deficit of more than $1 trillion this fiscal year.

More companies resist paying jobless benefits
It’s hard enough to lose a job. But for a growing proportion of U.S. workers, the troubles really set in when they apply for unemployment benefits.
More than a quarter of people applying for unemployment compensation have their rights to the benefit challenged as employers increasingly act to block payouts to former workers. The proportion of claims disputed by former employers and state agencies has reached record levels in recent years, according to the Labor Department numbers tallied by the Urban Institute. Under state and federal laws, employees who are fired for misbehavior or quit voluntarily are ineligible for unemployment compensation. When jobless claims are blocked, employers save money because their unemployment insurance rates are based on the amount of the benefits their workers collect.

As unemployment rolls swell, many workers seem surprised to find their benefits challenged, their former bosses testifying against them. On one recent morning in a Maryland court, employees and employers squared off at conference tables to rehash reports of bad customer service, anger management and absenteeism. “I couldn’t believe it,” said Kenneth Brown, who lost his job as a hotel electrician in October. He began collecting benefits of $380 a week but discovered that his former employer, the owners of the Gaylord National Resort and Convention Center, was appealing to block his benefits. The hotel alleged that he had been fired for being deceptive with a supervisor.

After a Post reporter turned up at the hearing, the hotel’s representative withdrew the appeal and declined to comment. A hotel spokesperson later said the company does not comment on legal matters. Brown will continue to collect benefits, which his family relies on to make mortgage payments. Unemployment compensation programs are administered by the states and funded by payroll taxes that employers pay. In 2007, employers put up about $31.5 billion in such taxes, and those taxes typically rise during and after recessions, as states seek to replenish funds. With each successful claim raising a company’s costs, many firms resist letting employees collect the benefit if they consider it undeserved. “In some of these cases, employers feel like there’s some matter of principle involved,” said Coleman Walsh, chief administrative law judge in Virginia. But, he said, “nowadays it appears their motivation has more to do with the impact on their unemployment insurance tax rate.”

Morgan Stanley, BoA, JPMorgan May Flee Bailout After Public Lashing
Bank of America Corp., JPMorgan Chase & Co. and Morgan Stanley may decide after enduring yesterday’s Congressional hearing that the old Troubled Asset Relief Program is more trouble than it’s worth. Eight chief executive officers of the biggest U.S. banks heard lawmakers in Washington criticize their bonuses, underwriting fees and perks. Rep. Emanuel Cleaver, a Missouri Democrat, read questions from angry constituents asking what banks had done with taxpayer money they’d taken from the $700 billion TARP fund, and Rep. Michael Capuano, a Massachusetts Democrat, said he "cannot believe no one has prosecuted you."

With more scrutiny ahead, bankers including JPMorgan’s Jamie Dimon, Morgan Stanley’s John Mack and Goldman Sachs Group Inc.’s Lloyd Blankfein have said they’d like to repay government loans as soon as possible. BB&T Corp. CEO Kelly King told an investor conference yesterday that his Winston-Salem, North Carolina-based bank wants to be first to get out of TARP and escape U.S. restrictions, which can be added retroactively. "We’d like nothing better than to pay it back early," Bank of America CEO Ken Lewis said during the hearing. His company, based in Charlotte, North Carolina, has received $45 billion of TARP plus $118 billion in guarantees. Asked why some banks spurned the funding, Lewis said, "They don’t want the government involved in their business, it’s as simple as that."

The House Financial Services Committee, led by Massachusetts Democrat Barney Frank, gave Wall Street’s top executives a daylong grilling on how they were using funds from TARP, which is being succeeded by Treasury’s Financial Stability Plan. The committee resembled a 71-member board of directors, with Lewis, Blankfein, Mack and Dimon appearing along with Citigroup’s CEO Vikram Pandit, Wells Fargo & Co.’s John Stumpf, New York-based Bank of New York Mellon Corp.’s Robert Kelly and Boston-based State Street Corp.’s Ronald Logue. Representative Paul Kanjorski, a Pennsylvania Democrat, told the bank leaders that they "once lived behind a one-way mirror, unaccountable to the public." When they took taxpayer money, he said, "you moved into a fishbowl."

The CEOs sat as politicians ordered them to raise their hands when asked yes or no questions, including whether they were lending more and giving themselves bonuses, and they had to wait when the committee recessed so that lawmakers could attend to other business. "This is going to be a good ‘Saturday Night Live’ skit," said Alabama Representative Spencer Bachus, the committee’s top Republican. "It clearly underscores who the banks are being run for," said Doug Sandler, the chief equity officer for Riverfront Investment Group LLC in Richmond, Virginia, which has about $450 million in assets under management. "It doesn’t make me feel like I want to own a bunch of bank stocks when they’re kow- towing to Washington."

Frank told the bankers if they don’t like the restrictions on the government aid, they should return the funds. "We will take it," Frank said. "If there are any obstacles to you giving it back, we will undo those obstacles." The CEOs said they intended to pay back the government’s money. When pressed for specifics, Mack of New York-based Morgan Stanley said he wanted to repay "some portion of it by 2012." Stumpf said, "It would depend upon credit markets more than anything else." The new scrutiny of bank spending on advertising and employee programs has led San Francisco-based Wells Fargo, which received $25 billion in TARP money, to cancel at least two events to recognize top achievers.

U.S. Bancorp, which got $6.6 billion in TARP funding to support the Minneapolis-based lender, canceled an incentive trip to the Ritz-Carlton in Naples, Florida. New York-based Citigroup in February scrapped a trip to the Bahamas for an insurance unit’s top customers, canceled plans to buy a $50 million corporate jet and has been pressured to end a naming rights deal for the New York Mets’ new baseball stadium. Citigroup’s Pandit pledged during the hearing to cut his salary to $1 from $1 million and take no bonus until Citigroup returns to profitability. "I get the new reality and I will make sure Citi gets it as well," Pandit said.

Ilargi: In the "priceless" category, Pioneer decides to focus its full attention on ..... car electronics. Boost my woofer.

Pioneer plans 10,000 job cuts, closing TV business
Pioneer Corp. said Thursday it is closing its television-making operations and plans to slash 10,000 jobs from its global workforce, as the economic slowdown batters the consumer electronics industry. The job cuts cover 6,000 staff positions -- about 16% of the total -- and 4,000 temporary positions. The withdrawal from the television business ends more than 25 years of TV manufacturing at Pioneer, which shifted its focus from cathode-ray tube sets to developing plasma-screen models in 1991, according to a Bloomberg News report.

The announcement came as the Japanese electronics firm posted a fiscal third-quarter 26.15 billion yen ($291 million) loss, down from a 1.69 billion profit in the year-earlier quarter. Sales for the period were 131 billion yen, down 38% from 210 billion yen the year before. Pioneer said it now expects a record-large loss of 130 billion yen in the fiscal year ending March 31, which compares to its previous forecast for a 78 billion yen loss. Sales are forecast to total 560 billion yen, down from a previous 700 billion estimate. In other cost-cutting measures, the company said it would cut executive pay by 20% to 50%.

Pioneer President Susumu Kotani was quoted as saying in an Agence France-Presse report that the company plans to focus on car electronics. "Even though the auto market is still subdued, we expect the market will pick up by March 2011, after which there will be a new business opportunity in the areas of environmentally friendly and fuel-efficient cars. ... We hope to take up the new challenge using our position in the market and our technological advantages," Kotani said.

Global Confidence Weakens as Slump Deepens, Job Losses Mount
Confidence in the world economy waned in February as stimulus packages were slow to revive growth and unemployment climbed, a survey of Bloomberg users on six continents showed. The Bloomberg Professional Global Confidence Index fell to 8.5 from 8.7 in January. A reading below 50 means pessimists outnumber optimists. Sentiment about Latin America deteriorated the most, while respondents in Asia were the least pessimistic about their region, the year-old survey showed. Advanced economies are already in a depression and government spending alone won’t succeed in dragging the global economy out of its mire, according to International Monetary Fund Managing Director Dominique Strauss-Kahn. Central bank officials say transmission channels for their policy actions are still clogged, delaying the effect of interest-rate cuts.

"People are coming to the recognition that even with additional government spending it’s not going to be easy," said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, who regularly participates in the survey. "They’re thinking this recession is going to persist." A measure of U.S. participants’ confidence in the world’s largest economy dropped to 8.6 from 9.5, the survey showed. Sentiment declined in most other markets, with the index for Mexico plunging to 7.8 from 17.9. The gauge for Western Europe rose to 9.1 from 8.4. The survey of more than 3,060 Bloomberg users was conducted between Feb. 2 and Feb. 6. Since the January survey, the IMF lowered its 2009 global growth forecast to the weakest in the postwar period.

Confidence worsened in the U.S. as concern grew that the recession will be longer and deeper than was anticipated at the start of the year, the survey showed. President Barack Obama is pushing to enact a stimulus plan as companies including General Electric Co. and Wal-Mart Stores Inc. cut jobs.
Employers cut 598,000 jobs from U.S. payrolls in January and the unemployment rate reached 7.6 percent, the highest level since 1992, government figures showed last week. The job losses of 3.57 million since the U.S. recession began in December 2007 marks the nation’s biggest employment slump of any economic contraction in the post World War II era. "The jobs situation has really upset a lot of people," Silvia said. "Consumers aren’t going to turn around and spend" all the money they may get from tax cuts under the stimulus plan.

In Latin America, confidence plunged to 10.4 in February from 16.1 percent last month as the global crisis spread beyond commodity exports. Brazil, the region’s biggest economy, lost a record 655,000 jobs in December as companies slashed production by the most in at least 17 years. Mexico, which depends on the U.S. to buy 80 percent of its exports, may enter a recession this year for the first time since 2001, the central bank said Jan. 27. With credit having shrunk, and five of the region’s seven currencies down by more than 10 percent since September, Morgan Stanley expects economic growth in the region to contract 0.4 percent this year and the jobless rate may rise for the first time since 2003, according to the United Nations. "Domestic demand has also lost momentum and now is contracting very fast," said Rodrigo Valdes, chief Latin American economist for Barclays Capital. "That’s caught many people by surprise." German survey respondents were among the few groups that were less pessimistic. The index for Germany rose to 14 from 13.2.

German business confidence unexpectedly climbed for the first time in eight months in January after the government doubled its economic stimulus package, Ifo data show. Respondents in Western Europe still expect short-term and central bank interest rates to fall further, the survey showed. The European Central Bank kept interest rates unchanged last week after cutting its main refinancing rate by a total of 225 basis points since early October to 2 percent. ECB President Jean-Claude Trichet signaled the bank may reduce borrowing costs further in March. "We have at least a sense of traction from policy but it will take time before it trickles down into the European economy," said Gilles Moec, an economist at Bank of America Merrill Lynch in London, who participated in the survey. The Bloomberg confidence index for Asia increased to 11.6 from 8.2. The reading for Japan climbed to 5 from 3.9.

Japan’s economy, the world’s second largest, is deteriorating at a pace unseen in the past half century, the central bank’s chief economist said Feb. 9. Exports plunged a record 23.1 percent in the fourth quarter and Toyota Motor Corp., Toshiba Corp. and Hitachi Ltd. have fired thousands of workers. "The little pickup was probably because the plunge in growth has been so unprecedented that people expect it won’t go further," said survey respondent Yoshiki Shinke, an economist at Dai-Ichi Life Research Institute in Tokyo. "We can’t be optimistic yet. The bottom of this recession isn’t in sight." Most Bloomberg users from Sao Paulo to Paris became more pessimistic on stocks, the survey showed. The MSCI World Index has dropped more than 8 percent this year, and about $1 trillion has been wiped from the value of global equities in 2009.

"Across the world, there’s genuine reason to be nervous about the economic outlook," said Guy LeBas, chief economist at Janney Montgomery Scott LLC in Philadelphia, and a survey participant. "Until we see some degree of confidence restored, private capital isn’t going to come back in." The U.S. dollar may rise in the next six months against the world’s most active currencies, with the index climbing to 50.2 compared with 45.5 in January, the survey showed. The majority of users in Western Europe were less confident of the euro’s appreciation against the dollar compared with January. U.K. participants expect the pound to weaken against its U.S. counterpart.

Worthwhile Canadian Initiative
Canadian banks are typically leveraged at 18 to 1--compared with U.S. banks at 26 to 1.

The legendary editor of The New Republic, Michael Kinsley, once held a "Boring Headline Contest" and decided that the winner was "Worthwhile Canadian Initiative." Twenty-two years later, the magazine was rescued from its economic troubles by a Canadian media company, which should have taught us Americans to be a bit more humble. Now there is even more striking evidence of Canada's virtues. Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors. Yup, it's Canada. In 2008, the World Economic Forum ranked Canada's banking system the healthiest in the world. America's ranked 40th, Britain's 44th.

Canada has done more than survive this financial crisis. The country is positively thriving in it. Canadian banks are well capitalized and poised to take advantage of opportunities that American and European banks cannot seize. The Toronto Dominion Bank, for example, was the 15th-largest bank in North America one year ago. Now it is the fifth-largest. It hasn't grown in size; the others have all shrunk. So what accounts for the genius of the Canadians? Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers. Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1. Partly this reflects Canada's more risk-averse business culture, but it is also a product of old-fashioned rules on banking.

Canada has also been shielded from the worst aspects of this crisis because its housing prices have not fluctuated as wildly as those in the United States. Home prices are down 25 percent in the United States, but only half as much in Canada. Why? Well, the Canadian tax code does not provide the massive incentive for overconsumption that the U.S. code does: interest on your mortgage isn't deductible up north. In addition, home loans in the United States are "non-recourse," which basically means that if you go belly up on a bad mortgage, it's mostly the bank's problem. In Canada, it's yours. Ah, but you've heard American politicians wax eloquent on the need for these expensive programs—interest deductibility alone costs the federal government $100 billion a year—because they allow the average Joe to fulfill the American Dream of owning a home. Sixty-eight percent of Americans own their own homes. And the rate of Canadian homeownership? It's 68.4 percent.

