Sunday, February 22, 2009

February 22 2009: Throw roses in the rain

Harris & Ewing More scary clowns 1925
Y.W.C.A. Circus." Washington, D.C.

Ilargi: It's no surprise that when I write about Americans needing to check the $100 trillion elephants in their own back, front and side yards, instead of those elsewhere in the world, I get comments suggesting I’m anti-American or something along those lines. I have one riposte: the reason people react like that is the very exact same one that distorts the bank nationalization theme. There is a huge and concerted effort underway to not see what is happening.

And no matter how hard y‘all try, it won't make one iota of difference. I'm on record for years saying that the main US banks are insolvent and way beyond salvation. And after all the hundreds of billions thrown into that fiery pit, where are we today? On the cusp of full-blown nationalization. Which will be executed so badly that the nation as a whole will go broke and broken. All the attempts to save the already insolvent banks can only have one outcome: an insolvent country. Instead of liquidating and gutting the banks, something that should have been done years ago, the money-controlled political system opts to liquidate and gut the entire nation.

No, America is not the only nation that gets it wrong. But there is no nation that gets it as wrong as America. There no longer is an alternative to nationalizing the main commercial banks. That moment passed by long ago. And the government has no idea how it will deal with the issue. Robert Rubin is the wizard behind Geithner and Summers' curtain, and he ain't going to save the taxpayer any money. He’ll save it for his Citi and Goldman friends. The country doesn't have the means, the structure, the system, to save itself. The people in charge have interests in mind that contradict those of the people in the street. The system carries the seeds for its own destruction, They are built in.

The demise of Citi and BofA will cause a shock wave like nothing you've even known. The government guarantees deposits? Oh really? The losses fermenting in the vaults far outweigh the deposits. Bad bank? Really bad bank? Confidence in a system brought down by debt can not be restored by more debt, and that happens to be all they have to offer. No-one in Washington has the guts to open the doors, because their campaigns are financed by keeping the doors shut.

My co(m)patriot Willem Buiter says it once more in today's Wall Street Journal: what the US needs are "good banks". What Buiter hasn't recognized yet is that it's too late to create them in America. The banks are about to fall and fail, any moment now, and Washington has no options left other than seizing them altogether, skin and bones. There is no timer left to stress test anything. It's Catch 22, 23 and 24, to infinity and beyond. Heads you lose, tails you die.

See, yesterday's title, "There were ghosts in the eyes", comes from Springsteen's Thunder Road —as does today's—. And I was thinking all along that that is the song that paints more than any other the zenith, the epitome, the high light of Anmerican dreams, largesse and wealth, and its downfall at the same time. And if you listen closely, you’ll hear the future about to unfold. Maybe we ain't that young anymore. And maybe that's alright with me. Make crosses from your lovers... Let the wind blow back your hair, like a killer in the sun. Sit tight, take hold. Springsteen unwittingly provides a picture of the demise of America. When he wrote the song 35 years ago. all roads seemed open. They no longer are. We passed the summit in the seventies, and we never noticed. So somewhere in there tragedy and hope comes up, ugly and beautiful all at the same time. Despair and faith. Misery and belief. That in turn leads me back to Professor Carroll Quigley, a teacher his one time student Bill Clinton should have listened to a lot more. Quigley's 1300 page tome Tragedy and Hope is available free online here.

If you have a problem with my analysis, hey, take it from a fellow US citizen (Quigley died in 1977). Here's an excerpt:

 "...[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. this system was to be controlled in a feudalist fashion by the central banks of the world acting in concert by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations....

"It must not be felt that these heads of the world's chief central banks were themselves substantive powers in world finance. They were not. Rather, they were the technicians and agents of the dominant investment bankers of their own countries, who had raised them up and were perfectly capable of throwing them down. The substantive financial powers of the world were in the hands of these investment bankers (also called 'international' or 'merchant' bankers) who remained largely behind the scenes in their own unincorporated private banks. These formed a system of international cooperation and national dominance which was more private, more powerful, and more secret than that of their agents in the central banks. this dominance of investment bankers was based on their control over the flows of credit and investment funds in their own countries and throughout the world.

They could dominate the financial and industrial systems of their own countries by their influence over the flow of current funds though bank loans, the discount rate, and the re-discounting of commercial debts; they could dominate governments by their own control over current government loans and the play of the international exchanges. Almost all of this power was exercised by the personal influence and prestige of men who had demonstrated their ability in the past to bring off successful financial coupes, to keep their word, to remain cool in a crisis, and to share their winning opportunities with their associates."

NB: A special thanks today to Special K (yes, more clowns) and Stoneleigh for their efforts to find what my brain, which I haven't yet been able to locate, could not.

Remembering the Dawn of the Age of Abundance
Monday morning, 11:30:39 Eastern Standard Time, and I had just hit send. I was in a wide-body 767, high above the continent. "This is so exciting," I wrote to a friend. "I am on an airplane going over the Rockies. I am sending you an email. Down there the settlers went in covered wagons. Up here on American Airlines flight something to L.A., I am surfing the Internet. There are ruts baked into the soil down there from the heavy wagons pushing west. I have never been on Wi-Fi on a plane before. I am looking down at the Rockies. 'These are the days of miracles and wonders.' " My friend, an Internet pioneer, a brave and steely-eyed entrepreneur, shot back a reply: "We fly higher than mere birds can fly." When I got home, I taped our exchange to a bookcase near my desk. In hard times we should not forget the magic of life, and the mystery.

I thought on the plane, for the first time in a long time, of the feeling of awe I had in 1990 and '91 and '92. I heard a man named Nathan Myhrvold speak of a thing called Microsoft. I saw a young man named Steve Jobs prowl a New York stage and unveil a computer that then we thought tiny and today we'd call huge. A man named Steve Wozniak became a household god as my son reported his visionary ways. It was a time so full of genius and dynamism that it went beyond words like "breakthrough" and summoned words like "revolution." If you were paying attention, if you understood you were witnessing something great, the invention of a new age, the computer age, it caught at your throat. It was like hearing great music. People literally said what had been said in the age of Thomas Edison: "What will they think of next?" What a buoyant era. And for a moment, as I sent and received my first airborne Wi-Fi emails, I was back there. And I was moved because I realized how much I missed it, how much we all do, that "There are no walls" feeling. "Think different." "On January 24th, Apple Computer will introduce Macintosh. And you'll see why 1984 won't be like '1984.' " That was 25 years ago. The world was on fire.

It has cooled. And the essential problem with the crash we're in is no one can imagine quite feeling that way again. People can remember it, but they can't quite resummon it.This isn't like the stock market crash of 1987 or the collapse of the dot-com bubble in 2001. People are not feeling passing anger or disappointment, they're feeling truly frightened. The reasons: This isn't stock market heebie-jeebies, it's systemic collapse.  It's not just here, it's global. It's not only economic, but political. It wasn't only mortgage companies that acted up and acted out, so did our government, all the governments of the West, spending what they didn't have, for a decade at least. And at the center of the drama is your house—its worth, or its ability to see you through retirement, or your ability to hold onto it. An extra added angst bonus:

Those thinking now about retirement are just old enough to remember America before the abundance, before everyone was rich, rich being defined as plenty to eat, a stable place to live, and some left over for fun and pleasure. For them, the crash has released old memories. And it's spooking people. Have you witnessed a foreclosure, or seen the growing log of pictures on the Internet? It happened to my family when I was a kid, and I didn't know how much it was with me until a woman in Los Angeles the other day mentioned she had a new chocolate Lab she'd adopted from a shelter. He'd been left behind when a family was foreclosed on. "They left him in the house with a bowl of water and a tennis ball." A neighbor heard him, saved him, and now he was hers. This story hurt like an old wound. There are a lot of such wounds out there. It's part of why people are hunkering down.

The best report on how the young are experiencing it all came this week from the Web site Boing Boing, from the writer Cory Doctorow, who asked readers, "How are you coping with collapse-anxiety?" He wrote, "For me, I think it's the suspense that's the killer. What institutions will survive? Which ones are already doomed? Which of the items in my calendar are likely never to come to pass? Will my bank last?" He continued, "What are you telling yourself? How are you all sleeping at night? Are you hedging your bets with canned goods and shotguns, or plans for urban communal farming? Are you starting a business? Restructuring through bankruptcy? Moving back in with your parents?" His readers wrote back, creating a stunning thread that said, essentially, all of the above, and more. They went from the wry—one reader is "drinking more . . . feeling disconnected from reality . . . watching more TV and movies"—to the tough—one said,

"When the world turns crazy the crazy turn pro." A number were moving in with relatives. In fact it sounded like the old days, before the abundance. Some were planting gardens. One said he was learning the ukulele so he could be a wandering minstrel. Mr. Doctorow told me the reaction was "stupendous" not only in terms of numbers but in terms of seriousness: These were people truly sharing their anxieties. All of this hunkering down has stopped the great churning, the buying, selling and buying that was at the heart of our prosperity. In private equity firms, the churning was life. They bought a company, removed the fat, sold it at a profit, and bought another one. They kept moving. That's over. No one is buying now, and no one can sell.

Perhaps the biggest factor behind the new pessimism is the knowledge that the crisis is not only economic but political, that we'll have to change both cultures, economic and political, to turn the mess around. That's a tall order, and won't happen quickly. One thing for sure: Our political leaders for at least a decade, really more, have by and large been men and women who had fortunate lives, who always seemed to expect nice things to happen and happiness to occur. And so they could overspend, overcommit and overextend the military, and it would all turn out fine. They claimed to be quintessentially optimistic, but it was a cheap optimism, based more on sunny personal experience than any particular faith, and void of an understanding of how dark and gritty life can be, and has been for most of human history. I end with a hunch that is not an unhappy one. Dynamism has been leached from our system for now, but not from the human brain or heart.

Just as our political regeneration will happen locally, in counties and states that learn how to control themselves and demonstrate how to govern effectively in a time of limits, so will our economic regeneration. That will begin in someone's garage, somebody's kitchen, as it did in the case of Messrs. Jobs and Wozniak. The comeback will be from the ground up and will start with innovation. No one trusts big anymore. In the future everything will be local. That's where the magic will be. And no amount of pessimism will stop it once it starts.

Experts push to nationalize U.S. banks
Former Federal Reserve Chairman Alan Greenspan thinks it's necessary. His successor, Ben Bernanke, doesn't rule it out. From editorial pages to the blogosphere to boardrooms, this is the question on many minds: Should the United States nationalize some banks? A few months ago, it would have been heretical to suggest that Bank of America could become Bank Owned by America. Now, however, the U.S. economy is sinking faster than anyone thought possible, and respected economic authorities are suggesting that temporary bank nationalization could be the best solution.

"It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring," Greenspan, the long-revered sage of free-market theory, told London's Financial Times in an interview published Wednesday. "I understand that once in a hundred years this is what you do." When Bernanke was asked whether he shared his predecessor's views, he didn't distance himself from them during a question session Wednesday at the National Press Club. He answered as if nationalization were inevitable -- after first listing some of the problems it would entail. "Well, I think as a general rule, it's very challenging for governments to manage banks for a protracted period. And there's the additional problem that if you have a government-run institution, that you tend to lose the franchise value," Bernanke said.

"So I think whatever actions may need to be taken at one point or another, I think there's a very strong commitment on the part of the administration to try to return banks or keep banks private or return them to private hands as quickly as possible." The term "nationalization" conjures images of the communist Soviet Union or corrupt Latin American dictatorships, but advocates of nationalizing U.S. banks envision a seizure of big banks on the grounds that they already are insolvent except for some accounting sleight of hand. Banks are sitting on trillions of dollars worth of complex securities, backed by U.S. mortgages that are going into default as more homes are now worth less than the mortgages on them. If banks were forced to put present-day values on these securities instead of hold-to-maturity values, their liabilities would far exceed their assets. They would be insolvent.

What's needed, nationalization advocates argue, is for the government to seize Bank of America, Wells Fargo, Citigroup and other large banks, carve out their bad assets, then break them into smaller pieces for quick sale to the private sector. "Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume," Nouriel Roubini, a prominent New York University economist, wrote in an opinion piece Feb. 15 in the Washington Post. "Of course, the economy would still stink, but the death spiral we are in would end." Other analysts think that nationalization is all but inevitable. "It's very hard when you get to this point not to do that," said Adam Posen, the deputy director of the Peterson Institute for International Economics, a free-market research center. Posen said he thinks that nationalization is losing its stigma, and he envisions scenarios in which the government could seize the nation's 50 largest banks.

Most depositors would be safe, since their deposits are insured up to $250,000. Stockholders probably would be wiped out, and bondholders eventually would get shares of any new company. The government could even make money on some seizures, if history is any guide. Roubini and Posen said they think that a bold, drastic step is inescapable, and that a failure to take it now would only make it costlier and more difficult later. Today's problem is the $1.2 trillion in assets whose underlying collateral is shoddy subprime mortgages, which have eroded faith in the broader U.S. housing market. For now, the Obama administration is mum on nationalization.

Ilargi: And $826 and 25 cents.......

Obama Plans to Reduce Budget Deficit to $533 Billion by 2013
President Barack Obama plans to cut the U.S. budget deficit to $533 billion by the end of his first term by increasing taxes on the wealthy and cutting spending for the war in Iraq, according to an administration official. Obama wants to reduce the deficit because he's concerned that over time, federal borrowing will make it harder for the U.S. economy to grow and create jobs, said the official, speaking on the condition of anonymity. The deficit Obama inherited on taking office last month was $1.3 trillion. The administration next week is to release an overview of its budget proposal for the 2010 fiscal year, which begins Oct. 1. "Next week sets the table for the year," and the president's four-year term, Kenneth Baer, spokesman for the White House budget office, said yesterday, referring to the budget plan that will be released on Feb. 26.

To increase revenue, Obama will propose taxing the investment income of hedge-fund and private-equity partners at ordinary tax rates, which are now as high as 35 percent and may rise to 39.6 percent under the administration's plan, the New York Times reported today. They are currently taxed at the capital-gains rate of as much as 15 percent. Obama promised during the campaign that he would slash federal programs that weren't working. "The president has said he can't kick the can down the road anymore," Baer said. The $1.3 trillion deficit Obama inherited equals 9.2 percent of gross domestic product, said the administration official. The administration's budget proposal cuts the deficit to 3 percent of GDP by 2013, at the end of Obama's first term.

Most of the savings will be realized from winding down the war in Iraq as well as increased revenue from Americans making more than $250,000 a year, said the official. The Times said Obama will propose letting President George W. Bush's tax cuts for the wealthy lapse in 2010. Earlier today, Obama talked about the importance of reining in the ballooning federal deficit in his weekly address. He will hold a so-called fiscal-responsibility summit at the White House on Feb. 23, with about 130 people invited to attend, including about 50 members of the House and Senate from both parties, according to Baer. Obama said the Treasury Department will begin ordering employers today to cut taxes taken from workers' paychecks as part of his effort to pull the economy out of a recession.

The president said a "typical" family will start getting at least an extra $65 a month by April 1 as a result of the $787 billion stimulus package he signed into law this week. He said the measure is only a "first step." The president has also pledged $275 billion to help struggling homeowners avoid foreclosure and plans to announce measures to stabilize banks. Companies from General Motors Corp. to Alcoa Inc. are slashing jobs and cutting production as the recession threatens to become the worst slump in the postwar era.

The Government and the Banks
Bank stocks plunged last week on fears that the government will have to take over battered institutions like Citigroup and Bank of America. That would wipe out the banks’ shareholders — hence, investors’ rush for the exits — and put the government in control of a swath of the financial system. Americans have a visceral horror of the word nationalization. So call it restructuring or majority ownership. Or call it the taxpayers’ due after pouring in hundreds of billions of dollars in capital and guarantees and standing ready to pour in hundreds of billions more. We increasingly believe it is the least bad solution to a truly desperate situation.

Bank losses are mounting, leaving some institutions undercapitalized and — by credible calculations — insolvent. That is a disaster for taxpayers. They need the banks to function, and it is their money on the line to support banks that are too big to fail, like Citi and BofA. Rescue measures have so far prevented a system-wide meltdown, but they have not reversed the downward slide or revived bank lending. That will not happen until investors have a firm grasp of the losses that everyone knows are on banks’ books — but that the banks are loath to acknowledge.

Done right, a takeover would be a once-and-for-all fix. The government would examine the banks’ holdings to get a realistic assessment of the toxic assets that are crippling the banks — and how much capital each bank needs, not only to survive but to begin lending again. Institutions that are healthy enough to raise the needed capital from private investors would remain in shareholders’ hands. Those that are too weak would be taken over by the government and recapitalized with taxpayer money. The government would be in charge of restructuring those banks’ finances and operations.

Current management would be fired — an appropriate end for executives whose failures have brought their companies and the country to this dark and dangerous point. Because taxpayers would be the owners, they would benefit from the gains to be had when the banks recover. Critics will charge that government bureaucrats do not have the skills to pull this off. But the United States has a successful history of seizing insolvent banks through the Federal Deposit Insurance Corporation. The takeovers contemplated here are larger in scale and would be more complex than those that have generally fallen under the F.D.I.C.’s purview. But the notion that the government totally lacks the know-how to nationalize insolvent banks is not valid.

Safeguards must also be built into the process to curtail political meddling in lending and other decisions. The aim is to clean up the banks efficiently, rather than allow the problems to become bigger, and then — as soon as possible — to sell the banks back to private investors. They will be smaller institutions. And there will be proper regulations in place to ensure that this catastrophe does not happen again.

Taking over big failed banks will be very difficult politically. But technically it could be easier than many of the elaborate rescues that have been tried and proposed. On Friday, President Obama’s spokesman tried to calm the markets by reaffirming the administration’s preference for a sound privately owned banking system. We share that preference. But it looks as if the best way to get from here to there is for some of the banks to spend some time in the government’s hands.

U.S. bank stress tests to show capital needs
Financial regulators will soon launch a series of "stress tests" to determine which of the largest U.S. banks should get bigger capital cushions in case of a deeper recession, a person familiar with Obama administration plans said on Saturday. The person, speaking on condition of anonymity, said if institutions were found to need additional capital, financial authorities would provide them with an "extra cushion of support." Banks are expected to receive additional information about the tests in the coming week from regulators. The largest U.S. banks are "well capitalized" for current conditions, the source said, but the Obama administration wants to ensure they can withstand a more severe economic climate and play an important role in helping restart the flow of credit.

Initial plans for the stress tests were announced on February 10 as part of Treasury Secretary Timothy Geithner's bank stabilization plan, but the source on Saturday for the first time linked the tests to additional government support for large banks. That person did not specify what form any extra capital cushion may take. Little is known about the form of the stress tests, but the person described them as "consistent, forward looking and conservative." The Obama administration tried on Friday to ease market fears the government was poised to nationalize some large banks that are struggling with losses and a lack of confidence, notably Citigroup and Bank of America.

Bank shares fell sharply, with Citigroup plunging 22 percent to below the $2 fee of a typical automated teller machine, or ATM, and Bank of America trading around the $4 level. White House spokesman Robert Gibbs said on Friday, "This administration continues to strongly believe that a privately held banking system is the correct way to go." That was quickly echoed by a statement from the U.S. Treasury. Citigroup and Bank of America have each received $45 billion in government capital in recent months and guarantees against losses on portfolios of illiquid mortgage assets -- aid that now exceeds their market value. With investors losing confidence in the sector as recessionary losses on real estate and commercial loans mount, analysts say the government may have to do more to prop up the largest banks.

But rather than opting for a sweeping takeover, the government may act more incrementally, demanding a little more control every time Bank of America or Citigroup seeks more capital, analysts said. Major interventions in financial institutions, such as Bear Stearns 11 months ago, American International Group in September and a second-round investment in Citigroup, occurred just after major drops in share prices made it clear they could not raise private capital. The government "will try to do everything they can before they nationalize banks, but they may ultimately do it," said Lee Delaporte, director of research at Dreman Value Management, which has $10 billion under management. "The bank stocks are telling you nationalization is going to happen," Delaporte added. Thus far, the Treasury has put up about $235 billion for banks largely by purchasing only preferred shares to avoid diluting common shareholders.

Under Geithner's revamp, those injections could come in the form of shares that could be converted to common equity if necessary. The lack of detail in Geithner's bank plan, particularly about a $500 billion to $1 trillion public-private fund to soak up toxic assets, has fueled investor concerns that bank takeovers could become an option. Geithner did not specify how much money would be earmarked for bank capital injections under the plan, which mapped out how the second $350 billion of the $700 billion bailout fund would be spent. Geithner has devoted $50 billion to modify troubled mortgages and $100 billion to support a $1 trillion Federal Reserve asset-backed securities lending facility aimed at unblocking frozen consumer credit markets. Lawmakers have pressed Geithner on whether and when he will return to seek more funding to shore up the banking system. Geithner told Congress on February 11 that as the "design elements" of his plan were fleshed out, he would have a better handle on the ultimate risks and costs for the program.