Canada has been remarkably responsible over the past decade or so. It has had 12 years of budget surpluses, and can now spend money to fuel a recovery from a strong position. The government has restructured the national pension system, placing it on a firm fiscal footing, unlike our own insolvent Social Security. Its health-care system is cheaper than America's by far (accounting for 9.7 percent of GDP, versus 15.2 percent here), and yet does better on all major indexes. Life expectancy in Canada is 81 years, versus 78 in the United States; "healthy life expectancy" is 72 years, versus 69. American car companies have moved so many jobs to Canada to take advantage of lower health-care costs that since 2004, Ontario and not Michigan has been North America's largest car-producing region. I could go on. The U.S. currently has a brain-dead immigration system.

We issue a small number of work visas and green cards, turning away from our shores thousands of talented students who want to stay and work here. Canada, by contrast, has no limit on the number of skilled migrants who can move to the country. They can apply on their own for a Canadian Skilled Worker Visa, which allows them to become perfectly legal "permanent residents" in Canada—no need for a sponsoring employer, or even a job. Visas are awarded based on education level, work experience, age and language abilities. If a prospective immigrant earns 67 points out of 100 total (holding a Ph.D. is worth 25 points, for instance), he or she can become a full-time, legal resident of Canada.

Companies are noticing. In 2007 Microsoft, frustrated by its inability to hire foreign graduate students in the United States, decided to open a research center in Vancouver. The company's announcement noted that it would staff the center with "highly skilled people affected by immigration issues in the U.S." So the brightest Chinese and Indian software engineers are attracted to the United States, trained by American universities, then thrown out of the country and picked up by Canada—where most of them will work, innovate and pay taxes for the rest of their lives. If President Obama is looking for smart government, there is much he, and all of us, could learn from our quiet—OK, sometimes boring—neighbor to the north. Meanwhile, in the councils of the financial world, Canada is pushing for new rules for financial institutions that would reflect its approach. This strikes me as, well, a worthwhile Canadian initiative.

Bank of England will buy gilts to boost economy
The pound slid sharply against all other world currencies after the Bank of England Governor said on Wednesday he is poised to embark on "unconventional measures" to pump cash into the economy as soon as this week. Mervyn King said the Bank would start buying commercial paper this week, and would most probably move on to full-scale quantitative easing, which involves buying securities but printing money to pay for it, before long. In a further surprise, Mr King said the Bank was prepared to buy government debt in an effort to bring the economy back on track - something which, so far, neither the Federal Reserve or European Central Bank has embarked on. He said: "The projections imply that further easing in monetary policy may well be required. That is likely to include actions aimed at increasing the supply of money in order to stimulate nominal spending," adding that the Bank would consider buying gilts - government bonds - as part of the scheme.

The news - alongside a Bank economic forecast which was far more pessimistic than many City analysts - sent the pound careering downwards against other currencies. Sterling dropped by well over 3 cents against the dollar to $1.4352, and the euro was up more than a penny against the pound to 89.89p. The pound's fall coincided with sharp falls in gilt yields, indicating that traders had bought more of the government bonds in anticipation of the Bank's unconventional measures. The Bank's Inflation Report predicted the biggest undershoot of the Monetary Policy Committee's 2pc consumer price index target in its history, warning that unless more is done to stimulate the economy, CPI will drop to around 0.5pc later this year. City economists took this as a sign that the Bank will cut rates even further below their current 1pc rate in the coming months - as well as embarking on unconventional measures. It came as a surprise to some economists, who assumed that the MPC had little leeway to cut rates.

Prospect of ‘liquidity trap’ haunts pound
Sterling lurched lower on Thursday as the the prospect that the Bank of England would take extraordinary measures to boost the economy continued to undermine the pound. The Bank on Wednesday downgraded its assessment of the UK economy, opening the way for further cuts in interest rates and also said the prospect of quantitative easing would be discussed at its next policy meeting. Richard Wiltshire at ETX Capital said the Bank’s comments suggested it now feared the UK might be approaching a liquidity trap, in which the UK’s nominal interest rate had been lowered nearly to zero to avoid a recession, but the liquidity in the market created by these low interest rates did not stimulate the economy. “This leaves the UK economy somewhere between a rock and a hard place,” he said. “Sterling was sold off on the back of the comments as market participants naturally remain wary on the effectiveness of the Bank’s next steps.” Those losses continued on Thursday, with the pound also under pressure given the heightened level of risk aversion in the market. Disappointment over plans to bail out the US banking system announced by Tim Geithner, US Treasury Secretary, on Tuesday stemmed a rally in risky assets and sent banking stocks lower. This hurt the pound, given the UK’s economy’s high level of exposure to the financial sector.

The pound fell 1.4 per cent to $1.4185 against the dollar, lost 0.9 per cent to £0.9040 against the euro and dropped 1.8 per cent to Y127.68 against the yen. Meanwhile, the euro came under pressure as figures showed eurozone industrial production fell by more than expected in December, dropping a record 2.6 per cent on the month. The euro also dropped 0.8 per cent to Y115.65 against the yen and eased 0.2 per cent to SFr1.4927 against the Swiss franc. Elsewhere, rising risk aversion boosted safe haven demand for the dollar and yen and kept higher-yielding and emerging market currencies on the back foot. Antje Praefcke at Commerzbank said risk aversion should generally remain high. She said the sharp rise in the gold price, combined with with flattening yield curves, suggested that market speculation about more unorthodox monetary policy measures – outright purchases of government debt by global central banks, including the Federal Reserve, the Bank of England and the European Central Bank - was gaining traction. “With central banks moving deeper into uncharted territory this leaves plenty of scope for surprises across the different asset classes and by definition market uncertainty should remain elevated,” she said. The dollar rose 0.2 per cent to SFr1.1611 against the Swiss franc, climbed 1.2 per cent to $0.5189 against the New Zealand dollar and gained 3.3 per cent to R10.0992 against the South African rand. The yen preformed even better, rising 0.5 per cent to Y90.01 against the dollar and climbing 1.3 per cent to Y58.45 against the Australian dollar.

UK mortgage lending slumps to 1974 levels
The number of people buying a home fell last year to its lowest level since 1974 as the mortgage drought restricted activity in the property market, new figures show. Only 516,000 mortgages were taken out for house purchase during the year – 49pc fewer than during 2007, according to the Council of Mortgage Lenders. Net lending, which strips out redemptions and repayments, for all types of mortgage also dived sharply, dropping to £39.7bn in 2008 from £108.2bn a year earlier. There was a steep fall in the number of first-time buyers getting on to the property ladder, with only 194,200 people buying their first home during 2008, 46pc fewer than in 2007.

The drop in first-time buyers continued during December, with just 12,100 people taking out loans collectively worth £1.4bn – the lowest levels since the CML's monthly records began in 2002. First-time buyers have been hit hard by banks and building societies tightening their lending criteria, and they now put down an average deposit of 22pc of their property's value, the highest level in the 34 years of available data. At the same time house price falls and the economic uncertainty have caused many people to delay plans to get on to the property ladder. The CML also reported an 18pc fall in the number of people remortgaging during 2008, as the combination of low standard variable rates – the rate that most borrowers revert to after their existing deal comes to an end – and tighter lending criteria meant that many people were better off staying where they were. Around 870,000 people remortgaged during the year, compared with 1.06m in 2007.

Overall, lenders advanced a total of £257.7bn in 2008, compared with £363.8bn in 2007. Michael Coogan, the CML's director general, said: "The shortage of mortgage funding and reduction in the number of active lenders has reshaped the mortgage landscape in the space of a year. "This low level of transactions is insufficient for the functioning of an efficient market. Measures are now in place to seek to restore the flow of funding to the mortgage market, but this will take time to feed through." He warned that further action may still be necessary to increase transactions, stabilise prices and restore confidence. The CML has previously warned that net mortgage lending will turn negative during 2009. It expects net lending for the year to be minus £25bn, meaning that home owners will collectively repay £25bn more to lenders than they borrow.

RBS Retreat From Global Banking Reveals Threat of Financial Protectionism
Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester dismisses concerns that Prime Minister Gordon Brown wields too much power on behalf of the bank’s new controlling shareholder, the British taxpayer. "I am not feeling pressure from the shareholder to act irrationally," Hester told analysts on a conference call last month. "If I stood up and said, ‘You know what, our strategy is to close the U.K. and move to Bermuda and become a hedge fund,’ we might have a debate." That same day, even as Brown was railing against the dangers of financial protectionism,

Hester pledged RBS would increase British lending by 6 billion pounds ($8.8 billion) and scale back business outside the U.K., which accounts for 41 percent of the bank’s lending. RBS has pulled out of loans to an Italian investment company and a German shipping line since December. "In a tightening credit environment, the increase in RBS’s lending to U.K. customers will probably be roughly matched by a decrease in lending outside the U.K.," said Sandy Chen, an analyst at London-based Panmure Gordon & Co, an amount equal to about 2 percent of the bank’s international loan book. After record writedowns and losses, Edinburgh-based RBS, Citigroup Inc. and American International Group Inc. are among the financial firms starting to disassemble their global franchises after receiving government bailout funds.

New York-based Citigroup, which received $45 billion from the U.S., plans to sell Japanese units, including NikkoCiti Trust & Banking Corp. AIG, the New York-based insurer founded 90 years ago in Shanghai, plans to sell more than two-thirds of its businesses, including its Asian life insurance unit. The U.S. arranged a $150 billion rescue package for AIG last year. "As soon as nations own the banks, they get to direct the lending," said David North, head of asset allocation at London- based Legal & General Group Plc, the largest investor in British stocks with more than 270 billion pounds of holdings. "Royal Bank of Scotland will start banking again where? In Scotland." U.K. domestic lending accounted for 46 percent of RBS’s 609 billion pounds of loans to customers in the first half of last year, company documents show. International banking transactions conducted through U.K. offices accounted for 13 percent, Europe for 20 percent, the U.S. for 14 percent, and Asia for 7 percent.

"Royal Bank of Scotland has to significantly reduce its balance sheet, and that means lending less," Hester told a panel of lawmakers today. "We can do that through our international, global operations, and yet protect our U.K. customers and lend more to creditworthy sections of the U.K. That is our plan." Eight Italian banks agreed to replace RBS and Paris-based BNP Paribas SA in December as lenders to Carlo Tassara SpA, the Italian holding company of financier Romain Zaleski. RBS also plans to pull out of a loan to Hamburg-based Hapag-Lloyd when German travel-services company TUI AG sells the shipping line, two people with knowledge of the decision said last month. Piers Townsend, a London-based spokesman for RBS, declined to comment on the loan pull-backs. RBS expanded its balance sheet more than 20-fold to 1.73 trillion pounds under former CEO Fred Goodwin. As Europe’s biggest arranger of leveraged loans from 2004 to 2008, the bank helped finance takeovers of companies ranging from German broadcaster ProSiebenSat.1 Media AG to Spanish clothing retailer Cortefiel SA. The loans now trade below face value, implying a higher risk of default and potential losses to holders of debt.

"The government’s investment in RBS means the bank will slim down and get rid of overseas assets," said Julian Chillingworth, chief investment officer at London-based Rathbone Brothers Plc, which manages $21 billion. "It will undoubtedly be much more risk-averse." Deutsche Bank AG, Germany’s biggest bank, hasn’t received government investment and expects to benefit as rivals that did face "pressure to withdraw" from international markets, CEO Josef Ackermann said at a press conference in Frankfurt Feb. 5. "It’s such an incredible advantage when you’re not feeling this pressure because you can decide freely," he said. "A taxpayer wants to get the credit himself, instead of seeing it granted somewhere in South America or elsewhere in the world." RBS was involved in more than $140 billion of takeovers during the past decade in the U.S., Asia and Europe. Those included ABN Amro Holding NV of the Netherlands in 2007; a 5 percent stake in Bank of China Ltd. in 2005; and Cleveland-based Charter One Financial Inc. in 2004. The investment in the Beijing-based Bank was sold last month for $2.3 billion, loosening RBS’s foothold in the world’s most populous nation. RBS also may sell units of ABN Amro to the Dutch government, Hendrieneke Bolhaar, a spokeswoman for the Netherlands finance ministry, said Feb. 2.

Hester, 48, replaced the 50-year-old Goodwin in November after the U.K. government invested 20 billion pounds for a 58 percent stake in the bank. That holding may climb to 70 percent. Goodwin and former RBS Chairman Tom McKillop apologized to a panel of lawmakers yesterday for acquisitions, including ABN Amro, that led to RBS’s near collapse. "I could not be more sorry," Goodwin said. John McFall, the Labour lawmaker who leads the Treasury Committee, questioned whether global banks like RBS are too large and complex to manage. "There have to be systemic problems here," he said. As Prime Minister Brown pushes RBS to lend more at home, he’s lecturing the rest of the world to keep lending abroad.

"The biggest danger that the world faces is a retreat into protectionism," Brown said in Parliament on Feb. 4. "As a result of the withdrawal of foreign banking capacity in large numbers of countries, we face a downward spiral whereby these countries cannot borrow from anybody because foreign banks have left." Jane Coffey, who helps oversee $63 billion as head of equities at Royal London Asset Management Ltd., said Brown isn’t being consistent. "The government’s key policy is to get the banks lending, and that means in the U.K.," Coffey said. "They have become very nationalistic in their tone, despite Gordon Brown saying that what we need is a global solution. It is British jobs for British people." Brown’s statements may be explained by Britain’s need for capital from abroad. Foreign lenders accounted for more than half of new U.K. corporate loans and 45 percent of new mortgages during the past decade, U.K. Chancellor of the Exchequer Alistair Darling told Parliament on Jan. 19.