'Good Banks' Are the Cost Effective Way Out of the Financial Crisis
by Willem Buiter

Treasury Secretary Tim Geithner's bank rescue -- the Financial Stability Plan (FSP) -- has been poorly received by the markets. My proposal last month to create brand new "good banks" with the limited taxpayer resources available is the best solution to the crisis. One reason the Geithner plan has been poorly received is that the money isn't there to recapitalize U.S. banks as a whole. Mr. Geithner has only $350 billion, what's left of the original $700 billion in the previous administration's Troubled Asset Relief Program. That's nowhere near enough to get Mr. Geithner's proposed Public-Private Investment Fund going on any significant scale. The scale of this investment fund -- $500 billion-$1 trillion -- is an empty wish unless the Treasury convinces the Congress to provide substantial additional resources to guarantee the toxic assets to be valued and bought by private investors. Moreover, Mr. Geithner's Consumer and Business Lending Initiative only puts up one dollar of Treasury money as credit protection for every $10 dollars of Fed lending, hoping that any losses will not exceed 10% of the amount lent by the Fed (up to $1 trillion). This leverage means that the Federal Reserve system has in effect become a branch of the Treasury.

The truth is that the federal government has little fiscal spare capacity. States and municipalities have, at best, none. With the fiscal boost provided by the stimulus legislation ($787 billion, or about 5.4% of GDP over two years), the federal deficit could easily rise to 12% or even 14% of GDP for the next two years. These are numbers historically associated with banana republics headed for insolvency or hyperinflation. The current federal debt-to-GDP ratio is around 40%, well below the above-100% level at the end of World War II. Any such ratio can be sustainable, as long as the economy is capable of generating large future government primary surpluses (that is, surpluses excluding net interest payments). But if markets judge that such future primary surpluses are not credible, they will be spooked. Any anticipation or fear by domestic or international markets that the future will bring some combination of government default and public debt "amortization" through inflation will push up medium- and long-term nominal interest rates, inflation risk premia, default risk premia, foreign exchange risk premia and real interest rates. These responses will nullify the government's attempt to expand the economy through increased public spending or tax cuts.

Credible larger future primary surpluses presuppose future political support for tax increases or cuts in public spending. I fear that the U.S. political system will support neither -- the necessary social capital is no longer there. The trust of the American citizen in the state is vanishingly low. Political polarization has reached the point where Democrats in Congress will kill almost any cut in public spending, and Republicans will kill almost any tax increase. At the end of World War II, Americans willingly shouldered the burden of paying down a public debt incurred because the nation had been at war with a hated external enemy. A few years down the road, the U.S. could find itself faced with a comparable public debt burden, but incurred because the nation has been at war with itself. Solidarity, cohesion and burden sharing don't come naturally when the defining event is not Pearl Harbor but a subprime crisis.

Given the limited scope U.S. authorities have for increasing the public debt burden without adverse asset market responses, it is best to forget about tax cuts or public spending increases. Instead, the available fiscal resources should be focused on restoring the flow of credit to nonfinancial enterprises and, to a lesser extent, to households (most of which are already over-indebted and should not be encouraged to spend more). Rather than wasting the $1.4 trillion of public funds it would take to restore (according to NYU economist Nouriel Roubini's estimate) the capitalization of the U.S. banking sector to its fall 2008 level, it would be better to use public money to capitalize new banks that don't suffer from an overhang of past bad investments and loans -- and to guarantee new borrowing or new loans and investment by these banks. This "good bank" model achieves this by identifying the systemically important banks that are kept afloat only by past, present and anticipated future public financial support ("bad banks") and taking their banking licenses away.

The "stress test" proposed by Mr. Geithner for major banks (assets in excess of $100 billion) could be used to gather the necessary information to identify the bad banks. New banks, capitalized by the government (possibly with private co-financing) would take the deposits of the bad banks and purchase the good assets from the bad banks. Future government support, through guarantees or other means, would be focused exclusively on new lending and new borrowing by the new good banks and those old banks that passed the stress test. The legacy bad banks would not be allowed to make new investments or new loans and would simply manage the inherited stocks of assets in the interest of their owners. They sink or swim on their own. If they fail, their unsecured creditors can figure out what to do with the bad assets. When public resources are scarce, they should be concentrated not on supporting the valuations of existing impaired or toxic assets -- representing yesterday's mistakes -- but on encouraging new flows of lending and borrowing, for which success or failure is still to be determined. To decouple flows of new lending from existing stocks of bad and toxic assets, a legal and institutional separation between the owners of the bad assets and the investors in the new assets is necessary. This objective is achieved by the good bank model.

The good bank approach would not be welcomed by the markets: They price the existing bad banks but not the taxpayer resources saved. This model is better than full nationalization, because it does not require the government to trust the valuation of toxic assets implicit in the market capitalization of the banks that own them. It only requires the valuation of good assets. It is better as a recession-fighting policy because it stimulates new lending to the real economy more effectively than would an injection of capital into the existing banks, for which old toxic assets act as a tax on new lending. The good bank model is also better from the point of view of moral hazard because it does not reward past reckless lending and investment. And it is fairer, because the losses on past failed investments are borne by those who made the bad decisions rather than by taxpayers.

No end yet in sight for recession
The U.S. economy is still getting worse, even as Washington's policy makers scramble to find the formula that will revitalize credit markets and consumer spending. The economy will probably provide some more bad news over the coming week, with little prospect that the Federal Reserve chairman or the Treasury secretary will do much to bolster spirits. The news from the flow of economic data should be disheartening. The estimate for fourth-quarter gross domestic product is likely to be revised lower to show at least a 5% annualized decline. Fresher data on housing, manufacturing, the jobs market and consumer confidence are expected to show little or no improvement. All the economic data "are on track to show that that the recession ... is getting worse with the floor yet to be seen," wrote Lori Helwig, an economist for Bank of America/Merrill Lynch. The week's biggest report, the GDP revision on Friday, could be ugly. Economists were expecting GDP to fall 5% when the first estimate came out last month, but were pleasantly surprised with a minus 3.8% reading. Still bad, but not horrendous.

However, it looks like they were right in the first place. The government will release its second GDP estimate on Friday. Economists surveyed by MarketWatch are now expecting GDP to fall 5.5% at an annual rate, the worst since 1982. And they are expecting another decline in the same ballpark in the current quarter; the current estimate is a 4.8% drop. Since the late 1940s, GDP has never fallen by more than 5% two quarters in a row, and has fallen by more than 4% twice in a row only twice before. "We continue to believe an unprecedented amount of monetary and fiscal stimulus will lead to a modest recovery during the second half of 2009, but it now looks as if the economic downturn towards the end of 2008 and the beginning of 2009 will be sharper than initially suspected," wrote Meny Grauman, an economist for CIBC World Markets. The government statisticians don't have all the monthly data they need when they make their first estimate of economic growth, so they have to make educated guesses about foreign trade, construction spending and inventories. (Indeed, much of what's reported about the services side of the economy is also an educated guess, with reliable data available only on an annual basis, which is why GDP keeps getting revised long after anyone really cares.)

Some of the assumptions made by the government in the first pass appear "to have been far too optimistic," according to Stephen Stanley, chief economist for RBS Greenwich Capital. Usually, a too-optimistic estimate for trade might be offset by a too-pessimistic assumption on inventories, so they somewhat cancel out. But this time, it appears the government was too optimistic on almost every key sector, as often happens when the economy is shrinking quickly. The biggest changes are likely to come from inventories and from the foreign trade sector, which almost single-handedly kept GDP positive in the first half of 2008 even while the economy was in a recession. Strong exports offset weakness in domestic spending and investment. But that's all changed. Global markets have now fallen into a sharp recession and aren't buying nearly as much American-made stuff.

The government also assumed more inventory stockpiling in the fourth quarter than has been reported in the updated monthly reports. That means inventories didn't contribute nearly as much to GDP as the 1.3 percentage points that was initially assumed. That's good news going forward, because it means companies have less work to do in paring down their unwanted inventories this year. It means the economy can bounce back faster. The typical recession is mostly an inventory correction cycle. Recessions begin with companies overstocking in anticipation of demand that never materializes, which leads them to cut back on employment and production temporarily until supplies and demand balance again. The revision to GDP will probably also show less investment in equipment, software and structures. And consumer spending probably was weaker than initially assumed as well. Final domestic demand probably dropped at a 5.3% annual rate in the quarter, Greenwich's Stanley said."The revised fourth quarter readings for real GDP and real domestic demand that we project would each be the third worst in the last 50 years," Stanley wrote in a weekly note to clients.

The manufacturing sector has been hit hard by the recession. New orders for durable goods, which haven't risen since July, are expected to fall 3.5% in January. Much of the decline is due to cutbacks by the automakers, but almost every sector has been hit by weak demand by consumers, foreign buyers, and U.S. businesses. "January appears to have been a disastrous period for a number of industries," Stanley wrote. "Auto assemblies sank by 40% vs. December (that is not an annualized number or a typo) and the semiconductor industry's three-month moving average of bookings dropped by half from December." Home sales are expected to decline again in January, economists said. Sales of new home are expected to hit a record-low seasonally adjusted annual rate of 320,000 annualized, compared with 331,000 in December. Sales of existing homes probably inched higher to 4.80 million annualized from 4.74 million as more foreclosed homes were sold in the West.

Stimulus may be just the first chapter
If the fight to end the economic crisis is a war, the stock market's continuing dive, deepening troubles in the global economy and recent developments at home show that the enemy still has the upper hand -- and we're going to need reinforcements. Maybe massive reinforcements. That could be a tough sell in Washington, where the rapidly increasing price tag is leading many Republicans and some conservative Democrats to adopt an old battle cry: Hell no, we won't go. Yet the alternative to additional federal spending on a huge scale could be that the present crisis could not only worsen but continue, not for months or a couple of years but for a decade or more -- as an eerily similar financial system crash did in Japan during the 1990s.

"You could have a 'lost decade' just like Japan did," said Simon Johnson, an economist at the Massachusetts Institute of Technology and former chief economist at the International Monetary Fund. "Anybody who says it's not possible isn't paying attention." Over the last year, Washington has approved a series of what seemed like eye-popping plans to help the various parts of the foundering economy, including last fall's $700-billion financial bailout and the $787-billion stimulus package signed into law by President Obama last week. Each time, Congress has almost choked, embracing the proposals only after bitter partisan fights -- and by the narrowest of margins.