At the peak of the mortgage market in 2007, New York-based Lehman Brothers Holdings Inc. and GMAC-RFC, the British mortgage-lending unit of Detroit-based GMAC LLC, provided 13 billion pounds of residential mortgage loans in the U.K., according to the Council of Mortgage Lenders in London. That was more than HSBC Holdings Plc, Britain’s biggest bank, loaned to homeowners in the U.K. that year. New York-based Lehman went bankrupt in September, and GMAC, which received a $6 billion government bailout, pulled out of the U.K. market last year. The British economy will shrink 2.8 percent this year, the most since 1946 and faster than any industrialized country, according to estimates from the International Monetary Fund. Nationalization policies in banking could jeopardize Britain’s centuries-old role as a center for global finance, according to Ranald Michie, a professor of history at the University of Durham and author of The City of London Since 1850: Continuity and Change. "A warning light has gone on," Michie said. "For Britain, there is no national solution to this crisis."

London’s rise as a modern finance center accelerated in the 1980s under Prime Minister Margaret Thatcher. The city became the world leader in cross-border bank lending after Thatcher’s government introduced policies in 1986, known as the Big Bang, which allowed London Stock Exchange member firms to be bought by outsiders. Over the next two decades, international banks bought all of London’s major investment banks, including Schroders Plc and Cazenove Group Plc. The policy of allowing non-U.K. banks to dominate London’s financial center was termed "Wimbledonization" by former Bank of England Governor Eddie George, because, as with the annual tennis competition, British players struggled to win. "We provide the tournament venue, but the prizes are mostly carried off by competitors from overseas," George said in 2001. "It is the activity rather than the nationality of ownership which creates a competitive marketplace."

Nationalized banks are problematic for international markets because the interests of governments and global capital don’t easily align, said Michael Marks, chairman of NewSmith Capital Partners LP in London and a former director of the London Stock Exchange Plc. "Governments have got different agendas from international capital," said Marks, whose Berkeley Square office features a black-and-white photograph of the London Stock Exchange’s old trading floor. "Government money carries with it social responsibilities, which may sound fine, but in the end are not necessarily the right thing for a commercial organization." HSBC, Barclays Plc and Standard Chartered Plc have so far avoided government investment. That may help preserve their international operations, Marks said.

"Government funding will restrict a bank’s future growth, direction and policies," Marks said. "If you can avoid government money, why would you want it?"
HSBC, founded in Shanghai in 1856, is determined to remain a "strong universal bank," Chairman Stephen Green said at the World Economic Forum in Davos, Switzerland, last month. "You need efficiently functioning international banks." Britain can’t afford to lose the wider battle for international capitalism, even as it gains more power over RBS and other lenders, NewSmith’s Marks said. "A small trading nation like the U.K. has to be international in its outlook," Marks said. "We’re really on a knife edge here. We need to make the right decisions."

AIG probed by U.K. fraud office
Britain's Serious Fraud Office (SFO) has launched a preliminary inquiry into suspected irregularities at a British subsidiary of American International Group Inc., the SFO said on Thursday. The SFO said its probe into the U.K. operations of AIG Financial Products Corp (AIGFP) did not concern the insurance operations of AIG in Britain or elsewhere. "It is right for us to look into the U.K. operations of AIG Financial Products Corp to determine if there has been criminal conduct," Richard Alderman, director of the SFO, said in a statement.

"We will use our full range of powers to seek information and to speak to those with an inside knowledge of the company's operations." AIG said it was cooperating fully with the SFO investigation. "As previously disclosed, AIG began the process of unwinding certain of AIGFP's and its subsidiaries' businesses and portfolios, including those in the U.K., late last year," the company said in a statement. "There are approximately 370 employees in AIGFP worldwide who are working on the winding down of the business."

The SFO said its probe was separate to two other inquiries into AIGFP being carried out by U.S. authorities and Britain's financial services regulator, the Financial Service Authority. AIG, once the world's biggest insurer by market value, averted bankruptcy last year after a $152 billion rescue package from the U.S. government. Its troubles were the result of the Financial Product group's heavy losses on toxic mortgage debt. 

Global financial crisis sparks unrest in Europe
Here are some details of protests linked to the global financial crisis:

-- Workers of Bosnia's only alumina producer Birac protested on Monday in Banja Luka, demanding payments and government support to offset falling metal prices. They carried signs reading "The Factory is Our Life" and "Who will Feed our Children?"

-- Bulgarian police vowed on Monday to protest until their demands for better salaries and working conditions were met.
-- Farmers blocked the only Danube bridge link with Romania and rallied across Bulgaria last week demanding the government set a minimum protective price for milk and stop imports of cheap substitutes, such as powdered milk. Prosecutors and authorities said earlier this week they had launched mass checks of milk and meat products safety following the protests.
-- Last month Bulgarians staged rallies to demand economic reforms in the face of the global slowdown, calling on the Socialist-led government to act or step down. One rally in Sofia turned into a riot.

-- Hundreds of workers protested outside British power stations on Wednesday over the use of foreign contractors in recession-hit Britain, where almost 2 million people are unemployed.
-- The protests follow a week-long dispute at the Total-owned Lindsey oil refinery in Lincolnshire earlier this month, which resulted in Total agreeing to hire more British workers on the project. Workers voted to end the unofficial strike on Feb. 5.
-- Workers from Britain's high street banks demonstrated outside parliament on Tuesday, saying jobs were put in jeopardy while banking executives reaped massive bonuses.

-- France's eight union federations have called for a new day of action on March 19 to protest against President Nicolas Sarkozy's handling of the slowing economy. Sarkozy has called for talks with the unions on Feb. 19.
-- Up to 2.5 million protesters took to the streets of France last month in a first day of strikes and rallies to denounce the economic crisis. Some protesters clashed with police, but no major violence was reported. The strike failed to paralyse the country and support from private sector workers appeared limited. Labour leaders hailed the action, which marked the first time France's eight union federations had joined forces against the government since President Sarkozy took office in 2007.
-- The French government rejected demands earlier this week to raise the minimum wage in the Caribbean island of Guadeloupe, which has been paralysed for three weeks by a general strike over the high cost of living. Protesters in Guadeloupe, a full part of France which sends deputies to the national parliament in Paris, have blocked fuel stations, roads and supermarkets, dealing a severe blow to the tourism industry on which the island depends.

-- Thousands of German public sector workers went on strike last week to press for more pay during the worst economic downturn in decades in action that affected transport and schools across the country.

-- Greek farmers set up roadblocks across the country in January, protesting against low prices. Most were taken down after the government pledged 500 million euros ($652 million) in aid. Blockades continued on and off at the Bulgarian border. On Feb. 3 riot police clashed for a second day with Crete farmers.
-- High youth unemployment was a main driver for rioting in Greece in December, initially sparked by the police shooting of a youth in an Athens neighbourhood. The protests forced a government reshuffle.

-- Prime Minister Geir Haarde resigned in January after a series of protests, some violent. The first leader in the world to fall as a direct result of the credit crunch, he was replaced by Johanna Sigurdardottir, who heads a new centre-left coalition. The collapse of the country's banks under a weight of debt last year forced the country to take a $10 billion IMF-led rescue package.

-- Latvia's agriculture minister quit on Feb. 3 amid protests by farmers over falling incomes.
-- A 10,000-strong protest in Latvia last month descended into a riot. Government steps to cut wages, as part of an austerity plan to win international aid, have angered people.

-- Police fired teargas last month to disperse demonstrators who pelted parliament with stones in protest at government cuts in social spending. Police said 80 people were detained and 20 injured. Prime Minister Andrius Kubilius said the violence would not stop an austerity plan launched after a slide in output and revenues.

-- In Podgorica on Monday, aluminium workers demanded to be paid their salaries and an immediate restart of suspended production at the Kombinat Aluminijuma Podgorica (KAP), a Russian-owned plant. Metal workers from the central town of Niksic and tobacco workers from Podgorica said they would rally at Montenegro's main government building later on Monday.

-- Thousands of opposition supporters rallied in Moscow and the port of Vladivostok on Jan 31. in a day of protests over hardships caused by the financial crisis. The next day hundreds of Moscow demonstrators called for Russia's leaders to resign.
-- Street rallies were held in almost every major city over those days. The pro-Kremlin United Russia party also drew thousands to rallies in support of government anti-crisis measures.
-- About 100 protesters were arrested in Vladivostok in January at protests against hikes in second-hand car import duties. (Writing by David Cutler, London Editorial Reference Unit)

Asia: The Coming Fury
As goods pile up in wharves from Bangkok to Shanghai, and workers are laid off in record numbers, people in East Asia are beginning to realize they aren't only experiencing an economic downturn but living through the end of an era. For over 40 years now, the cutting edge of the region's economy has been export-oriented industrialization (EOI). Taiwan and Korea first adopted this strategy of growth in the mid-1960s, with Korean dictator Park Chung-Hee coaxing his country's entrepreneurs to export by, among other measures, cutting off electricity to their factories if they refused to comply.

The success of Korea and Taiwan convinced the World Bank that EOI was the wave of the future. In the mid-1970s, then-Bank President Robert McNamara enshrined it as doctrine, preaching that "special efforts must be made in many countries to turn their manufacturing enterprises away from the relatively small markets associated with import substitution toward the much larger opportunities flowing from export promotion." EOI became one of the key points of consensus between the Bank and Southeast Asia's governments. Both realized import substitution industrialization could only continue if domestic purchasing power were increased via significant redistribution of income and wealth, and this was simply out of the question for the region's elites. Export markets, especially the relatively open U.S. market, appeared to be a painless substitute.

The World Bank endorsed the establishment of export processing zones, where foreign capital could be married to cheap (usually female) labor. It also supported the establishment of tax incentives for exporters and, less successfully, promoted trade liberalization. Not until the mid-1980s, however, did the economies of Southeast Asia take off, and this wasn't so much because of the Bank but because of aggressive U.S. trade policy. In 1985, in what became known as the Plaza Accord, the United States forced the drastic revaluation of the Japanese yen relative to the dollar and other major currencies. By making Japanese imports more expensive to American consumers, Washington hoped to reduce its trade deficit with Tokyo. Production in Japan became prohibitive in terms of labor costs, forcing the Japanese to move the more labor-intensive parts of their manufacturing operations to low-wage areas, in particular to China and Southeast Asia. At least $15 billion worth of Japanese direct investment flowed into Southeast Asia between 1985 and 1990.

The inflow of Japanese capital allowed the Southeast Asian "newly industrializing countries" to escape the credit squeeze of the early 1980s brought on by the Third World debt crisis, surmount the global recession of the mid-1980s, and move onto a path of high-speed growth. The centrality of the endaka, or currency revaluation, was reflected in the ratio of foreign direct investment inflows to gross capital formation, which leaped spectacularly in the late 1980s and 1990s in Indonesia, Malaysia, and Thailand. The dynamics of foreign-investment-driven growth was best illustrated in Thailand, which received $24 billion worth of investment from capital-rich Japan, Korea, and Taiwan in just five years, between 1987 and 1991. Whatever might have been the Thai government's economic policy preferences — protectionist, mercantilist, or pro-market — this vast amount of East Asian capital coming into Thailand could not but trigger rapid growth. The same was true in the two other favored nations of northeast Asian capital, Malaysia and Indonesia.

It wasn't just the scale of Japanese investment over a five-year period that mattered, however; it was the process. The Japanese government and keiretsu, or conglomerates, planned and cooperated closely in the transfer of corporate industrial facilities to Southeast Asia. One key dimension of this plan was to relocate not just big corporations like Toyota or Matsushita, but also small and medium enterprises that provided their inputs and components. Another was to integrate complementary manufacturing operations that were spread across the region in different countries. The aim was to create an Asia Pacific platform for re-export to Japan and export to third-country markets. This was industrial policy and planning on a grand scale, managed jointly by the Japanese government and corporations and driven by the need to adjust to the post-Plaza Accord world. As one Japanese diplomat put it rather candidly, "Japan is creating an exclusive Japanese market in which Asia Pacific nations are incorporated into the so-called keiretsu [financial-industrial bloc] system."

If Taiwan and Korea pioneered the model and Southeast Asia successfully followed in their wake, China perfected the strategy of export-oriented industrialization. With its reserve army of cheap labor unmatched by any country in the world, China became the "workshop of the world," drawing in $50 billion in foreign investment annually by the first half of this decade. To survive, transnational firms had no choice but to transfer their labor-intensive operations to China to take advantage of what came to be known as the "China price," provoking in the process a tremendous crisis in the advanced capitalist countries’ labor forces.

This process depended on the U.S. market. As long as U.S. consumers splurged, the export economies of East Asia could continue in high gear. The low U.S. savings rate was no barrier since credit was available on a grand scale. China and other Asian countries snapped up U.S. treasury bills and loaned massively to U.S. financial institutions, which in turn loaned to consumers and homebuyers. But now the U.S. credit economy has imploded, and the U.S. market is unlikely to serve as the same dynamic source of demand for a long time to come. As a result, Asia's export economies have been marooned.

For several years China has seemed to be a dynamic alternative to the U.S. market for Japan and East Asia's smaller economies. Chinese demand, after all, had pulled the Asian economies, including Korea and Japan, from the depths of stagnation and the morass of the Asian financial crisis in the first half of this decade. In 2003, for instance, Japan broke a decade-long stagnation by meeting China's thirst for capital and technology-intensive goods. Japanese exports shot up to record levels. Indeed, China had become by the middle of the decade, "the overwhelming driver of export growth in Taiwan and the Philippines, and the majority buyer of products from Japan, South Korea, Malaysia, and Australia."

Even though China appeared to be a new driver of export-led growth, some analysts still considered the notion of Asia "decoupling" from the U.S. locomotive to be a pipe dream. For instance, research by economists C.P. Chandrasekhar and Jayati Ghosh, underlined that China was indeed importing intermediate goods and parts from Japan, Korea, and ASEAN, but only to put them together mainly for export as finished goods to the United States and Europe, not for its domestic market. Thus, "if demand for Chinese exports from the United States and the EU slow down, as will be likely with a U.S. recession," they asserted, "this will not only affect Chinese manufacturing production, but also Chinese demand for imports from these Asian developing countries."