"These things are not big relative to the scale of the problem," said Johnson, who co-founded the Baseline Scenario, a blog on the economic crisis. "Unfortunately, we're almost certainly going to have to do more." And on Thursday, Obama is to outline his budget for the 2010 fiscal year. It could include a federal deficit even greater than the record $1.2 trillion projected for 2009, which doesn't even include the new stimulus spending. Beyond the budget, significantly more deficit spending is coming, in the form of a new bailout plan for the still-sinking financial system and possibly a second stimulus package. "The upfront costs are going to continue to rise," said Adam Posen, deputy director of the Peterson Institute for International Economics, who predicted at least $1 trillion more will be needed. "They're going to have to buy a bunch of bad assets from the banks in one form or another, and they're probably going to have to put more capital into the banks."

Partly to prepare the way for those unwelcome prospects, Obama has been traveling the country warning that fighting the recession will be expensive and cautioning against expectations of a quick recovery. "We will need to do everything in the short term to get our economy moving again, while at the same time recognizing that we have inherited a trillion-dollar deficit, and we need to begin restoring fiscal discipline and taming our exploding deficits over the long term," Obama said before signing the stimulus bill in Denver on Tuesday. "None of this will be easy." To further amplify that message, Obama will convene a White House summit on financial responsibility Monday, in part to burnish his claim that he will practice thrift once the present emergency has passed.

But recovery still appears a long way off, especially after last week. The Federal Reserve downgraded its 2009 forecast, projecting the economy would shrink as much as 1.3% and the unemployment rate would rise to as high as 8.8%. It is at 7.6% now. Stock markets here and abroad tanked as fears rose that the deepening worldwide recession would lead the Obama administration to nationalize major banks. (The White House said Friday that it does not plan to take that step.) But beyond the markets' passing fears or hopes about specific government policies or other developments, what was really eroding securities values was the objective reality of economic trouble almost everywhere -- with no clear notion of what could reverse the tide.

General Motors and Chrysler submitted financial viability plans to the federal government asking for nearly $22 billion in government loans to stave off imminent bankruptcy -- on top of the $17.4 billion they already received. And on Wednesday, Obama unveiled a housing foreclosure plan partially funded with $50 billion from what remains of the financial rescue fund -- called TARP, for Troubled Assets Relief Program -- approved in the waning days of the Bush administration. That increased the likelihood that Obama will need to ask for more TARP money for the still-being-developed public/private partnership to buy "toxic" assets clogging the balance sheets of financial institutions. Only about $300 billion remains in the original $700-billion TARP fund, which also must pay for any additional loans to the automakers.

"I don't see how that's going to cover the cost of the financial system bailout, let alone the auto industry," said economist Mark Zandi of Moody's, who predicts the administration will need to ask for an additional $350 billion this year or early in 2010. Congress members are unlikely to welcome such a request, particularly Republicans already concerned about runaway government spending. "If they come back, it will not be a surprise," Sen. Bob Corker (R-Tenn.) said. "As to how that's received, I think it will be based on the way things are carried out in the interim." More clarity about how the Obama administration is spending the stimulus and other money would help with Congress, Posen said. Much of the backlash on Capitol Hill stems from how the Bush administration sold the $700-billion bailout last fall as necessary to buy toxic assets, then changed direction to inject money into banks.

"I am hopeful if the Obama administration goes to Congress and says explicitly, 'This is what we need and this how we're going to use it,' Congress in the end would get a majority to support it," Posen said. The administration has promised more transparency in its spending and last week launched the website so people could track stimulus spending. And Monday's summit is intended to highlight fiscal accountability and restraint amid the blizzard of cash flowing out of Washington. Obama and Vice President Joe Biden will "lead a frank discussion on how we can address the long-term fiscal problems facing this country," White House Press Secretary Robert Gibbs said.

About 130 people will attend, including Zandi and other economists; Democratic and Republican congressional leaders; and business and labor officials. The event will feature discussion groups led by senior administration officials focusing on major economic challenges, such as healthcare and Social Security. "The summit's a first step in the process of beginning to lay out how we can bring down the deficit and put our economy back on sound financial footing," Gibbs said. But before the deficit can come down, it will probably continue to rise in what's shaping up as a drawn-out war against the recession, economists said.

Clinton Urges China to Keep Buying US Debt
U.S. Secretary of State Hillary Clinton has urged China to keep buying U.S. debt and to work with Washington in combating the global economic crisis. Clinton was speaking Sunday before leaving Beijing at the end of a four-nation tour of Asia -- her first overseas trip since taking office. The top U.S. diplomat says Washington must incur more debt to China to boost the ailing U.S. economy and stimulate demand for Chinese products. She says it would not be in China's interest if the U.S. is unable to get its economy out of a recession.

China is the largest holder of U.S. Treasury bonds. Clinton says China's continued investment in U.S. Treasuries is a recognition of the interconnection of the U.S. and Chinese economies. Chinese Foreign Minister Yang Jiechi told Clinton Saturday that both countries should boost economic policy coordination and reject protectionism in trade. On Sunday, Clinton met with Chinese women's rights advocates at the U.S. Embassy in Beijing. She also attended a service at a state-sanctioned Beijing church and answered questions from Chinese Internet users in a Web chat hosted by the China Daily newspaper.

Yang says he and Clinton also discussed their differing views about human rights in China. He says China will continue to discuss the issue with Washington on the basis of equality and non-interference in each other's internal affairs. Before her talks, Clinton said the debate with China over human rights should not get in the way of progress in other areas, such as tackling climate change. Rights groups criticized that position, saying Washington should make human rights a priority.

Chinese rights activists complained that police prevented them from leaving their homes to stop them from speaking out or meeting with Clinton. Clinton says she will host Foreign Minister Yang in Washington next month to prepare for a first meeting between U.S. President Barack Obama and Chinese President Hu Jintao. The two leaders are expected to hold talks on the sidelines of an April summit of the Group of 20 advanced and developing nations in London. Clinton's trip to Asia also took her to Japan, Indonesia and South Korea.

What We Don’t Know Will Hurt Us
Andso on the 29th day of his presidency, Barack Obama signed the stimulus bill. But the earth did not move. The Dow Jones fell almost 300 points. G.M. and Chrysler together asked taxpayers for another $21.6 billion and announced another 50,000 layoffs. The latest alleged mini-Madoff, R. Allen Stanford, was accused of an $8 billion fraud with 50,000 victims. “I don’t want to pretend that today marks the end of our economic problems,” the president said on Tuesday at the signing ceremony in Denver. He added, hopefully: “But today does mark the beginning of the end.” Does it?

No one knows, of course, but a bigger question may be whether we really want to know. One of the most persistent cultural tics of the early 21st century is Americans’ reluctance to absorb, let alone prepare for, bad news. We are plugged into more information sources than anyone could have imagined even 15 years ago. The cruel ambush of 9/11 supposedly “changed everything,” slapping us back to reality. Yet we are constantly shocked, shocked by the foreseeable. Obama’s toughest political problem may not be coping with the increasingly marginalized G.O.P. but with an America-in-denial that must hear warning signs repeatedly, for months and sometimes years, before believing the wolf is actually at the door.

This phenomenon could be seen in two TV exposés of the mortgage crisis broadcast on the eve of the stimulus signing. On Sunday, “60 Minutes” focused on the tawdry lending practices of Golden West Financial, built by Herb and Marion Sandler. On Monday, the CNBC documentary “House of Cards” served up another tranche of the subprime culture, typified by the now defunct company Quick Loan Funding and its huckster-in-chief, Daniel Sadek. Both reports were superbly done, but both could have been reruns.

The Sandlers and Sadek have been recurrently whipped at length in print and on television, as far back as 2007 in Sadek’s case (by Bloomberg); the Sandlers were even vilified in a “Saturday Night Live” sketch last October. But still the larger message may not be entirely sinking in. “House of Cards” was littered with come-on commercials, including one hawking “risk-free” foreign-currency trading — yet another variation on Quick Loan Funding, promising credulous Americans something for nothing.

This cultural pattern of denial is hardly limited to the economic crisis. Anyone with eyes could have seen that Sammy Sosa and Mark McGwire resembled Macy’s parade balloons in their 1998 home-run derby, but it took years for many fans (not to mention Major League Baseball) to accept the sorry truth. It wasn’t until the Joseph Wilson-Valerie Plame saga caught fire in summer 2003, months after “Mission Accomplished,” that we began to confront the reality that we had gone to war in Iraq over imaginary W.M.D. Weapons inspectors and even some journalists (especially at Knight-Ridder newspapers) had been telling us exactly that for almost a year.

The writer Mark Danner, who early on chronicled the Bush administration’s practice of torture for The New York Review of Books, reminded me last week that that story first began to emerge in December 2002. That’s when The Washington Post reported on the “stress and duress” tactics used to interrogate terrorism suspects. But while similar reports followed, the notion that torture was official American policy didn’t start to sink in until after the Abu Ghraib photos emerged in April 2004. Torture wasn’t routinely called “torture” in Beltway debate until late 2005, when John McCain began to press for legislation banning it.

Steroids, torture, lies from the White House, civil war in Iraq, even recession: that’s just a partial glossary of the bad-news vocabulary that some of the country, sometimes in tandem with a passive news media, resisted for months on end before bowing to the obvious or the inevitable. “The needle,” as Danner put it, gets “stuck in the groove.” For all the gloomy headlines we’ve absorbed since the fall, we still can’t quite accept the full depth of our economic abyss either. Nicole Gelinas, a financial analyst at the conservative Manhattan Institute, sees denial at play over a wide swath of America, reaching from the loftiest economic strata of Wall Street to the foreclosure-decimated boom developments in the Sun Belt.

When we spoke last week, she talked of would-be bankers who, upon graduating, plan “to travel in Asia and teach English for a year” and then pick up where they left off. Such graduates are dreaming, Gelinas says, because the over-the-top Wall Street money culture of the credit bubble isn’t coming back for a very long time, if ever. As she observes, it took decades after the Great Depression — until the 1980s — for Wall Street to fully reclaim its old swagger. Not until then was there “a new group of people without massive psychological scarring” from the 1929 crash.

In states like Nevada, Florida and Arizona, Gelinas sees “huge neighborhoods that will become ghettos” as half their populations lose or abandon their homes, with an attendant collapse of public services and social order. “It will be like after Katrina,” she says, “but it’s no longer just the Lower Ninth Ward’s problem.” Writing in the current issue of The Atlantic, the urban theorist Richard Florida suggests we could be seeing “the end of a whole way of life.” The link between the American dream and home ownership, fostered by years of bipartisan public policy, may be irreparably broken.