The collapse of Asia's key market has banished all talk of decoupling. The image of decoupled locomotives — one coming to a halt, the other chugging along on a separate track — no longer applies, if it ever had. Rather, U.S.-East Asia economic relations today resemble a chain-gang linking not only China and the United States but a host of other satellite economies. They are all linked to debt-financed middle-class spending in the United States, which has collapsed. China's growth in 2008 fell to 9%, from 11% a year earlier. Japan is now in deep recession, its mighty export-oriented consumer goods industries reeling from plummeting sales. South Korea, the hardest hit of Asia's economies so far, has seen its currency collapse by some 30% relative to the dollar. Southeast Asia's growth in 2009 will likely be half that of 2008.

The sudden end of the export era is going to have some ugly consequences. In the last three decades, rapid growth reduced the number living below the poverty line in many countries. In practically all countries, however, income and wealth inequality increased. But the expansion of consumer purchasing power took much of the edge off social conflicts. Now, with the era of growth coming to an end, increasing poverty amid great inequalities will be a combustible combination.

In China, about 20 million workers have lost their jobs in the last few months, many of them heading back to the countryside, where they will find little work. The authorities are rightly worried that what they label "mass group incidents," which have been increasing in the last decade, might spin out of control. With the safety valve of foreign demand for Indonesian and Filipino workers shut off, hundreds of thousands of workers are returning home to few jobs and dying farms. Suffering is likely to be accompanied by rising protest, as it already has in Vietnam, where strikes are spreading like wildfire. Korea, with its tradition of militant labor and peasant protest, is a ticking time bomb. Indeed, East Asia may be entering a period of radical protest and social revolution that went out of style when export-oriented industrialization became the fashion three decades ago.

Spain enters first recession for 15 years
The Spanish economy has fallen into its first recession for 15 years, according to official statistics released on Thursday, heralding further grim news from other European economies that release their figures on Friday. Spain’s gross domestic product shrank 1 per cent in the fourth quarter of last year from the previous quarter, and was down 0.7 per cent on the fourth quarter of 2007. Although the decline was marginally less severe than expected, it underlined how Spain is suffering from the collapse of its housing market and the homebuilding sector. Unemployment of 3.3m, more than 14 per cent of the workforce, is the worst in the eurozone and nearly twice the region’s average jobless rate.

Economists said the economy would have contracted further still without greatly increased government spending. “Spain has thus entered a prolonged and painful recession,” wrote Tullia Bucco, economist at UniCredit Research. A detailed breakdown of the latest Spanish GDP numbers is not yet available, but the National Statistics Office said domestic demand was the main negative factor, while net exports made a positive contribution. This suggests that Spanish imports have been falling faster than exports. Among the larger eurozone countries, Spain has been the worst hit by the housing market collapse, but the general economic downturn late last year was equally steep elsewhere in the 16-country region. Friday’s eurozone GDP figures are expected by economists to show a fourth quarter contraction of 1.3 per cent or more.

Germany’s economy - Europe’s largest - could have shrunk by as much as 2 per cent as a result of tumbling global demand for German products. Eurozone industrial production dropped by a record 2.6 per cent in December, extending a 2.2 per cent fall in November, according to Eurostat, the European Union’s statistical office. December’s eurozone industrial production was 12 per cent lower than a year before - also the steepest annual drop since the euro was launched in 1999. Some European economies are not expecting to start growing again before 2010. In Spain, for example, GDP could shrink by as much as 3 per cent this year and record a further slight decline next year, according to economists. Last year, growth fell to 1.2 per cent, compared with 3.7 per cent in 2007.

Sarkozy Go-It-Alone Aid Defies Rules, Risks Reprisals
First he told smaller countries to take a back seat in crafting the European Union’s response to the economic crisis. Then he rapped Germany for spending too little and the U.K. for spending too much. Now French President Nicolas Sarkozy is discarding any pretense of European solidarity, clashing with EU authorities who object to his plan to lend 6 billion euros ($7.8 billion) to carmakers Renault SA and PSA Peugeot Citroen as long as they agree not to close French plants or fire French workers. Sarkozy’s economic nationalism threatens to trigger an every-country-for-itself scramble to save jobs, analysts say. It offers a French twist on "Buy American" provisions in a U.S. stimulus bill that has raised hackles with European industry and stoked complaints that such protectionism will deepen the global slump.

"There’s a certain risk that we’ll repeat the terrible mistake of the 1930s," Leszek Balcerowicz, who as Poland’s finance minister masterminded the post-Cold War transition to capitalism, said in an interview. "All these initiatives by America, by France, etcetera -- they’re very dangerous." The economy of the 16 countries using the euro is likely to shrink 2 percent in 2009, the International Monetary Fund says. Unemployment has risen for five months, retail sales have dropped for seven months, and business and consumer confidence are plumbing record lows. Car production in Europe may plunge 15 percent this year, Carlos Ghosn, chief executive officer of Renault, France’s second-biggest automaker, said this week. Global car sales may plummet as much as 21 percent to 50 million, he predicted.

Sarkozy’s auto plan contrasts with his six-month stint as president of the 27-nation EU, which he concluded in December as a champion of European unity. During his maiden term as the EU’s first among equals, Sarkozy won plaudits for marshaling the EU’s response to the Russia-Georgia war and to the banking crisis following the collapse of Lehman Brothers Holdings Inc. "The world needs a strong Europe," Sarkozy told European lawmakers on Dec. 16. "Europe cannot be strong if it is disunited." With French car production down 39 percent in the fourth quarter and unemployment at the highest in two years, Sarkozy has rediscovered priorities closer to home. He is defying EU competition rules that are designed to prevent governments from coddling hometown companies.

Group of Seven finance ministers meet in Rome this weekend, with officials from Tokyo to Berlin signaling their concern that a "Buy American" clause in Barack Obama’s stimulus package marks the first shot of an international trade war. The European Commission, enforcer of EU market rules, says Sarkozy’s plan tying loans to local-content provisions and commitments to maintain French jobs may counter fair trade. French Prime Minister Francois Fillon journeys to Brussels today to defend the aid proposal. European Competition Commissioner Neelie Kroes said Sarkozy’s strategy reflects "protectionist rhetoric." "We have to give a strong signal that we won’t tolerate protectionist conditions attached to state aid," Kroes said late yesterday in Brussels. Sarkozy, 54, told reporters yesterday in Kuwait he has received demands from the EU on the aid plan and that he will respond "without any problem."

His response to the recession has also prompted a new tone toward the leaders of his biggest trade partners. In December, Sarkozy praised the U.K.’s Gordon Brown and prodded Germany’s Angela Merkel to write a bigger check for an EU stimulus package. Last week, he praised Merkel and slammed Brown for a tax cut that he said "has made absolutely no difference." To be sure, while Sarkozy is riding a protectionist wave, he didn’t unleash it. A backlash against foreign labor is under way in Britain. In Italy, Prime Minister Silvio Berlusconi paired the announcement of as much as 2 billion euros in incentives for car and appliances purchases with a warning to appliance maker Indesit SpA not to move jobs to Poland. The risk is a "tit for tat -- if one country supports its own industry and other countries do the same," said Fabian Zuleeg, an analyst at the European Policy Centre in Brussels. "We will see a rise in voices which call for protectionist solutions."

The leakage of jobs to lower-wage eastern Europe has been a French preoccupation since the EU started absorbing ex-communist countries in 2004, and was one of the reasons why French voters rejected the EU’s planned constitution in 2005. French manufacturers with bases in eastern Europe include Paris-based Peugeot, Europe’s second-largest carmaker, which began making cars in the Czech Republic in 2005 at a factory jointly owned with Toyota Motor Corp. Sarkozy’s best intentions are still being overwhelmed by the industry slump. Peugeot said this month it aimed to reduce its staff in France by 3,000 jobs through voluntary departures. While the Brussels-based commission and politicians from Sweden and Slovakia have assailed the French aid plan, the fiercest criticism has come from Czech Prime Minister Mirek Topolanek, Sarkozy’s successor in the EU chair.

As EU president last year, Sarkozy thought out loud about holding separate economic summits for euro-area leaders, bypassing the mostly eastern European countries like the Czech Republic that haven’t passed the euro admission test. Last week Sarkozy upped the ante, saying it "isn’t justified" for French automakers to build cars in the Czech Republic for export back to France. That stance led the Czech prime minister to denounce "xenophobic, protectionist" rhetoric. Voicing concern that national business-promotion schemes and bailouts will undermine the continent’s $17 trillion economy, Topolanek yesterday summoned EU leaders to Brussels for a summit on March 1 dedicated to halting protectionism. "It’s crunch time," said Nicolas Veron, research fellow at Bruegel, a Brussels-based research group. "As state intervention is expanded and as democratic government frameworks remain essentially national, we will have more and more tensions like this."

‘Time Bomb’ Ticks in Hungary as Roma Tension Rises
Hungary is contending with rising resentment toward its Roma, or Gypsy, population as the economy sinks and unrest grows. A police chief who last month blamed Roma for crime in his city was fired by the government, then reinstated after more than 1,000 people protested. Anti-Roma demonstrations also erupted in western Hungary last weekend after media reports that Roma men were responsible for the murder of a local athlete. A court in December banned a two-year-old uniformed nationalist group sworn to tackle what it called "Roma crime." As in other European countries, Hungary’s Roma live in the poorest areas and endure the highest rates of unemployment, said Janos Ladanyi, director for the Center of Social, Regional and Ethnic Conflicts in Budapest.

Clashes will become more frequent as the economic crisis engulfs the region, unless the rule of law can be enforced, he said. "This is a time bomb," said Ladanyi. "I hope the alarming events of the past few weeks will make the sensible majority and especially the political elite recognize that we can’t go down this road. This road is a dead end. It leads to the Balkans." The government is trying to balance public resentment and the need for order. Justice Minister Tibor Draskovics on Feb. 8 ordered police to increase patrols and the cabinet the same day decided to direct extra funds to security forces. "We have to act while we can, not wait until the prejudices and the urge to vigilantism distil into unmanageable social phenomena," Prime Minister Ferenc Gyurcsany, 47, wrote on his Web site. "We have to act against violence most decisively."

The opposition Fidesz party, which is leading the governing Socialist Party in opinion polls ahead of elections next year, said the government should focus more on catching criminals than on worrying about prejudice. "We have to tell it like it is: the number of serious crimes committed by people of Gypsy origin is rising at an alarming pace," Fidesz said in a statement yesterday. "We demand that the government, instead of finding excuses based on the origins of the perpetrators, find the perpetrators and protect the rights and interests of the victims." The situation isn’t helped by the decline of what was once eastern Europe’s economic dynamo. Unemployment probably rose to 8.3 percent in January, the highest in at least 10 years, according a Bloomberg survey of economists. Official data is due on Feb. 27.

Last year, the government was forced to turn to the International Monetary Fund to avert a debt default, and the economy is forecast to contract as much as 3 percent this year. Marian Cozma, 26, a Romanian national handball player, was stabbed to death in front of a dance club in the town of Veszprem in western Hungary on Feb. 7. Two of the three suspects were detained in Austria late the next day, Hungarian police said in a Feb. 9 statement. The third is being sought. "Everyone in the whole wide world knows that those murderous animals were Gypsies," wrote columnist Zsolt Bayer in daily Magyar Hirlap. "A huge number of Gypsies have given up on coexistence and given up on their humanity." Gyurcsany ordered state institutions to cancel subscriptions to the daily, his office said in a statement yesterday.

Albert Pasztor, the police chief in Miskolc, claimed at a Jan. 30 press conference that all the December and January burglaries in the city of 180,000 were committed by Roma. Draskovics reinstated him after street protests from a crowd estimated at 1,500 by state-run MTI news agency. With about 10 million people, the Roma have made up the European Union’s largest ethnic minority since the bloc started expanding eastward in 2004. The EU operates an integration program, with traineeships and funding for anti-discrimination groups, according to the European Commission’s Web Site. "Roma communities in Europe have long faced discrimination and persecution," the site said. Rob Kushen, managing director of the European Roma Rights Center, blames the media and growing support for nationalist political parties for fueling hatred.

"What you have is a political climate that plays up ethnic tensions and attempts to demonize the Roma minority," said Kushen, whose center is in Budapest. "That’s a serious concern. You create the climate for an increase in tension." Members of the nationalist group, Magyar Garda, wore 1930s- style uniforms and armbands. It was established in 2007 by the nationalist party Jobbik, which has organized a demonstration for Feb. 13 in Budapest to protest "Roma crime." During the past two years, members marched in Budapest and villages with a large Roma population under a red-and-white striped flag similar to one used by Hungary’s Nazi-allied government in World War II. The group was banned in December for inciting fear among minorities.

The biggest population of Roma in Europe is in Romania, estimated at as much as 2.5 million people, according to the Roma rights center. The Roma in Hungary number 200,000 to 700,000, or 2 to 7 percent of Hungary’s 10 million people, Ladanyi said. While many don’t state their ethnicity in the census, about 40 percent are considered "permanently excluded" from society, he said. "My concern is for the 15 percent or so of Roma who have managed to leave the shantytowns, who are trying to join the middle class but whose tentative grip may slip now during the economic crisis," said Ladanyi.

'Dead' Russian Bond Market’s 80% Yields Squeeze Firms
Russian companies, the biggest emerging-market borrowers during the last three years, are shut out of the international bond market after yields jumped sixfold since August amid plunging energy prices and a weakening ruble. No Russian company has raised money through foreign bond sales since August, compared with $80 billion raised by more than 200 companies in Latin America and Asia outside of Japan, according to data compiled by Bloomberg. Yields on bonds due next year from Moscow-based Transcapitalbank and JSC AIKB Tatfondbank in the Russian republic of Tatarstan are trading at yields above 80 percent, up from 12 percent in August. "The primary market is dead," said Stanislav Ponomarenko, a fixed-income analyst at ING Groep NV in Moscow. "I wouldn’t be too surprised if there are no bond deals done by Russian corporates for most of 2009, if not the entire year."

The credit squeeze will force companies to rely on government bailouts to refinance their debt or face default, according to MDM Bank, VTB Group and Commerzbank AG. International banks proposed talks with Russian companies that owe $400 billion in the next four years, the Russian Association of Regional Banks said yesterday. Financing became strained as Urals crude, the country’s main oil export blend, slumped 69 percent from a July record to $45 a barrel, below the $70 average required to balance this year’s budget. The decline in revenue will push Russia into its first recession since the 1998 financial crisis, according to the Economy Ministry. The worsening economy spurred investors to pull at least $290 billion from the country since Aug. 1, according to BNP Paribas SA, and triggered a 35 percent slide in the ruble against the dollar, increasing the cost of servicing foreign-currency debt. The ruble strengthened 1.9 percent against the dollar today. The central bank drained more than a third of its foreign currency reserves to stem the decline.

While investors "fear massive defaults" on some of the $100 billion of Russian debt due in 2009, the concern is "overstated," Troika Dialog analysts Andrey Kuznetsov and Kingsmill Bond in Moscow wrote in a research note on Jan. 19. Companies have between $20 billion and $30 billion of their own funds, will borrow between $30 and $40 billion from the government and will rollover another $30 to $40 billion of debt this year, according to the note. "The shortfall is likely to be in the region of $10-$20 billion, but this is more likely to damage the weaker credits among smaller banks" rather than big corporations, the Troika Dialog analysts said. Russian companies won’t be permanently excluded from the market, said Paul McNamara, who helps manage $1.2 billion of emerging-market debt at Augustus Asset Managers Ltd. in London. "A top-tier corporate, or maybe a quasi-sovereign, may be able to issue," he said.

Still, it may take at least six months for Russian companies to raise money on international markets unless the new debt is government-backed, Andrei Kostin, chief executive officer of VTB Group, the nation’s second-biggest lender, said in an interview Jan. 29. Moscow-based VTB Bank has $11.7 billion of debt due in the next 12 months, Bloomberg data show. Only state-run OAO Gazprom owes more in short-term debt among companies in Russia and eastern Europe, with $13.3 billion due to mature. The government has pledged more than $200 billion in loans and tax cuts to companies, and will be the main source for repaying the $60 billion of publicly-traded foreign corporate debt due this year, said Nigel Rendell, senior emerging-markets strategist at RBC Capital Markets in London, citing Fitch Ratings data. International banks suggested meetings with Russian companies concerning their ability to meet obligations, Anatoly Aksakov, head of the regional lenders’ association, said in an interview yesterday. Less than $100 billion of international debt may need to be restructured, $15 billion of which is due this year, he said.

OAO Nutrinvestholding, the parent company of Russia’s largest baby-food maker, missed interest payments to holders of its $50 million of bonds due in 2049. The company’s cash was "tied up in illiquid investments," Standard & Poor’s said in a report Dec. 12, when it cut its rating to "selective default." United Co. Rusal, Russia’s biggest aluminum producer, said yesterday it aims to agree on restructuring debt with lenders in the next two months. Moscow-based Rusal owes $16.3 billion to Russian and foreign lenders as well as one shareholder, billionaire owner and Chairman Viktor Vekselberg said on Jan. 30.

Transcapitalbank, which had 1 billion euros ($1.3 billion) in assets as of July, sought a $15 million loan from the European Bank for Reconstruction and Development in December, according to its Web site. The bank is rated four levels below investment grade at B1 by Moody’s Investors Service. The yield on its $175 million of bonds due in 2010 surged to 81 percent from 12 percent in August, according to prices on Bloomberg. "We intend to fully pay all of our obligations," Dmitry Sakharov, head of fixed income at Transcapitalbank, said in a phone interview yesterday. Tatfondbank, based in Tatarstan’s capital city Kazan, introduced temporary limits on cash withdrawals last year, Moody’s said in a report in November. The bank received about $300 million from Russia’s central bank, according to Moody’s, which said it may cut its rating of B2, five levels below investment grade. Tatfondbank’s $200 million of bonds due 2010 yielded more than 100 percent last month, and were last quoted at an 83 percent yield, Bloomberg data show. The bank’s ruble-denominated bonds due in 2011 yield 20 percent.

The dollar bonds are "highly illiquid," said Leonid Slipchenko, an analyst at UralSib Capital in Moscow. Investors couldn’t buy the securities on the "open market," he said. "We have balanced assets and liabilities," Tatfondbank spokesman Alexander Tsyganov wrote in an e-mailed statement today. "At the time the Eurobonds are to be repaid, we will receive payments from clients who were lent money in foreign currency. Because of that, we believe that the repayment will proceed successfully." The yield on OJSC Kazanorgsintez, a chemical manufacturer also based in Kazan, jumped to more than 90 percent in November from 10 percent in August, according to prices on Bloomberg from Troika Dialog in Moscow. Fitch Ratings said Jan. 26 the company faces "liquidity and financing issues as a result of deteriorating market conditions."

The company’s $200 million of notes due in 2011 are now trading for less than half face value at 47 cents on the dollar and a yield of 42 percent. Kazanorgsintez is rated seven levels below investment grade at CCC+ by Standard & Poor’s and eight levels below at CCC by Fitch Ratings. Record commodity prices helped fuel nine years of economic growth in eastern Europe and Russia, where companies expanded by borrowing in foreign currencies from banks in western Europe and the U.S. Russia accounted for about 27 percent of emerging-market corporate bond sales in the three years ending Dec. 31, Commerzbank figures show. Companies in Russia sold an average $1.6 billion of bonds every month last year and about $3 billion every month in 2007, according Moscow-based MDM Bank. In the same six-month period to Feb. 10 last year, Russian companies raised $6.2 billion in the international bond market, Bloomberg data show.

Demand for Russian bonds reached the lowest in at least five years last month, pushing the average price of ruble-denominated corporate debt to 78 cents on the dollar on Jan. 28, according to the Micex Russian corporate bond index. Bonds sold last year by Promsvyazbank JSCB, the lender controlled by billionaire brothers Dmitry and Alexei Ananiev, trade for about 50 cents on the dollar, Bloomberg data show. The yield on the $100 million of notes due 2018 more than doubled to 28 percent from 12.5 percent. "If a company doesn’t have access to state funds, it is in deep trouble," said Mikhail Galkin, head of fixed-income research at MDM in Moscow.

Australian Senator Xenophon kills off $42 billion stimulus plan
Independent Senator Nick Xenophon has dashed the Government's hopes of implementing its $42 billion economic stimulus package by voting to reject it. Earlier today the passage of the legislation appeared doomed as Senator Xenophon vowed he would not support the package without the inclusion of an amendment to bring forward funds to save the Murray-Darling Basin. The Government was relying on the Greens and Senators Fielding and Xenophon to pass the package after the Opposition refused to support it.

It earlier had gained the support of the Greens by agreeing to more than $300 million worth of requested changes. It also amended the package to reduce the cash payments to single income families and the tax bonus to workers from $950 to $900. But Senator Xenophon would not budge on his opposition. The package was comprised of measures including $12.7 billion worth of cash handouts, $14.7 for schools infrastructure and $6.6 billion for new public and defence housing. The Government had argued a speedy approval of the package was needed to immediately stimulate the economy and protect those facing hard times as economic conditions continued to worsen. Government Leader of the Senate Chris Evans has blamed the Opposition for the failure of the package.

"They seek to undermine the capacity of this Government to respond to this crisis," he said. Prime Minister Kevin Rudd is now seeking to have the legislation reintroduced into the House of Representatives. "This Government will not be deterred from taking whatever action is necessary in the national economic interest to underpin this country's and our people's economic wellbeing," Mr Rudd said. But Opposition Leader Malcolm Turnbull lashed out at Mr Rudd for refusing to negotiate with the Opposition. "He has treated this Parliament with so much disingenuous contempt," he said. "We have a Prime Minister who in his hubris chose to present a package of spending which represents an enormous percentage of GDP."

OPEC Nations Delay Drilling Projects
The members of the Organization of Petroleum Exporting Countries have collectively postponed 35 oil-drilling projects in various stages of development -- a sign that the group's members are starting to feel the financial pain of low crude prices. Until now, nearly all of the global oil industry's drilling projects canceled or delayed in past months have been in non-OPEC countries, including the U.S. and Canada, where high-cost developments such as extracting oil from tar sands were put on the back burner as economic incentives and financing dried up. But with crude prices below $50 a barrel in recent months, even the world's cheapest-to-produce hydrocarbons are taking a hit. The delayed drilling projects have been shelved for an indefinite period, said OPEC Secretary-General Abdalla Salem el-Badri. "These projects are on hold ... and will continue to be until the price recovers," he said, referring to the oil price. OPEC members have seen oil revenues tank in recent months, with crude prices falling to about $40 a barrel Monday from $147 a barrel in July.

A big factor in the project postponements is that OPEC's effective spare-production capacity has swelled to an eight-year high, according to various analyst estimates. The organization's officials also have expressed concern that demand will be tepid even once the global economy starts to recover. It isn't clear exactly how much production capacity the 35 projects had been expected to add, said Mr. Badri, adding the distribution of the postponements was across OPEC members, which had planned to deliver 150 projects over the next decade. The comments came just hours after United Arab Emirates Oil Minister Mohammad Al-Hamli warned in a speech at Chatham House, a London-based think tank, that weak oil prices and economic recession are threatening longer-term spending on Middle East oil projects.

Oil slips below $36 as inventories rise
Surging crude inventories and investor skepticism over the U.S. stimulus package dragged oil prices below $36 per barrel Thursday. Investors seemed more wary than relieved after U.S. lawmakers finally agreed overnight to a $790 billion stimulus bill designed to pull the economy out of recession. Light, sweet crude for March delivery fell 53 cents to $35.41 a barrel by midday in Europe on the New York Mercantile Exchange. The contract fell $1.61 overnight to settle at $35.94. U.S. crude oil inventories have jumped in recent weeks as rising unemployment erodes spending on gasoline. A weekly report Wednesday from the Energy Information Administration showed that crude inventories jumped by 4.7 million barrels for the week ended Feb. 6, more than an increase of 3.4 million barrels expected by analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos. Including last week's build up, crude inventories have swelled by more than 30 million barrels in the past six weeks. "Conditions in the West and globally remain quite weak," said Gerard Burg, minerals and energy economist with National Australia Bank in Melbourne. "Given the economic outlook, there's little to drive prices higher."

Forecasters continue to lower their expectations for crude demand. The Paris-based International Energy Agency said Wednesday that global oil demand in 2009 will likely be 84.7 million barrels per day, 570,000 barrels less than the previous estimate. "It's still a market that's really focused on demand," Burg said. "I think there's potential for conditions to weaken further." Investors are also skeptical that a Treasury Department plan announced earlier this week to spend more than $1 trillion to help remove banks' soured assets from their books and unclog the credit markets will work. "The bank plan lacked specifics, and the market is quite concerned that it won't kick start the economy," said Christoffer Moltke-Leth, head of sales trading for Saxo Capital Markets in Singapore. Falling prices may eventually trigger a recovery in the medium-term, as producers could reduce supply from high-cost oil fields that have become unprofitable. "I think the cost of production is going to increasingly become an issue," Burg said. "If it becomes unprofitable, most producers would seek to cut back."

The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global crude supply, said earlier this week it has completed about 80 percent of 4.2 million barrels per day of output cuts announced since September. The output cuts have failed to counter surging U.S. crude inventories and weakening demand. "All of the hand-wringing regarding OPEC compliance press releases aside, U.S. supplies of crude oil (foreign and domestic) continue to build," said energy analyst Stephen Schork in his Thursday report. "There is no reason to think this trend will not continue." In other Nymex trading, gasoline futures rose 1 cent to $1.28 a gallon, while heating oil slid 1 cent to $1.31 a gallon. Natural gas for March delivery jumped 3 cents to $4.56 per 1,000 cubic feet. In London, the March Brent contract rose 22 cents to $44.50 on the ICE Futures exchange.

Banks predict April energy asset sales as reserves value shrink
Banks with large energy lending portfolios expect a deluge of oil and natural gas asset auctions as early as April as banks and federal and state banking officials squeeze banks to shed poorly performing loans, according to officials at the banks. "Everybody is guiding their clients to expect that their borrowing bases will come down 20 to 30%" from last year, said Mark Ammerman, a managing director and head of Canadian-owned Scotia Capital's energy trading desk in Houston, said February 6. Those with natural gas-dominant reserves are likely to see borrowing bases cut more than crude oil reserves, he said. Scotia Capital's billions-dollar energy lending portfolio includes upstream, downstream, midstream, and oilfield service assets.

Companies not heavily drawn on revolving loans will go unscathed in the upended lending environment. But "everything is going to be re-priced and have fees attached," Ammerman said. "Those that have drawn between 80%-90% "will probably have their lives changed," Ammerman said. Banks perform "redeterminations" to reassess lenders' borrowing bases when measured against the value of producing and proven reserves. The heavily leveraged will be subject to new bank terms, or covenants, in which they will no longer be able to make dividend payments, or, in the case of master limited partnerships, distribution pay-outs, become obliged to spend within cash flow, and cut general and administrative costs, Ammerman said.