Pity our new president. As he rolls out one recovery package after another, he can’t know for sure what will work. If he tells the whole story of what might be around the corner, he risks instilling fear itself among Americans who are already panicked. (Half the country, according to a new Associated Press poll, now fears unemployment.) But if the president airbrushes the picture too much, the country could be as angry about ensuing calamities as it was when the Bush administration’s repeated assertion of “success” in Iraq proved a sham. Managing America’s future shock is a task that will call for every last ounce of Obama’s brains, temperament and oratorical gifts.

The difficulty of walking this fine line can be seen in the drama surrounding the latest forbidden word to creep around the shadows for months before finally leaping into the open: nationalization. Until he started hedging a little last weekend, the president has pointedly said that nationalizing banks, while fine for Sweden, wouldn’t do in America, with its “different” (i.e., non-socialistic) culture and traditions. But the word nationalization, once mostly whispered by liberal economists, is now even being tossed around by Lindsey Graham and Alan Greenspan. It’s a clear indication that no one has a better idea.

The Obama White House may come up with euphemisms for nationalization (temporary receivership, anyone?). But whatever it’s called, what will it mean? The reason why the White House has been punting on the new installment of the bank rescue is not that the much-maligned Treasury secretary, Timothy Geithner, is incapable of getting his act together. What’s slowing the works are the huge political questions at stake, many of them with consequences potentially as toxic as the banks’ assets. Will Obama concede aloud that some of our “too big to fail” banks have, in essence, already failed? If so, what will he do about it? What will it cost? And, most important, who will pay?

No one knows the sum of the American banks’ losses, but the economist Nouriel Roubini, who has gotten much right about this crash, puts it at $1.8 trillion. That doesn’t count any defaults still to come on what had been considered “good” mortgages and myriad other debt, whether from auto loans or credit cards. Americans are right to wonder why there has been scant punishment for the management and boards of bailed-out banks that recklessly sliced and diced all this debt into worthless gambling chips. They are also right to wonder why there is still little transparency in how TARP funds have been spent by these teetering institutions.

If a CNBC commentator can stir up a populist dust storm by ranting that Obama’s new mortgage program (priced at $75 billion to $275 billion) is “promoting bad behavior,” imagine the tornado that would greet an even bigger bank bailout on top of the $700 billion already down the TARP drain. Nationalization would likely mean wiping out the big banks’ managements and shareholders. It’s because that reckoning has mostly been avoided so far that those bankers may be the Americans in the greatest denial of all. Wall Street’s last barons still seem to believe that they can hang on to their old culture by scuttling corporate jets, rejecting bonuses or sounding contrite in public. Ask the former Citigroup wise man Robert Rubin how that strategy worked out.

We are now waiting to learn if Obama’s economic team, much of it drawn from the Wonderful World of Citi and Goldman Sachs, will have the will to make its own former cohort face the truth. But at a certain point, as in every other turn of our culture of denial, outside events will force the recognition of harsh realities. Nationalization, unmentionable only yesterday, has entered common usage not least because an even scarier word — depression — is next on America’s list to avoid.

Analysts: Stock slide signals fading hope
The shock that accompanied the market meltdown last fall has been replaced by something else: a resignation that it may take months or even years for the stock market to recover. The worst week for stocks since early October underscored a loss of hope that government actions to stabilize the economy and the markets will pay off any time soon. Closing at 7,366 Friday, the Dow Jones industrial average is now down 48 percent from its peak just 16 months ago. Investors are showing their strong disappointment with federal rescue efforts after putting their faith in it for months, according to Art Hogan, chief market analyst at Jefferies & Co. in Boston. "The fiscal stimulus is now being looked at through the clear eyes that it's a longer-term, back end-loaded plan that will take years, not months, to start affecting the real economy," he said.

Financial advisers and planners are trying to stay in closer touch with nervous clients and revisiting whether their advice from last fall still holds true. "Everybody wants to know where things are at and where is this going to bottom out," said Doug De Groote, managing director of United Wealth Management in Westlake Village, Calif. "They're seeing that the (political) change has not brought any good news to their portfolio." Those who are the most vulnerable, including older investors and those with the most riding on the market, are among the uneasiest. Joseph Leonard, a financial planner and retirement specialist from near Wilmington, says attendance at the financial planning meetings he organizes has tripled to 150 since the meltdown, with many clients keeping their money in cash.

"They're scared," he said. "One guy told me, due to economic conditions the light at the end of the tunnel has been shut off. They don't see where that light is today." Overall, however, the confusion and alarm that accompanied last fall's selloff have ebbed, as reflected in the recent relative stability of the VIX, the Chicago Board Options Exchange's volatility index. The VIX reflects investor sentiment about market volatility over the next 30 days and is often called Wall Street's fear gauge. But those emotions have been replaced by weary uncertainty and still-substantial concern, based on input from numerous financial advisers. David Twibell, president of wealth management for Colorado Capital Bank in Denver, senses from talking with people about the markets that most are worn out by the constant flow of negative news and poor stock performance. "During the current selloff, the feeling is more akin to resignation," he said.

Annual Consumer-Price Gauge Hits 53-Year Low
U.S. annual inflation vanished for the first time in over half a century, a government report showed, as the severe recession and sharp decline in energy prices since last summer led to a rapid reversal in price pressures. Still, consumer prices advanced on a monthly basis in January for the first time in six months, easing fears somewhat that the U.S. might face a protracted stretch of falling prices known as deflation. The consumer price index rose 0.3% in January on a seasonally adjusted basis, the Labor Department said Friday, slightly more than the 0.2% rise Wall Street economists in a Dow Jones Newswires survey had expected. The CPI slid 0.8% in December. That number was revised from a 0.7% drop earlier this week when the government released annual adjustments to the CPI data. The core CPI was up 0.2% last month, also slightly higher than expected.

Unrounded, the CPI rose 0.282% last month. The core CPI rose 0.177% unrounded. Consumer prices were unchanged compared to one year ago, the lowest rate of change since August 1955 and well below the 2% annual rate of inflation that most Fed officials think is consistent with their dual mandate of price stability and maximum employment. Core CPI was up 1.7% in the last year, however. The core CPI increase "suggests the U.S. has not yet slipped into serious deflation," said Zach Pandl, economist at Nomura. In fact, as long as price declines stay centered in energy and commodities, it's generally a plus for the economy by freeing up more disposable income for households to spend. It's when those declines get embedded more broadly in inflation expectations and cause consumers and business already facing a severe recession to further delay spending and hiring that they become an economic headache known as deflation.

According to the Fed's January meeting minutes released Wednesday, many officials saw "some risk" of "excessively low inflation" while "a few even saw some risk of deflation." Having already lowered official interest rates to near zero, Fed officials have two main options for combating deflation: quantitative easing through their myriad credit programs and communicating a more explicit inflation target. The Fed's balance sheet has already doubled in the past five months to almost $2 trillion, and the Fed recently increased by five-fold the size of its Term Asset-Backed Securities Loan Facility, to as much as $1 trillion. Meanwhile, in their January meeting minutes officials extended their inflation forecast horizon, which Fed watchers interpreted as a defacto target. The Fed's longer-term inflation forecasts -- measured by the price index for personal consumption expenditures -- are centered between 1.7% and 2%, though most officials think 2% is appropriate. If that catches on with markets and the public, it could keep inflation expectations from turning negative. "Increased clarity about the [Fed's] views regarding longer-term inflation should help to better stabilize the public's inflation expectations, thus contributing to keeping actual inflation from rising too high or falling too low," Fed Chairman Ben Bernanke said Wednesday.

In another sign that the U.S. should escape the kind of sustained price drops that plagued Japan earlier this decade, consumer companies including Procter & Gamble Co. and Clorox Co. said at a Florida conference this week that they don't plan to roll back prices. "We are not after mindless share and volume growth at any cost," P&G's Chief Executive A.G. Lafley told investors at the conference. But Nigel Gault, chief U.S. economist at the consulting firm Global Insight, said the U.S. isn't in the clear yet. "If core prices were up in January because demand was so strong that would be one thing," he said. But with demand weakening, core inflation will likely dip below 1% later this year, Mr. Gault said, which will have negative effects on the economy. According to Friday's report, energy prices rose 1.7% in January compared to December, yet plunged 20.4% over the last 12 months. Gasoline prices rose 6% last month. Food prices advanced 0.1%. Typically recession-proof products like alcoholic beverages and tobacco rose in price.

Transportation prices jumped 1.3% after three straight steep declines. Airline fares fell, but new vehicle prices increased 0.3%. Automobile prices were down on the year, however, reflecting the severe slump in sales. Housing, which accounts for 40% of the CPI index, was unchanged. Rent increased 0.3%, as did owners' equivalent rent. However, household fuels and utilities prices tumbled 0.7% while lodging away from home fell 1.1% as households cut back on non-essential spending. Medical-care prices increased 0.4%, while clothing prices rose 0.3%. In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, fell 0.1% in January. An increase in average hourly earnings was offset by the CPI rise, while hours worked were unchanged.

Mortgage-Aid Tiff May Portend a New Wave of Class War
Anger among homeowners about President Obama's foreclosure bailout plan boiled up to the White House yesterday as press secretary Robert Gibbs unleashed a barrage of criticism at a former trader whose rant against the plan this week made him a cable and Internet phenomenon. Rick Santelli, a CNBC reporter who exploded in a tirade Thursday from the Chicago Board of Trade, has accused the president of crafting a housing bailout that is unfair to the millions of responsible mortgage holders. "Government is promoting bad behavior," Santelli said on his network. He called for Obama to put his plan to an Internet referendum "to see if we really want to subsidize the losers' mortgages, or would we like to . . . reward people that can carry the water instead of drink the water."

"President Obama! Are you listening?" Santelli demanded. Apparently someone in the White House was. In response, Gibbs attacked Santelli by name repeatedly at a news briefing, accusing him of not reading the president's housing plan and mocking the former derivatives trader as an ineffective spokesman for the little guy. "I'm not entirely sure where Mr. Santelli lives or in what house he lives," Gibbs told reporters in a derisive tone. "Mr. Santelli has argued -- I think quite wrongly -- that this plan won't help everyone. This plan will help . . . drive down mortgage rates for millions of Americans." Later, Gibbs added: "I would encourage him to read the president's plan and understand that it will help millions of people, many of whom he knows. I'd be more than happy to have him come here and read it. I'd be happy to buy him a cup of coffee, decaf."

The exchange underscores the potential for a new wave of class warfare as the president unveils economic plans that reward some people, often at the expense of others. The stimulus plan that Obama pushed through Congress largely avoided that kind of fight. But the housing plan -- which targets up to 9 million homeowners for help -- quickly has become a focal point for homeowners who are paying their mortgages but still struggling financially. Gibbs's response also indicates that the White House is particularly sensitive to criticism that it is unconcerned with people who acted responsibly as the economy crashed. In his response, Gibbs insisted that the plan will not reward irresponsible behavior. "It won't help somebody trying to flip a house. It won't bail out an investor looking to make a quick buck," Gibbs said. "It won't help speculators that were betting on a risky market. And it is not going to help a lender who knowingly made a bad loan."

He ended by holding up the president's housing plan -- an indication that his tirade against Santelli was planned in advance -- and encouraged Santelli to read it. Santelli, who was hardly a household name 48 hours ago, appeared to be enjoying the attention. "I think it's wonderful that he invited me to the White House," he said on CNBC. "I'm not really big on decaf, though. I think I prefer tea."

Winning a Cyber War
The Central Asian Republic of Kyrgyzstan experienced a cyber attack last month that took down its two largest Web sites. But that's small beer compared to what happened to the Pentagon and several other U.S. agencies in 2007, when cyber attackers successfully hacked into their computer systems, including Defense Secretary Robert Gates's email. Welcome to the brave new world of cyber war, an area where the U.S. lacks the dominance it enjoys in traditional military arenas. President Obama's recent appointment of Melissa Hathaway to head a 60-day cyber security review is a sign that he is serious about stepping up the battle in cyber space. Like other forms of terrorism, cyber war offers an attacker asymmetrical advantages and can be used by individuals as well as governments to debilitate and confuse civilian and military targets. The more governments and economies rely on the Internet, the more vulnerable they become. Michael McConnell, the recently departed National Intelligence Director, called cyber security "the soft underbelly of this country."

The Bush Administration made some progress, such as last year's executive order creating the Comprehensive National Cyber Security Initiative. This highly classified $6 billion program aims to secure the dot-gov and dot-mil domains by instituting basic security measures for federal agencies. These include installing improved monitor programs -- known as "Einstein" -- to detect intrusions on federal computers, for example, and sharing attack information across federal departments. The U.S. government deflects low-level cyber attacks every day. Many are seeking sensitive information, such as weapon designs or classified communications. Security experts say most hackers who target Washington appear to operate from China, although the nature of the Internet makes it impossible to know for certain. In 2007, the government reported nearly 13,000 information security attacks, more than twice the number in 2006. Brigadier General John Davis, deputy commander of the cyber security unit at U.S. Strategic Command, told us his mission deals with millions of cyber "events" every day, although not all of these turn out to be attacks.

Cyber attacks can also be coupled with conventional warfare, which is what happened in Georgia in August. Even before Russian tanks rolled over the border, hackers -- probably Russian -- probed Georgian government Web sites and took several down. Russian hackers are also believed to have attacked Estonia in 2007, freezing government and private information systems, including banks, for days, apparently in retaliation for Estonia's decision to remove a historic Russian statue. The U.S. hasn't experienced such a coordinated and sustained attack, but no one is sure what would happen if it did. A known vulnerability is America's power grid, which could be disrupted for months by a sophisticated cyber attack, experts say. In telecommunications, banking and transportation, it's harder to predict how great the damage would be; the current season of the TV program "24" is showcasing some of the more unpleasant possibilities. It makes sense that one of Ms. Hathaway's first tasks is overseeing an assessment of the country's vulnerabilities.

The task is complicated by the lack of a legal framework that defines cyber war and security standards. It isn't clear whether the government can dictate security standards for private industry or if federal agencies can probe private networks to determine their safety. If you thought the debates over warrantless wiretapping were heated, get ready for fireworks over cyber security. Responsibility for U.S. cyber security is shared across many federal agencies. The Departments of Defense and Homeland Security, the FBI, the CIA, armed services and others all have cyber security projects. A successful counterterrorism strategy has to be decentralized to some degree, but better coordination is needed. A good defense also requires a shift in mentality for anyone with access to sensitive computer systems -- even an ordinary flash drive can become a weapon if handled carelessly.

The experiences of Estonia and Georgia show that cooperating with allies to share information -- and possibly coordinate counterattacks -- is an important element of any response. Cyber warriors typically take control of computers in a third country, from which they launch their attacks. Negotiating agreements on cyber security with allies will also help make the U.S. more secure. Mr. Obama released a statement on homeland security last month saying he would "declare the cyber infrastructure a strategic asset." That's a start. As the attacks on Kyrgyzstan remind, an aggressive response to the cyber threat can't come soon enough.

Economy fears dog Asia-Pacific markets
Asian stocks slumped on Friday to their lowest since early December, led by big losses in South Korea, as fears about the global economy and the financial sector led investors to shed riskier assets. In a tough week for global markets, the MSCI index of Asia-Pacific stocks outside Japan is headed for an 8 percent slump for the week – its worst since a 10 percent weekly drop in late November when the gauge touched five-year lows.

The sell-off in US markets overnight following weak U.S. employment data and fears of nationalisation of US banks spread into Asia, with European shares also set to track these losses, as investors shift to safer assets such as US Treasuries and the dollar. The tough markets indicate that a deluge of rescue packages – with measures ranging from increased spending in the United States to the outright buying of corporate debt in Japan – has yet to win over investors. "The biggest problem is that there are very few buyers in the market. Risk tolerance of global investors is falling," said Takashi Kamiya, chief economist at T & D Asset Management.

"Even though countries like Japan and the United States are expanding their government spending, consumer demand hasn't followed due to heavy consumer debt, and that will prevent the economy from a full-fledged recovery." The MSCI index of regional stocks outside Japan slumped 2.9 percent as of 0705 GMT, after earlier hitting its lowest level since December 2. The gauge is not far off from a low of 194.03 hit in late November. The latest fall comes after data on Thursday showed U.S. workers drawing unemployment aid jumped to a record at nearly 5 million, suggesting the 13-month-old US recession is deepening.

In another bad omen for Asian exporters that depend on the recovery of the world's largest economy, US lender stocks hit 17-year lows on fears they would be nationalised, reflecting concerns about the stability of the financial sector. Other sources of concerns abound. Japan's central bank said on Friday a deterioration in corporate profits had gathered pace, while investors also fret about the economic gloom gripping cash-strapped eastern Europe. South Korea, another country that has been hit hard by the crisis, on Friday saw its main KOSPI index slump 3.7 percent to its lowest close in more than two month, while the won currency slid for a ninth consecutive session on fears domestic banks will struggle to access overseas capital markets.

Japan's Nikkei average fell 1.9 percent to its lowest close since Oct. 27, while the broad-based Topix index slumped 12 points to its lowest close since January 1984. Among steep decliners were financials such as South Korea's Shinhan Financial Group. Exporters also fell, with Japan's tyre maker Bridgestone Corp sliding 7.4 percent a day after forecasting a bigger-than-expected slide in profits this year Other Major Asian index in Australia, Hong Kong, Taiwan, India, and Singapore slid 1-3 per cent each. Investors sought to avoid the volatility by targeting assets often prized for their liquidity and safety.

US Treasuries gained during Asian trade, though inflows were limited by caution given a record $94 billion in U.S. government debt will be sold next week. Benchmark 10-year notes rose 11/32 in price to yield 2.811 percent, down about 4 basis points from late U.S. trade the previous day. The dollar jumped 1.6 percent to 1,504.9 won, bringing the South Korean currency to its lowest closing level since Nov. 24 and within sight of an 11-year low. The dollar was broadly resilient against other currencies, benefitting from a rush to liquidity. The euro fell about 0.6 percent to $1.2580, though that was well off a three-month low around $1.2510 reached on Wednesday.

Caution was also a key factor in the commodities market. Spot gold prices climbed slightly to $975.70 an ounce after on Thursday hitting as much as $985.95, the highest since July on its march towards the $1,000 barrier that analysts say will be breached soon. Holdings in both gold and silver exchange-traded funds, which are often used by funds, both hit records. US crude futures for March delivery, which expire later in the day, fell 93 cents to $38.65 a barrel, after jumping 14 percent to top $39 a barrel on Thursday following data showing an unexpected fall last week in U.S. crude inventories. April delivery contracts fell 96 cents to $39.22, while London Brent for April delivery lost 70 cents to $41.29 a barrel.

Investors flee to gold and government bonds

Global stock markets ended a miserable week at multi-year lows as fears of a deepening worldwide recession and fresh worries about the banking sector drove nervous investors to the perceived safety of gold, government bonds and the dollar. The US S&P?500 index sank below the psychologically significant 800 level, European stocks fell to six-year lows and the Topix share index in Japan closed at its worst for a quarter of a century as gold broke above $1,000 an ounce and the dollar touched a three-month high against the euro.

Garry Evans, strategist at HSBC, said: "Equity markets continue to be held back by worries about structural vulnerabilities in the global economy." He noted that market attention had focused heavily this week on central and eastern Europe (CEE) amid fears that borrowers in the region would struggle to repay debt owed to foreign banks. Moody's Investors Service warned that the recession in CEE economies would be more severe than elsewhere and that western banks with subsidiaries in the region risked ratings downgrades. "This issue highlights two of the biggest risks on investors' minds: the lack of solvency of big international banks, and the structural weaknesses in some emerging markets," Mr Evans said.

"These jitters have begun to affect Asia too. Credit default swap rates have started to rise again, with Korea this week hitting a three-month high – higher than the Philippines – and even China rising." While CEE dominated newsflow in emerging markets this week, there were plenty of grim reports from developed economies for investors to absorb. Investors were shocked by the deterioration in Japan as figures showed GDP falling by an annualised 12.7 per cent in the last three months of 2008 – the steepest drop since the oil crisis of 1974. In the US, labour market concerns were heightened by news that continued claims for jobless benefit had hit a record high, while the eurozone composite purchasing managers' index fell to the lowest level on record.

There was a broad lack of enthusiasm from the markets for the latest global stimulus measures. Dean Maki of Barclays Capital said: "Policymakers have been busy trying to arrest the global downturn in recent months, but the challenge they face keeps getting larger." In the US, President Barack Obama's $787bn fiscal package was followed up with plans to help struggling homeowners. In the UK, the minutes of the Bank of England's most recent policy meeting showed a unanimous vote in favour of buying government and other securities – so-called "quantitative easing" – which analysts believe could provide a powerful boost to the economy. The Bank of Japan unveiled plans to buy up to Y1,000bn ($10.7bn) of corporate bonds.