"They are calling in to say 'What are some ways around this?'" Ammerman said. There are three possible fixes: Raise debt, equity, or sell properties. In some cases, sellers will press for higher prices and balk, he said. Low crude oil and natural gas prices rejigger bankers' compasses. If prices stay low "then, yes, it will create opportunities for distressed debt," said Mark Fuqua, vice president of Dallas-based Comerica Bank's energy finance group. Banks will come under scrutiny from regulators. Some banks will "get marching orders" to shed their bad loans, said Ammerman. But "how do you reduce your exposure when there is no commercial paper?"

On the upside, many banks did not buy into the 2008 crude oil or gas price highs when setting "price decks," or loan assumptions, bankers said. "The highest we were ever at was $65/barrel" Fuqua said. In 2009, Fuqua's Comerica established a price deck of $45/b crude oil and natural gas at $5.50/MMBtu, he said.
Prices can be "a lagging moving average" based on New York Mercantile Exchange futures contracts, Fuqua said. Looking at the forward curve, Wells Fargo bet oil prices would fall, said Marc Cuenod, senior vice president of Wells Fargo Energy Group in Houston. "We got as high as $70 and no higher than that," he said. Cuenod said Wells Fargo adjusts price decks quarterly. Ammerman said Scotia Capital set price decks at $75/b in 2008, $65/b in 2007. They are now "likely $45" per barrel, he said.

With syndicated bank loans, in which a group of banks together provide financing, setting new terms may take on a bag-of-cats tension; Ammerman said he feared "a war" as participating banks with differing levels of risk appetites squawk over stepping up loan demands of exploration and production companies.
National banks, of course, have been under pressure. But regional banks in Texas are also increasingly under pressure, an official with the state Department of Banking said February 6. "We are seeing an increase in our problem banks," said Kurt Purdom, director of the department's banks and trust supervision.
The number of "problem banks" has risen to 30, from 21 in August 2008. Those with aggressive energy portfolios have stood in a better light, but "we're watching it closely," he said.

With the manic commodity price swing, they no longer have "as much margin as they did a few months ago," Purdom said. That's where investors such as Tim Murray of Guggenheim Partners come in. Like other private equity players, Guggenheim plans to angle for equity stakes, not debt. His $1 billion fund, which also puts up capital on the lending side, is now fund-raising for fresh capital with which buy assets as they go on the market. Borrowers are waiting to see where the "pain will be inflicted," Murray said. "And that's where we can play a role," said Murray whose firm includes merchant banking and private equity interests. "We are sitting waiting for someone to fall over so we can circle in and see how we can help." The firm looks for 30% annualized return rates and manages commodity risk with a two-year rolling hedge, Murray said. One of its recent sweet deals was flipping a natural gas field in southern Alabama, formerly owned by Occidental, in late 2007 for a 40% gain on the $170 million purchase price.

Pressure mounts on Madoff middlemen
After rebuffing subpoenas for weeks, a close associate and key middleman for Bernard Madoff essentially had one thing to say when he finally showed up to testify before Massachusetts regulators: I'm not talking. Robert Jaffe, who had delivered clients to Madoff, invoked the "Fifth Amendment," a constitutional right of witnesses who do not want to incriminate themselves, when he testified last week, court documents released on Wednesday show. The documents and Jaffe's silence in the face of a barrage of questions by Massachusetts Secretary of State William Galvin illustrate the intensifying focus on middlemen and so-called "feeder-funds" that funneled investor money to Madoff.

"Galvin is taking a novel and aggressive approach to scrutinize the middlemen more closely and find out what they knew and when," said Jay Gould, who heads law firm Pillsbury Winthrop Shaw and Pittman LLP's hedge-fund practice. "Ultimately he is looking if any of these middlemen committed criminal fraud," added Gould, who once worked for the U.S. Securities and Exchange Commission. "Even being stupid could end up getting you a very severe penalty." Growing scrutiny of those who channeled funds to Madoff also follows the filing of court documents on the Massachusetts island of Nantucket suggesting that another middleman, Frank Avellino, may have known crucial information about Madoff's losses a week before the New York money manager was arrested for running a purported $50 billion investment fraud.

Harry Markopolos, a former investment manager who tried to warn regulators about Madoff, told a congressional hearing this month that Madoff could not have acted alone, pointing to accountants and people helping to convey money to his firm. Several lawyers working on the case told Reuters they agree. Markopolos said he knew of at least a dozen feeder funds that have not been publicly identified. Galvin issued a 39-page complaint on Wednesday seeking to revoke the securities registration of Jaffe's firm, Cohmad Securities Corp, in Massachusetts and providing extensive details of its tight links with Madoff. "The relationship was so close that Galvin seems to be doing the right thing by probing this middleman at a time other prosecutors are concentrating mainly on Madoff himself," said a lawyer who declined to be identified so he could speak freely.

Cohmad, a conjunction of the last names of investor Maurice Cohn and Madoff, is a small brokerage house in which Madoff has a 10 to 25 percent stake. It operates out of the same Manhattan office as Madoff's stock-trading operation. Jaffe is vice president. Galvin's 39-page complaint offers a possible glimpse into the inner-workings of a key Madoff associate. Over the past eight years, Madoff made more than $67 million in monthly payments to Cohmad, providing about 84 percent of Cohmad's total income in that period, it said. The money appeared to be based on assets that clients referred by Cohmad had under Madoff's management, it said. Cohmad would keep a portion and then distribute the rest to its staff, said the complaint, which noted that the information was based on "limited documents" and failed to include commissions Jaffe received from Madoff.

The complaint suggests Madoff had held Cohmad together, paying for its electricity, market data and exchange fees, telephone lease, long-distance calls, employee benefits and other expenses each month over that period. The most sensational revelation was that Madoff's wife Ruth withdrew $10 million from Madoff funds on December 10, the day before her husband was arrested and charged, after pulling out $5.5 million on November 25. Galvin also found that Cohmad had ties to another possible investment conduit to Madoff -- Sonja Kohn, the high-profile Viennese banker who founded Bank Medici in Austria. The bank was placed under state supervision in December. It had sold more than $3 billion of Madoff-exposed funds to investors.

Through Cohmad, Madoff paid about $526,000 to Kohn even though she was not listed as a Cohmad employee or registered in any way with Cohmad, the complaint said. When Galvin's team asked Jaffe about commissions and other issues on February 4, Jaffe invoked the Fifth Amendment. Jaffe has said he is as much a victim as anyone, telling the Palm Beach Post in December that while he earned 1-to-2 percent of an investor's first profits in Madoff's fund, he knew nothing about his "dark side." "Ultimately, Galvin is trying to determine if these people were part of the scheme," said Gould.

The End of the Second Gilded Age
Mark Twain called the late nineteenth century the "Gilded Age". In fact, Mark Twain wrote a novel called "The Gilded Age" ridiculing Washington D.C. and many of the leading figures of the day. Mark Twain thought that the period was glittering on the surface but corrupt underneath. Many people believe that there are many similarities between that era and our current era. It seems to me to be another instance of history "rhyming". The Gilded Age was an era of intense political partisanship. Sound familiar? This era also saw the rise of the Populist party. Burdened by heavy debts, many farmers joined the Populist party. The Populist party, among other things, called for an increase of the amount of money in circulation and government assistance to help farmers repay loans. Similar populist policies are definitely alive and well today.

The Gilded Age has been caricatured as an era of corruption, conspicuous consumption, vulgar displays and unfettered capitalism. This late nineteenth century era was seen as a period of  the "robber barons", unscrupulous speculators and extravagant displays of wealth by America’s upper class. Many people would describe our current era in a similar fashion. I do look forward to some writer stepping up and becoming this era’s Mark Twain because human nature being what it is, not much has really changed either on Wall Street or in Washington.

I am often asked by folks not familiar with the financial world - "Why are the banks in such bad shape?" It’s simple - because their executives looted them and their board of directors let them. Will future historians talk about this era as an age where "robber bankers" ran rampant? This age of the "robber bankers" began years ago. During the dotcom bubble, investment bankers and the like took public hundreds of companies which were valued on nothing more than hot air. Much of the hot air was supplied by the enablers on CNBC and other media outlets. During that boom, for every dollar that was raised via an IPO, banks made 57 cents in fees and about half of that was dished out directly to the bankers. This was their reward for the ludicrous valuations they put on basically worthless companies.

This is where the perverted system of rewarding bankers for short-term profits really got rolling. Bankers were rewarded regardless of what happened to the IPOs in the years that followed. There was no "punishment" for bringing companies public which failed shortly thereafter. Bankers thus became fearless about risk. There was no stick in a traditional carrot and stick approach, only a juicy carrot – their compensation pool. Compensation for bankers became so skewed that they were encouraged to take more and more risks in order to generate larger and larger profits for themselves.

Fast forward to today. Investment banks and hedge funds turned risk into a form of leveraged financial crack cocaine. Much of the risky, overrated (thanks to the corrupt rating agencies) debt issued by Wall Street had little upside potential, only massive downside potential. The "robber bankers" knew this and yet had their "snake oil salesmen" (see my Bourbon & Bayonets article on Wall Street snake oil) selling this garbage all over the world. What we needed was for the financial regulators to step in and rein in the lying snake oil salesmen.

Instead, the Bush administration closed their eyes and chose to ignore the happenings on Wall Street. They did their best imitation of an ostrich and kept their heads buried in the sand. They kept their heads firmly buried in the sand even when Wall Street had brought the global financial system to the edge of financial oblivion and US-style capitalism had fallen into disrepute. Which brings us to today. The Obama administration has been passed a horrendous hand by the Bush administration. So far, they have not played it well. Think about it. Whatever solution is agreed upon by the political class in Washington will mean that the United States will have to go many more trillions of dollars deeper into debt. This means that the US Treasury will have to issue many trillions of dollars worth of Treasury bills, notes and bonds.

This also means that the United States desperately needs foreign investors to hold on to the US debt they already own and to keep buying new US debt. Yet, it seems that the Obama administration is deliberately trying to antagonize foreign investors with their Buy American policy. Add to that, their stirring the currency pot with the largest overseas holder of US treasuries – China. Americans have greatly underestimated the degree of anger around the world toward Wall Street and America. What the Obama administration has to realize is that global investors, particularly in Asia, are already fuming. Many countries are already fuming over all of those triple-A rated "suitcase bombs" that went off in their financial markets, left there by Wall Street’s "snake oil salesmen". People overseas have come to realize that many of the securitized bonds issued and sold to them by Wall Street banks were nothing more than a conduit for shifting losses to "suckers" - unsuspecting overseas investors. In effect, they were swindled by Wall Street with Washington’s tacit approval.

This has led to widespread global distrust of major US institutions – both Wall Street and Washington, which allowed Wall Street to sack and pillage everywhere across the globe. America is going to have to do a lot to regain the trust that had been built up for generations and has now been lost due to the greed of a relatively few people. Meanwhile, there is another important fact that has not escaped the notice of overseas investors. This fact is that none of the Wall Street bank executives, who were largely responsible for nearly blowing up the global financial system, have been brought to justice. In fact, many of them are still in place and have been handed responsibility for the multi-billion dollar clean-up. This is absolute insanity and will not re-kindle trust in US institutions by overseas investors any time soon.

I believe this will be the next major shock to the US financial system in 2009. There is a palpable fear among overseas investors, such as the sovereign wealth funds, that the Americans will swindle them again. Due to this lack of trust in America, foreign investors are very gun-shy and will likely keep lots of dry powder, invest in their own markets and stay away as much as possible from upcoming Treasury auctions. I believe they will continue to do so until the Obama administration brings about real Changes on Wall Street. The Obama administration has to clearly tell Wall Street, "Your Gilded Age Is History!" I won’t hold my breath for that sort of Change any time soon.

Panasonic to fly home workers' families over bird flu fears
Panasonic Corp. has ordered Japanese employees in some foreign countries to send their families home to Japan in preparation for a possible bird flu pandemic, a spokesman said Tuesday. Family members of Japanese employees in parts of Asia, the Middle East, Africa, Russia, former Soviet states and Latin America will fly back to Japan by the end of September, Panasonic spokesman Akira Kadota said. The firm decided to take the rare measure "well ahead of possible confusion at the outbreak of a global pandemic," he said.

Eight people have contracted the H5N1 bird flu virus in China alone this year -- five of whom died. "The bird flu cases reported so far are infections from bird to human, but once an infection between human beings is reported, things can get chaotic with many other companies trying to bring back their employees," Kadota said. "We wanted to take action early before it gets difficult to book flight tickets," he said. The company did not say how many family members would return to Japan. Employees and their families in North America, Western Europe, Australia, New Zealand and Singapore will not be affected.

The H5N1 strain of the virus that is most dangerous to humans first emerged in Asia in 2003 and has since caused nearly 250 deaths, according to World Health Organisation figures. Bird flu, or avian influenza, kills mainly birds but scientists fear it could mutate to jump from human to human, sparking a global pandemic. Panasonic said last week it was cutting 15,000 jobs and closing dozens of plants worldwide as it braces to fall deep in the red due to the global economic crisis.


Bigelow said...

“As home values decrease, so do property assessments. Just as assessments increased during the real estate boom, now they should be lower. And a lower assessment means you'll pay less in property taxes. If your property taxes haven't declined along with your house's value, you should take action: Appeal the assessment.”
Protesting your property assessment Protesting your property assessment

How to Fight Property Taxes National Taxpayers Union (small charge, I have no connection to them)

Ilargi said...

Yes, Bigelow, they have most bases covered, but the problem is that Fannie and Freddie's role elevates home prices artificially, and the vague definition "the price most people would pay for it in its present condition" can be interpreted in various ways as well. The real market value, that is the day value, of 95+% of US homes is much lower than what they are assessed at. In many places, well over 50% of sales are foreclosures, which greatly lowers the price. But the buyers still wouldn't get a mortgage if the lenders couldn't sell the loans on to the taxpayer (F&F), so those prices are still way too high.

But as I said, there's a catch. Or two. In order to pay less taxes, you need a lower assessment. And people like the illusion that their homes have a certain value.

Unknown said...

$5.1 billion hedge fund is buying gold

"The size of the Fed's balance sheet is exploding, and the currency is being debased."

No kidding.

Phil said...

“As home values decrease, so do property assessments. Just as assessments increased during the real estate boom, now they should be lower. And a lower assessment means you'll pay less in property taxes."

Hmm, not necessarily. This is a tax cheat game, which benefits those who make the effort to get revalued at the expense of the others.

But, let's assume we're all rational and everyone gets their home revalued. What then? The local authority has to raise taxes per notional dollar in house values, so they can recoup the monies needed for their budget. Worse still, they have to raise more to pay for all the revaluations they've conducted.

It's a negative-sum game overall, but by trying to leverage it to your advantage you're shifting the burden to those less fortunate and less clever.


Anonymous said...

Even as property's assessed value decreases, property taxes can still be increasing due to various local factors. Notably, if a local government spends more, increased property taxes are one way to foot the bill. There's an interesting Oct. 2008 article from the Chicago Reader about this:

gestalt_n_pepper said...

In case you were wondering just how insolvent the banks were, take a look at the federal comptroller's figures here: from

and take a look at the very last chart. Remember that's millions they're talking so just add 6 zeros to those numbers.


Alan said...

re: property taxes

Around here the assessed value is only used to determine what percentage of the total a given property owner pays.

The city chooses a budget for the year. They then divide that number by the number of properties adjusted for relative value. So if my property is worth 1/2 what a property across town is worth, I pay half the tax dollars then the other owner.

If property values fall by 50% next year, the city does not cut 50% from their budget. Assuming both properties fall by the same relative amount (50%) both owners still pay the same tax amount in dollars. Or more if the city decides to increase its budget.

Alan said...

Likewise when property values go up, the city does not get more money.

Ilargi said...


"Around here the assessed value is only used to determine what percentage of the total a given property owner pays."

And then we just have to sit back and wait till property taxes are higher than home values. There have been stories about this happening in Michigan already.

Bigelow said...


"But as I said, there's a catch. Or two. In order to pay less taxes, you need a lower assessment. And people like the illusion that their homes have a certain value."

Didn't government --way back when-- collect mainly excise taxes to fund themselves, not property taxes? About one in eleven Americans own all of their home without a mortgage. No sense paying more tax than necessary. Homes temporarily became an investment so the Ponzi crowd could leverage even more out of us. Now a home is a place to live again.

My neighbor told me he thought they should have bulldozed my house before I bought it. It is over 120 years old and a pit, but it was my pit and I wanted the illusion it would be worth more so I could justify fixing the roof, etc.

Assuming we all don't die in wars, eventually valuations will equal reality.

Ilargi said...

"In case you were wondering just how insolvent the banks were, take a look at the federal comptroller's figures here"

Those are 2007 numbers. JPM $83 trillion, C and BoA $30 trillion each.

More recent ones, which I've addressed, multiple times lately, are JPM $97 trillion, C and BoA $38 and $39 trillion. So some $30 trillion added in one year, over 2 times US annual GDP.

Anonymous said...

All this talk about housing in the US, but what about in Europe. Are there any fannies and freddie in Europe or Australia/Asia or the Mid East?

I think that the home price increases of recent years was mostly due to the global irrational exuberance of the last decade. Sure interest rates in US were low but they were much higher in the rest of the world.

People just felt real estate was a good investment, It had to go up! But now the social mood has changed, reality has set in.

Mish had an interesting post up, the telegraph had reported that EU banks needed 16.3 trillion dollars but than they removed that figure and changed the name of the article. The hyperlink stil says banks need 16.3 trillion though.

The figure grows ever larger each passing day.

The market rally today right at the end was quite stunning. Makes you wonder if the PPT really exists?

scandia said...

Ha! Even I noticed the late rally in the market, timing similar in Canada and US and wondered who was buying? I trust noone now!

Anonymous said...

@Ilargi - "The entire economy is one huge mirage."

Which is exactly why the banks cannot be nationalized. There's no there, there. Not only would equity/bond holders get wiped out, there might not even be enough proceeds to cover depositors. The coupe de grace is that this would also trigger CDS events.

And these are only the unrealized/realized losses; what about the impact on GDP? We'd see an immediate contraction around 10-20%, which would spike unemployment & crash tax receipts, creating huge deficits in operating budgets.

The real nut is foreign investors (Saudis, Chinese, et al) who would be hammered on investment losses would then be asked to purchase Treasuries to fund the operating deficits + deposit insurance shortfalls!

We're talking multi-trillions here: a minimum of $2-4T from investment losses in stock/bonds/CDS, plus $2-4T for deficit funding + deposit shortfalls.

The entire tax basis of the modern welfare state was/is completely dependent on the false economic proposition of the FIRE model. The PTB know that if their resuscitation efforts fail and the model collapses, there's nothing to replace it.

No FIRE economy, no welfare state. No welfare state, no peace. This gets back to the heart of political power, which is why they will do anything to forestall the day of accountability. But the end game is already underway - position yourself accordingly.

Anonymous said...

I should add that rather than suspect that BB & Geithner are helping out their banking buddies, or are protecting the investments of the 100 richest families in America, or are involved in some other nefarious deed, etc, their motivations and actions are driven by much simpler impulses.

Namely, they've modeled the potential outcomes in much finer detail than what I posted above and they're coming up with the same, or much worse, results. That's why they're trying the impossible and why the most common sense recommendations found on any blog are all ignored.

In some ways, I'm sure they would just like to disappear. They remind me of the attorney in Jurassic Park who hid from the T-Rex in the porta-potti hoping the monster would go away.

Chaos said...

Re: property taxes

I have no idea how it works everywhere else, but here in Texas the taxing authority determines the rate of property tax. Most taxing authorities (most especially school districts, which are the majority of the property tax amount), are limited to a percentage raise, subject to a mandated cap on rates. So, larger government expenses do not necessarily lead to automatic tax increases (hope this was understandable).

Regarding the bailing out/fixing/nationalizing/doing whatever with the banks, this is seeming to me to be a predicament and not a problem. As our friend John Michael Greer reminds us, in contrast to a problem, a predicament has no solution, only adaptation or adjustments.

Anonymous said...

" We are living in a strange civilization. Our minds and our souls are so overlaid with fear, with artificiality, that we do not even recognize beauty. It is this fear, this lack of direct vision of truth that brings about all the disaster the world holds, and how little opportunity we give any people for casting off fear, for living simply and naturally. When they do , first of all we fear them, then we condemn them. It is only if they are great enough to outlive our condemnation that we accept them.

" Always we would try and tie down the great to our little nationalism; whereas every great artist is a man who has freed himself from his family, his nation, his race. Every man who has shown the world the way to beauty, to true culture, has been a rebel, a "universal" without patriotism, without home, who has found his people everywhere, a man whom all the world recognizes, accepts, whether he speaks through music, painting, words or form.

" Each genius differs only from the mass in that he has found freedom for his greatness; the greatness is everywhere, in every man, in every child. What our civilization is busy doing, mainly, is smothering greatness. It is a strange anomaly; we destroy what we love and we reverence what we destroy. The genius who is great enough to cut through our restraint wins our applause; yet if we have our own way we restrain him. We build up the institution on the cornerstone of genius and then we begin to establish our rules and our laws, until we have made all expression within the commonplace. We build up our religion upon the life of the freest men that ever lived, the men who refused all limitations, all boundaries, all race kinship, all family ties; and then we circumscribe our religion until the power that comes from the organization blinds and binds its adherents. We would circumscribe our music, we would limit the expression of our painter, we would curb our sculpture, we would have a fixed form for our poet if we could. Fortunately, however, the great,significant splendid impulse for beauty can force its way through every boundary. Wagner can break through every musical limitation ever established, Rodin can mold his own outline of the universe. Whitman can utter truths so burning that the edge of the sonnet, roundelay, or epic is destroyed. Millet meets his peasants in the field and the academy forgets to order his method of telling the world of this immemorial encounter.

" I am always sorry for the Puritan, for he guided his life against desire and against nature. He found what he thought was comfort, for he believed the spirit's safety was in negation, but he has never given the world one minute's joy or produced one symbol of the beautiful order of nature. He sought peace in bondage and his spirit became a prisoner.

" All my life I have refused to be for or against parties, for or against nations, for or against people. I never seek novelty or the eccentric; I do not go from land to land to contrast civilizations. I seek only, wherever I go , for symbols of greatness, and as I have already said, they may be found in the eyes of a child, in the movement of a gladiator, in the heart of a gypsy, in twilight in Ireland or in the moonrise over deserts. To hold the spirit of greatness is in my mind what the world was created for. The human body is beautiful as this spirit shines through, and art as it translates and embodies this spirit."

Robert Henri

Asmita said...

@ Ilargi and/or Stoneleigh

What do you think of the comments by anonymous 8:34.

He/she has articulated my thoughts exactly.

If the banks are left to die, or if the banks creditors are wiped-out, then its game over for our present welfare state. If the banks are pseudo-bailed out, the game continues for a bit longer. Either way, the endpoint seems to be the same (large scale social upheaval and violence).

Anonymous said...

Adam Smith got the last laugh? I think I got the last laugh! Adam Smith wrote: ""A dwelling-house, as such, contributes nothing to the revenue of its inhabitant," Smith said in The Wealth of Nations" How can that guy be so clueless? A dwelling-house is a prerequisite to any revenue in England: if you don't have one, you die of exposure in a cold winter night. Therefore, the dwelling-house contributes 100%. Another question is, of course, whether you need a mansion or just a 600-sqf trailer, and there I would agree that the trailer is all that is needed to keep you alive.

Anonymous said...

Bigelow, in theory, yes. In practice, in the USA, property taxes are a bit like the poll taxes in the bad old days. Suppose the town needs $6,000 per household. They can assess every house at $100,000 and take 60 mil (6%), or assess every house on average at $200,000 and take "only" 3%. If the average property values go down, you simply adjust the mil rate up. If they under-assess every house by 50% and adjust mil rate accordingly, people will have a hard time protesting their assessment.

Anonymous said...

“"Accountability" and "transparency" aren't just words you throw around during campaign season. They're words we must use to describe a new Wall Street. Assume Wall Street can't police itself, because it obviously can't.

We should make securities fungible again, like they once were. Innovation is not necessarily a good thing on Wall Street. Stop the newfangled scams. Standardize stuff. Raise disclosure requirements. Protect investors, especially institutional investors, like pensions and endowments, who chase returns like tweakers chase crank—they can't seem to stop themselves. Lower the banking industry's debt-to-capital ratio to where it once was before the craziness started, 12-to-1, and reform Wall Street's compensation structure, which is perverse. Finally, bring back the Glass-Steagall Act.

Walls and fences in a zoo are a good thing. It's all so goddamn simple.”
Too Big to Bailout

Starcade said...

I've been banned from Denninger's site for basically telling people that basically welfare keeps the peace.

The day that people are no longer paid not to riot, they better have the guns out and start shooting, because it ends and it ends _QUICKLY_. Note how fast they finally started getting close to a deal in California once the counties (which are now the only things keeping the welfare system up in California) are now bearing the brunt of it.

If you truly believe we are leech--fucks, then you are either going to have to shoot us or segregate us, because, if the day comes that there is nothing left to lose, I've got 9 years on the streets which says _that_ is the most likely day TSHTF.

Anonymous said...

Regarding posting earlier by VK on EU toxic bank debt, the missing words from the Telegraph article are here: (comment by CHR at 10:04 PM)

For a short time today, this article reported the following:
"The figures, contained in a secret European Commission paper, are startling. The dodgy financial packages are estimated to total £16.3 trillion in banks across the EU.
The "impaired assets" may amount to an astonishing 44 per cent of EU bank balance sheets. It is a deep ditch the bankers, regulators and their friends in government have dug us into.
As discussed here on Monday, the secret 17 page paper..."
If the figure of £16.3 trillion given in this version of the story is true, then it should be the front page lead. Junk debt on this scale could break the EU.
However, this detail was omitted in the later version.


Anonymous said...

"The free market is dead. It was killed by the Bolshevik Revolution, fascist dirigisme, Keynesianism, the Great Depression, the second world war economic controls, the Labour party victory of 1945, Keynesianism again, the Arab oil embargo, Anthony Giddens’s "third way" and the current financial crisis." -- PJ O'Rouke

This is the singularly most ignorant statement in the history of financial journalism. When someone shows me indisputable evidence this mysterious global "free market" -- a market that functioned independently of the modern nation state -- that preceded the Russian Revolution of 1917, I will gladly shave my arse on national TV.

What Mr. O'Rouke meant to write is that the financial liberalization and the global move to deregulate all national and international economies that Uncle Miltie got rolling in 1971 (an effort in part to feed America's voracious war machine), rolled to the same nasty conclusion that it always has done in the past up to and including the first wave of globalization (ending in 1914 with WW I & NOT in 1917 in pissant Russia for Christ's sake). With complete collapse of the financial system. Each and every collapse that preceded it required some form of government intervention, some for the better, some for the worse. Modern industial markets cannot and do not exist independently of the nation state, know who first noticed this fact ... Adam F'in Smith! (Read the whole book doughboy)

Only a stupid fool would be against government intervention in this crisis or any other crisis. Government agents are the only ones with the monopoly of force at their backs to force big bankermen and other ne'er do wells to open their books and force the rancid assets onto the market to see if in fact they have any value at all. Only government can at the same time safeguard savers from the inevitable collapse of the global financial casino that they did not in any way intend to enter upon depositing their money in the banks.

In my opinion it is time for anyone who is beyond the grip the free market claptrap of neoliberal religious fanatics to put these men and women down, harshly and without remorse. O'Rouke and his merry band of motley fools failed, once again, and this time, we may never see a return of the economy as we have known it. The nerve to now blame it on 'liberal central planners' when these free market baffoons lead the charge for deregulation and financial mass-delusionization is beyond the pail. Shut up, go home, better yet, find an open window in a tall building and .....