But equity markets weakened across the board. In the US, the Dow Jones Industrial Average dipped to a six-year low while the S&P 500 was on track for a weekly fall of 6.5 per cent and within striking distance of last November's bear market lows. Financials bore the brunt of the sell-off amid mounting fears that the government would be forced to nationalise a leading bank. European banks also suffered and the FTSE Eurofirst 300 recorded a weekly fall of 7.3 per cent as it touched its lowest since March 2003. In Tokyo, the Nikkei 225 Average fell 4.7 per cent and the Topix shed 3.3 per cent. The MSCI Emerging Markets index dropped 8.5 per cent – its worst week since November. The weaker tone in equities prompted a steep widening of credit spreads, particularly for banks. The investment-grade Markit iTraxx Europe index widened 20 basis points over the week to 174bp while the Crossover index – a closely watched barometer of risk aversion – briefly hit a record wide of 1,120 basis points before easing back to 1,085bp, up 15bp.

In the worsening risk environment government bonds pushed higher over the week in spite of persistent concerns about supply. The 10-year US Treasury yield fell 15bp to 2.75 per cent as investors brushed off a slightly higher than expected core inflation reading on Friday. Germany's 10-year Bund yield dropped 12bp to 3.01 per cent and the 10-year UK Gilt yield dropped 13bp to 3.42 per cent. The clear winner in the currency markets this week was the dollar as the safe-haven status of the yen was called into question by Japan's worsening economic backdrop. The dollar hit a six-week high against the Japanese currency and touched its best level against the euro for three months. In commodities, gold stood out as it touched an 11-month high of $1,005.40 – a rise of 6.8 per cent over the week. But the heightened worries about global growth put other prices under pressure, with the Reuters-Jefferies/CRB commodities index hitting a 6?-year low.

Evidence suggests Madoff bought no securities
Records recovered from the investment firm run by Bernard Madoff, who is accused of carrying out a $50bn fraud, suggest that no securities were purchased on behalf of customers for as much as 13 years. The findings released on Friday by Irving Picard, the court-appointed trustee liquidating the Madoff business, offer the first clear glimpses of how investigators are untangling the alleged $50bn "Ponzi" scheme by Mr Madoff. The New York broker was accused of securities fraud in December.

Mr Picard met creditors – including sole investors, banks and charities – at the US Bankruptcy Court in Manhattan on Friday. "We have found no evidence that securities were purchased for customer accounts," he said. The trustee has recovered records going back as much as 13 years. There was also no evidence so far that there was any difference between Mr Madoff's brokerage business and investment adviser business, according to Mr Picard. This finding could put further pressure on securities regulators, who are under heavy fire for missing the alleged Ponzi scheme for years. The investment advisory business, at the centre of the purported fraud, was never examined by the Securities and Exchange Commission after it registered in 2006. However, the SEC and the Financial Industry Regulatory Authority, the securities body overseeing US broker-dealers, regularly examined the brokerage operation.

Investigators working with Mr Picard have located books and records at Mr Madoff's main office in Manhattan, the basement of that building, a warehouse and a "back-up" site in Queens. They have inventoried more than 7,000 boxes with account records. They have also retrieved account information dating back to 2000 from an old computer. Mr Picard said that investors with qualified claims would be eligible to receive a maximum of $500,000 from the Securities Investor Protection Corp, the non-government agency that helps customers of failed brokerages. The body was set up by Congress to help investors in failed brokerages. Beyond the initial $500,000 that investors could receive, any remaining funds will be distributed based on a formula depending on how much is ultimately recovered. The SIPC had received 2,350 claims so far. This month Mr Picard said that he had recovered about $946m.

Some investors on Friday expressed concerns about a "clawback" provision under which the SIPC would try to retrieve money paid out by Mr Madoff to investors in the 90 days before the fund was shut down. Some also asked what recourse they would have on taxes paid on fictitious earnings. "One of the entities that has made out the best is the Internal Revenue Service; they have been collecting on non-income for the last 30 or 40 years," said one investor. "This is a human tragedy. Many, many thousands of us are not wealthy people." Mr Picard said that officials are working on liquidating Mr Madoff's valuable artwork, prints and statues that he owns – and also looking into every family member and associated insider. Meanwhile, about 45 employees are being retained to sell Mr Madoff's market-making unit.

Court papers lift lid on Stanford's lifestyle
The lavish lifestyle enjoyed by Sir Allen Stanford, the Texas billionaire charged by US financial regulators with "massive" investment fraud, has been laid bare by court documents from two years ago that emerged on Friday. A $10m Florida mansion, bills of up to $75,000 for Christmas presents and childrens' holidays, and a $100m fleet of private jets topped a list of Sir Allen's outgoings and assets in the documents obtained by the Financial Times from a 2007 court case.

Details of his lifestyle emerged as the Federal Bureau of Investigation continued its probe into the billionaire's affairs and allegations that his Antigua-based Stanford International Bank was at the centre of an $8bn fraud that may have drawn in tens of thousands of investors. The criminal inquiry by the FBI and justice department is expected to resemble that of Enron seven years ago, when a special taskforce was formed to investigate allegations of criminal behaviour at the Houston-based energy company. Sir Allen and two co-defendants had surrendered their passports to the US authorities, the Securities and Exchange Commission said on Friday.

A law firm representing 100 Stanford clients filed a civil lawsuit in Texas accusing the billionaire of fraud, conspiracy and breach of contract. It is thought to be the first such action. James A. Dunlap Jr and Associates LLC, a Georgia firm, filed its suit on behalf of a Colorado charity. In London, the England and Wales Cricket Board said it was ending all contracts with the Stanford Financial Group, including a planned four-country tournament in England due in May.  The 2007 court case against Sir Allen was brought by a woman who claims to be the mother of two children by him. The documents detailed personal expenditure ranging from a $100,000 a week yacht to $25,000 a month rent for a Florida home.

In the paternity suit, Louise Sage Stanford said the family once lived together in a $10m mansion known as the Wackenhut Castle after its builder, the former FBI agent and private security tycoon George Wackenhut. Her claims – admitted by Sir Allen – included his chartering of the yacht, the purchase of gifts and vacations costing from $30,000 to $75,000, and his ownership of a fleet of private jets. Elsewhere, the reverberations from the SEC allegations continued apace. In Houston, the court-appointed receiver for the Stanford Financial Group warned that customers of the firm's brokerage and advisory businesses would not be able to access their cash or close their accounts while the company's assets were being examined.

"For the foreseeable future, customers cannot use their accounts to make payments because transfers out of these accounts are frozen until the receiver is able to verify there are no legal or equitable claims against those accounts," the receiver said in a statement. In Antigua, the island's financial regulators appointed separate receivers to unravel the affairs of Stanford International Bank, Sir Allen's offshore business, and the Stanford Trust Company. Separately, the Eastern Caribbean Central Bank - the monetary authority for eight island nations - was forced to seize control of a commercial bank owned by Sir Allen to prevent its collapse. The ECCB said it would take over the Bank of Antigua after "an unusual and substantial withdrawal of funds" during the week.

The Bank of Antigua is a separate entity from Stanford International Bank and is not mentioned in the SEC's complaint. But the association with Sir Allen was enough to prompt hundreds of locals to demand their money back. The subsequent run on the bank had threatened to destabilise the country's economy, banking officials said. Officials in Venezuela have also banned the directors of Sir Allen's banking operations there from leaving the country. The Venezuelan government took control of Stanford Bank Venezuela on Thursday.

Dubai to take up $10bn UAE loan
The United Arab Emirates is to lend Dubai $10bn to ease the emirate's debt repayment schedule in an effort to rescue the struggling economy, officials say. The UAE central bank subscribed to half of a $20bn five year bond programme launched by the Dubai government. The unsecured paper yields a 4 per cent dividend. "This program will secure the necessary funding for Dubai to meet its financial obligations and continue its development program," the Dubai government said on Sunday. Federal backing is designed to help restore confidence in the Dubai economy, the foundations of which are based on real estate, tourism and trade, making it particularly exposed to the global credit crunch.

"Things have been getting more difficult for Dubai on a daily basis...they had to make the decision before it became too late," said an official in Abu Dhabi.
Government-owned Borse Dubai's $3.4bn refinancing went down to the wire last week, illustrating the grim state of credit markets and highlighting the sense of tapping a federal facility. The loan should ease the cost of insuring against a default, which in recent weeks saw five-year credit default swaps on Dubai debt rising to levels similar to Iceland. Dubai, which maintains some autonomy within the federation, walked away from plans for a similar federal facility last November. Dubai officials declined to comment.

The federal government, located in the UAE's wealthy capital of Abu Dhabi, has long been expected to help Dubai, which lacks oil resources but has built a vibrant, services-focused economy. To date, the UAE government has made up to Dh120bn available to banks in all seven emirates and also agreed to rescue Dubai's two mortgage companies, Amlak and Tamweel. But Abu Dhabi earlier this month injected Dh16bn into its own banking sector, rather than supporting all financial institutions in the UAE, triggering a wave of concern over Dubai. Borse Dubai last week refinanced the $3.8bn it borrowed to buy Scandinavian exchanges group OMX, but it faced challenges while raising the $2.5bn to help retire the debt.

Local banks at the eleventh hour put in $1bn to the loan syndicate. Speculation rose that the federal government had contributed to the deal. Bankers have since said that the Borse Dubai's main shareholder, the holding company for government assets, Investment Corporation of Dubai, persuaded local banks to lend. Nonetheless, new federal money might help restore faith in Dubai's troubled real estate sector, where more than half the developments have been abandoned as financing dries up and demand disappears. Property prices are in freefall, dropping on average a quarter from the third to fourth quarters last year. Dubai grew rapidly during the petrodollar boom of the past six years, borrowing heavily to finance infrastructure expansion and to fund overseas investments. "Thanks heavens, the money is coming," said a senior banker in Dubai.

High-skilled foreign migrants entering Britain to halve, Jacqui Smith says
The number of highly skilled migrants coming to Britain from outside the European Union will be cut in half from next year after a tightening of entry requirements, the Home Secretary said today. Ministers have also ordered a review to see if entrants could be restricted to occupations where there are shortages in the UK, and are also planning to make it easier to deport EU nationals convicted of sexual, violent and drugs crimes. Jacqui Smith announced the tightening of the new points-based system after a series of wildcat walkouts by British workers protesting at jobs going to foreign migrants. The moves come amid deepening concern among Labour backbenchers at the potency of claims that large numbers of foreign workers are entering the country at a time when tens of thousands of British workers are losing their jobs.