[The remainder of the rant has been censored by Uncle Mitlie's PPT] Move along citizens...

Anonymous said...

Anon 9:21
Thankyou for your Robert Henri quote, definitely speaking from his right brain. I presume that is from The Art Spirit, a book on my shelf which I haven't opened for a long time.

As for the global trade falloff in numbers, though it has huge economic implications, it was so obvious that it couldn't go on at that rate. To anyone who has walked through a mall these past few years and seen the over-availability of goods of all varieties, and especially housewares and home decorating and building supply items, and the stores largely empty, much of the time, this is good. HGTV became a channel of showing how to remodel or decorate and evolved into a channel of swat teams coming into homes to show how to organize and declutter homes filled with too much stuff. I hate to bring up the blow up snowmen and plastic toys that cover many basements and Little Tykes playsets, and heaping landfills...As advertising dries up and ToysRUS stores close, hopefully people can get their brains back and figure out what really matters to them.

Anonymous said...

Catching up from yesterday:


I have no idea what you mean by an "investigation team"; that's a rather weird claim. My quibble with your comment was in your attempt to reduce/discredit information flow, rather than add to it. That has a negative effect on everyone.


Well, since you were claiming this was happening "over my head", I'd expect to see some evidence in English. Alas, this is lacking in the States, so the problem is apparently confined to your paridise of Mexico. Sorry, I don't speak Spanish, so I'll have remain unconvinced about what you're claiming until I can see something more than just pictures of the sky. Perhaps it's related to the UFO's Mexico was announcing a few years back?

In any case, even if you could really document it, it would still make my original point. Namely, that you're not telling the whole truth about your "paradise" when you go praising it to others.


Gosh, you can't defend your views with any sort of logic, so the only way you can cling to them is to stoop to even lower levels via an attempted smear campaign? Truly an effort worthy of Joe McCarthy and Richard Nixon. Apparently you must've picked up some of their ways when you were growing up.

Sorry to disappoint you, but there's no relation between the young Anon and myself.

The only time I post anonymously is when I accidently hit the post button prematurely, or this blog interface doesn't take the name. That's rare, but it does happen once in a while.

And frankly, claiming that there's some sort of "set up" is crazy. I've got bad news, dear. You are starting to see things where nothing exists.

Anonymous said...

And now, hopefully we can get back to something useful on this blog.


Property taxes vary from State to State. In California, we have Prop. 13, which was passed back in the 1970's. When you buy a house, your tax rate is set to a specific percentage of the selling price. And from there, the maximum that it can raise is 1.1% per year. There's very little left to some Pols' discretionary wet dream.

In the past, this almost always was raised to the maximum. Now, with falling values, that value goes down as well. The homeowner can present comps, and have the County Assessor reduce it. This happens all the time; it's fairly routine where I am.

There are obvious plusses and minuses to this scheme. It's not the ultimate fair answer to everything, but it does solve a number of problems. Before Prop 13, homeowners were being taxed out of their houses, literally.

The Pols here have been complaining about it ever since, but then they've seldom been able to balance the budget; the answer is to always raise taxes, no matter how irresponsible the spending is.

Which we're still seeing right now.


Anonymous said...

@Anon 8:34 PM

Ok, now that's one of the most insightful comments that I've seen in these comments lately. Could I trouble you to please use a "Name/URL" when posting? It would help me to recognize your posts as something worth reading. Thanks.

Regarding the amount of money needed to cover the deposits, a year ago there was about $7 Trillion in deposits in the Banks (Ref: WSJ); with 37% over the FDIC limit and not insured (mostly State/Local governments and big businesses). $2-4 Trillion is probably conservative.

Needless to say, covering even the supposedly "insured" accounts would be problematic, if not impossible.

"This gets back to the heart of political power, which is why they will do anything to forestall the day of accountability."

Bingo. I think you've touched upon all of the bases, and you said it well. So I'm curious; what kind of actions do you see ahead by TPTB and over what time line?

I won't hold you to it, as predicting such specifics with such things is dicey. Rather, I'm more interested in your thinking. Thanks.

Anonymous said...

Recovery is in the air! Recovery is in the air! Stocks have bottomed (especially the FTSE), housing is near its bottom. US retail sales are up, Baltic Dry Index is up, China is showing glimmers of recovery, UK home prices are up for January and Bank shares are rising as well.

This is going to be called the depression that never was. Don't be such doom and gloomers. Recovery is at hand.

el gallinazo said...

Geithner is opening up the new gates of opportunity for vulture capitalists. However, here is a warning from Wikipedia - be careful what you eat.

Studies in Pakistan showed that diclofenac caused acute kidney failure in vultures when they ate the carcasses of animals that had recently been treated with it (see below at Ecological problems). Species and individual humans that are drug sensitive are initially assumed to lack genes expressing specific drug detoxification enzymes.

Use of diclofenac in animals has been reported to have led to a sharp decline in the vulture population in the Indian subcontinent, 95% decline in 2004, 99.9% decline as of 2008.[11] The mechanism is probably renal failure, a known side-effect of diclofenac. Vultures eat the carcasses of domesticated animals that have been administered veterinary diclofenac, and are poisoned by the accumulated chemical. At a meeting of the National Wildlife Board in March 2005, the Government of India announced that it intended to phase out the veterinary use of diclofenac.[12] Meloxicam is a safer (though more expensive) candidate to replace use of diclofenac.[13] "The loss of tens of millions of vultures over the last decade has had major ecological consequences across the Indian subcontinent that pose a potential threat to human health. In many places, populations of feral dogs (Canis familiaris [sic]) have increased sharply from the disappearance of Gyps vultures as the main scavenger of wild and domestic ungulate carcasses. Associated with the rise in dog numbers is an increased risk of rabies"[13] and casualties of almost 50,000 people.[14]
The Government of India cites one of those major consequences as a vulture species extinction.[12] A major shift in transfer of corpse pathogens from vultures to feral dogs and rats can lead to a disease pandemic causing millions of deaths in a crowded country like India.
The loss of vultures has had a social impact on the Indian Zoroastrian Parsi community, who traditionally use vultures to dispose of human corpses in Towers of Silence, but are now compelled to seek alternate methods of disposal.[13]

scandia said...

Anon who said recovery is at hand.
It is my view that recovery will be possible when we deleverage from a mother lode of debt, when we have transparency.
For gov'ts to attempt a reinflation of the debt as money society is misguided at best.My judgement is actually much harsher than misguided but why stir emotion is contracting economies.
Just this week I encountered 4 people in my circle who have lost their employment, each one representing a different class, a different age group. My downtown is dying before my eyes. It is distressing to witness the decline in small business, the collapse in stark relief to the state edifices under construction. The rising display of disparity between state environments and everybody else demonstrates an unhealthy inbalance in the use of resources.
We may indeed have a rally but, no, I do not recognise recovery.

Anonymous said...

@Orion said...
@Anon 8:34 PM
"Ok, now that's one of the most insightful comments that I've seen in these comments lately. Could I trouble you to please use a Name/URL when posting?"
I go by a number of different handles, so I'll use centiare for TAE.
"So I'm curious; what kind of actions do you see ahead by TPTB and over what time line? I won't hold you to it, as predicting such specifics with such things is dicey. Rather, I'm more interested in your thinking. Thanks."
Since Darwin b-day celebrations have been getting a lot of press, I'll preface my response with the observation that the most base motivation of any living organism, regardless of kingdom, is survival and the instinct for self-preservation.

So, a quick answer is that politicians will seek to preserve their political power. It's actually a two-edged sword; if they fall out of power, depending on circumstances, they may be in actual physical danger. It's happened before, and needless to say, it can/will happen again.

I love to predict things - it's actually not that tough if you know where to look. Here's what's gonna happen: Iceland...Spain, Greece, UK. There's only one thing shielding the US from what is taking place in those countries, and it's the status of the USD as a reserve currency.

Closer to home, watch California. The porkulus package was a life-line to the states which are no longer able to raise any more money on their own, so Calif got a small reprieve.

The first public sector impact I noticed in Calif were that the roads began to deteriorate - potholes, repaving, etc. (Of course, shopping centers have a lot of vacancy & there's many homes for sale, but I'm focusing on gov't impact.)

We didn't get enough time to see the effect of furloughs/layoffs, much less shortfalls in meeting debt obligations, support payments, etc., other than the issuance of IOUs.

Not to worry, though, all of these problems will return fairly soon, only bigger and more virulent. The cool thing about Calif is that what happens here definitely doesn't stay here. I'll we be able to observe & map the march of events as a heads up for the rest of the country.

Anonymous said...


Here is the 100 Items list somebody posted it yesterday. Some are common sense but some of the items may not be appropriate depending on the situation. For example if you have a subpump for water a generator will be a good idea but there are other options a battery and inverter may be dedicated to the pump alone plus a PV might give you the indipendece you want. If you are on city water a water tank in the attic might be a good idea, and for the condo a water cooler and 3 -4 of those big bottles in stock. I dont think the neccesities for existence will disapper in the near future bread and water, but my prespective is very modest most of the people here "deserve" so much and that might be very troublesome. Panic I think is the second biggest problem after denial.


Regarding my remark here is a book that will exlain very well what I meant The team . Regarding the crappy paper, again it is not a problem. Any paper will do you crumble it inside your fist and then depending on paper you do the same motion as washing socks and imagine you have a small stain. Do that for most of the inner surface and you have a fluffy soft 10 ply quality toilet paper. I did try it just to make sure I did not forget. My Visa statement was a miracle also a glossy magazine page turned up very soft. Not one of those Vogue pages will go to waste now ... mmm well.

Anonymous said...

Its interesting to see "survivalist"mindset become mainstream among those who a few months ago would laugh and deride any thought of "systemic collapse"ect.Now that the big cracks in our society are becoming apparent to all who spend time looking for such things....

After seeing the new treasury sec.flop so spectacularly,I believe his job to is that of scapegoat..When it all blows up...he hold the bag.Kinda like the 5 volunteers who stay after the rest of the platoon to make sure their buddies get away from the mob...

I think the evaluations I have seen today match closely with my own,and the"reality"we all will be dealing with soon.



Anonymous said...

oh, one thing

Thanks Eugen...wonderful tip[ha!]


Anonymous said...

Regarding the article "Worthwhile Canadian Initiative", it strikes me that the author does not appreciate the role that 0/35 and 0/40 mortgages had in creating the giant real estate bubble in our larger cities, particularly in the West. I can only assume that it is because the US financial sector had all the common sense of bungee jumpers and cliff divers that Canadian bankers come off as responsible. An 18 to 1 leverage ratio is still madness.


Anonymous said...


I'm not the only one suspecting that you might be an infiltrator in TAE, perhaps using different aliases. Both Eugen and Adios have stated the same in different ways. Of course, anyone cognizant of the ways the US spies on its citizens would find this very plausible.

Anonymous said...


Thanks for sharing the great list. I agree that seeds are very important, especially organic seeds.

Thought some here might find this video on backyard gardening of interest:

Unknown said...

I&S, I require your clarity and expertise. The question from a friend of mine is this:

Quick question for you --- aren't the notional values of derivatives held necessarily inflated by the definition of notional values? If I have 2 completely counterbalancing derivatives each with a notional value of $200M, the combined notional value is $200M but my underlying risk is $0... I'd be far more interested to know the spread/risk of derivatives than their notional values, but of course banks aren't required to report this.

If a derivative held by me loses 1% of its notional value my exposure is only 1% of the actual spread between the derivative and the underlying asset. I appreciate that this can cascade when you've got derivatives based on derivatives, but isn't the problem "inflated" by the definition of notional value which has no relation to the risk I face?

Now I know this isn't the whole story, but my understanding of derivatives is super fuzzy. Right now I'm relying on this discussion and the commentary to it gets somewhat into the difference between credit risk (small) and actual market risk (huge), but I was wondering if either of you have a clear, concise response to the above question? Because I sure don't.

*** said...

despite Orion:

For those who must see it on teevee in order to believe, click the embedded link.

Here's a little science from an independent production.

Here's a Congressional bill citing [censored] by name - the site is unavailable at the moment of posting: link

Once again, here's the first of a five part television series in Spanish, and there's enough visual information in of the Spanish television production for it to be quite useful without understanding the language.

Second, the phenomenon discussed in the presentations linked above is primarily observed over all major cities among the G20 nations, not necessarily in the country, with the extreme exception of the US. For a look at how US skies appear at night, forward this link to 5:57 and have a look. For those who don't speak Spanish, it's a case of a picture saying a thousand words.

Just to set the record straight you will not see among my comments that "Mexico is paradise." I maintain that the people are wonderful. Big difference. Secondly, the people are not utterly suffocated by their gummnt, nor so dependent on it for survival.

I recognize that this character Orion is hoping to bait me into conflict with this site. Therefore I don't foresee any reason to further answer to [him/her/it].

Unknown said...

I should add further to my question above that the discussion I linked makes a clear distinction between "risk to the banking system" and "risk to the economy" with the acknowledgement that the latter is much, much larger.

The risk to the banking system is suggested to be about 1% of notional derivative values, although there is some skepticism about this and there is the half-stated suggestion that in a systemic failure, the notional value might come closer to the actual risk. It seems clear to me that Ilargi pegs the risk to the banking system much closer to the notional value.

I'm looking for an explanation why? I've been digging up notional derivative values held by Canadian banks, and am hoping to get some more data from original research soon, but the numbers so far are super huge and on the same proportional magnitudes to bank capital as outside of Canada. So the question of actual risk to the banking system seems critical even in the land of "the most sound banks in the world".

Second question I guess is along these lines: I take it as an axiom that risk to the banking system in our current environment translates directly into a risk to the economy, but the discussion I linked seems to posit that even in the absence of a high risk to the banking system there is a tremendous risk to the market or economy. How is that possible?