Speaking on the BBC's Andrew Marr Show, she said that highly skilled migrants would from April this year have to have a Masters rather than a Bachelors degree and to earn a minimum £20,000 a year compared with the current figure of £17,000. In a move which could also signal further cuts in non EU migration, she has asked the Migration Advisory Committee to look at whether skilled migrants should be limited to occupations where there are currently skills shortages in the country such as civil engineers, chemical engineers, maths and science teachers and senior care workers.

She has also asked the committee to examine the economic contribution made to the UK by dependents of migrants entering under the points-based system.
The Home Secretary added that skilled jobs now had to be advertised for a minimum of two weeks in Jobcentre Plus branches before firms could seek workers from outside the EU. The rules were changed after claims that some jobs were being advertised in obscure media outlets in the UK, meaning British workers were missing out. Ms Smith said the changes should mean the number of highly-skilled migrants entering the UK from outside the EU falling from 26,000 last year to 14,000 in the next financial year.

She cannot restrict the number of people from within the EU who come to work in Britain, but figures to be published on Tuesday are expected to show that those coming eastern Europe are continuing to fall. "I am actually raising the bar," Ms Smith said. "Migration is important for this country but at a time when we have more people actually looking for work within the UK, it is also economically right that we are more selective about those who come into the country.
"I think, given the current economic situation, it is right for us now to look at that points-based system and to make sure that it is responding to the current economic circumstances," she added.

"What I think is important is that we base our policy, not on prejudice, but on a judgment about what is best for the British economy, for British workers."
The Government is also planning to make it easier to deport EU citizens convicted of sexual, violent and drugs crimes. At the moment an EU citizen can only be deported if they are given a jail sentence of two years or more. Ms Smith said she would reduce this to 12 months for EU migrants convicted for drugs, sex and violent crimes. Damian Green, the Shadow Immigration Secretary, said that Ms Smith's measures would not make a significant impact. "Jacqui Smith is just tinkering around the edges of the immigration system," he said. "If she wants to control the numbers entering the country legally then should introduce a limit, as a Conservative Government would. "If she wants to control illegal immigration better, she should introduce a border police force. For the moment, she is just floundering in reaction to public anger."

Gordon Brown tries to ban 100% home loans
Gordon Brown wants to ban 100% mortgages as part of a blitz of initiatives designed to save the banking system — including a new bailout with a potential cost of £500 billion. The prime minister is to ask the City regulator to prevent lenders from offering loans for the full value of a property.
In future, buyers would be forced to find a deposit of at least 5%, even if the property market was booming. The move will hit first-time buyers hoping to get on to the property ladder. However, last night Brown said: "We want to see the reinvention of the traditional savings and mortgage bank in Britain, making loans on prudent and careful terms." The announcement comes ahead of a series of fresh bailouts for Britain's battered financial system, which could cost the taxpayer as much as £500 billion.

The new measures include:
- Government insurance of banks' "toxic assets", with up to £400 billion of risky debts set to be put into a "bad bank".
- Permission for the Bank of England to begin £100 billion of "quantitative easing" — in effect printing money — to encourage banks to resume lending.
- A cash injection of up to £10 billion for Northern Rock, the nationalised bank, to issue new mortgages.
With the government preparing to announce at least four measures on the economy in less than a week, some ministers privately fear Brown is expending too much energy trying to "look busy".

In a speech last week, Lord Mandelson, the business secretary, warned there was "no value in trying to create frenzy around these events every day". Brown's move to control home loans closes the door on an era that saw hundreds of thousands of house buyers taking advantage of mortgages of up to 125% as prices soared. All banks and building societies have now withdrawn 100% mortgages, but potential first-time buyers had hoped the deals would return. The government is presenting the policy as evidence of its determination to end irresponsible lending for good.

A Downing Street source said: "There is a big question over whether it was responsible for banks to have been offering upwards of 100%. The prime minister will be asking the Financial Services Authority to look into whether these loans should be banned." Opposition politicians decried it as too little, too late. Grant Shapps, the shadow housing minister, said: "This comes well after the horse has bolted. It was Gordon Brown's failure of judgment which allowed the credit explosion to get out of control." At the height of the housing boom in November 2007, there were more than 150 mortgage products with no deposit, with about a third of prime lenders offering 100% loans. Some, including Northern Rock, offered "cash-back" mortgages of up to 125%.

Ministers are putting the final touches to a £10 billion refinancing of Northern Rock, which last week marked the first anniversary of its nationalisation. The plan is to hive off its remaining risky assets into a separate vehicle, while the Treasury will inject money into its mortgage business in an effort to kick-start the home loans market. As Northern Rock prepares to start lending more aggressively, another state-owned bank, Bradford & Bingley, is closing its doors to new business, and warning customers they must look elsewhere once their current deals expire. On the wider front, Alistair Darling, the chancellor, will tell the Bank of England it can buy £100 billion worth of high-grade assets from banks in return for cash.

The authorities hope this huge flow of liquidity will tip the banks into lending to cash-strapped businesses. However, some economists fear that the unprecedented move to pump more money into the economy could trigger a further devaluation of sterling, already hovering just above parity with the euro. Darling is also preparing to launch a £400 billion scheme to use public money to insure the "toxic assets" held by British banks, a move aimed at drawing a line under catastrophic corporate losses. Lloyds TSB and Royal Bank of Scotland, the two hardest hit lenders, will be the first to sign up to the insurance plan, with each set to place about £200 billion of assets into the scheme. The taxpayer owns a majority of RBS and 43% of Lloyds TSB, which took over Halifax Bank of Scotland.

The blitz of activity comes as RBS, 68% owned by the taxpayer, prepares to unveil Britain's biggest corporate loss of £28 billion. It will axe 20,000 jobs worldwide, with half likely to go in the UK. Although RBS has agreed to curb its bonus payments, other banks still fully in private hands but which benefit from the government's wider measures to support the banking system are expected to announce billions of pounds in payouts to directors and staff over the next fortnight. Michael Geoghegan, the chief executive of HSBC, is believed to be in line for a bonus of more than £1m in cash and shares, while Barclays will pay bonuses that industry sources expect to be worth more than £1 billion.

RBS signals £300bn asset sale
Stephen Hester, the chief executive of Royal Bank of Scotland (RBS), will this week trigger the dismantling of the empire assembled by his predecessor, Sir Fred Goodwin, by announcing plans to create a "non-core" subsidiary into which about £300bn of unwanted assets will be placed.
The Sunday Telegraph has learned that Mr Hester will replicate a structure he used while he was chief operating officer at Abbey in 2002 by establishing a new division that will sit within RBS but which will be ring-fenced from the rest of the bank. Mr Hester hopes that adopting this structure will bring some clarity to employees and to investors. But he will not be rushed into selling assets at fire-sale prices and will stress to the City that his strategic plan is to be delivered during the next five years.

Among the assets and businesses to be placed in the non-core division will be the Asian and Australian units acquired as part of the ABN Amro acquisition in 2007, RBS's aircraft leasing unit, and portfolios of mortgage and lending assets held by Charter One in the US. Mr Hester will also outline plans for a drastic reduction in the bank's leveraged finance operations as well as scaling back its operations in areas such as shipping finance and commercial property. RBS will also withdraw from about half of the 60 countries in which it operates, including Indonesia, Malaysia and some parts of Eastern Europe. "Everything that does not reinforce the client franchise will be given a vastly reduced emphasis," said a person close to RBS. "This will wind back the bank's over-expansion."

The measures have already been signed off by the Treasury, which owns almost 70pc of RBS. Included in Mr Hester's announcement will be a commitment to reducing RBS's annual cost-base by about £1.5bn and details of restructuring charges to be taken during the next three years which are likely to reach at least £2bn. Mr Hester will not place a figure this week on the number of jobs that will be lost at RBS but people familiar with his plans said it would be close to 20,000, or more than 10pc of the bank's workforce, in addition to thousands of posts which have already been axed. Alongside the results of the strategic review, Mr Hester will confirm that RBS made a loss last year of about £28bn, including up to £20bn of goodwill write-downs related to previous acquisitions.

The turmoil at the bank culminated in the Government's £20bn rescue last autumn, months after Sir Fred had tapped investors for £12bn in a rights issue.
The sweeping restructuring engineered by Mr Hester will leave a slimmed-down RBS retaining businesses such as NatWest and Direct Line in Britain, parts of Citizens in the US, and investment banking operations in important financial centres such as Hong Kong. RBS is not expected to announce further board appointments this week. Three new directors are being recruited, and will have the endorsement of UK Financial Investments, the Treasury body which holds the RBS stake, but they will not join the board until after the bank's annual meeting in April.

According to people close to RBS, each remaining unit within the group will be given its own restructuring plan to deliver improved performance during the next three years. Further details of individual businesses that may be offloaded will be announced later this year. Mr Hester is also likely to signal that RBS will end its involvement with Formula One once its current sponsorship agreement expires in 2010. He has no intention of ending such marketing activities in key markets such as Britain, where RBS sponsors rugby union's Six Nations competition. Since taking over as chief executive, Mr Hester has offloaded RBS's 4.2pc stake in Bank of China, which had been acquired by Sir Fred as a platform for expansion in the world's fastest-growing major economy. Although Mr Hester has declined to criticise Sir Fred since replacing him, this week's strategic review will be interpreted by the City as another indictment of the speed at which RBS grew its balance sheet during the boom years.

RBS and Lloyds close in on £500bn Treasury deal
Two of Britain's largest banks have submitted plans to insure almost £500bn of assets as part of the Treasury's scheme to kick-start lending and halt the economy's slide towards a full-scale depression. Gordon Brown, the Prime Minister, and Alistair Darling, the Chancellor, will meet with the Treasury's advisers in Whitehall tonight to hammer out details of the programme, which will involve the creation of a new class of non-voting shares to allow the banks to fund their participation. Stephen Hester, chief executive of Royal Bank of Scotland (RBS), and Eric Daniels, chief executive of Lloyds Banking Group, are expected to meet with Treasury officials tomorrow to finalise details including pricing and the scale of losses which would be borne by the banks and the taxpayer.

Central to the negotiations will be the form of payment used by the banks to insure the assets proposed for inclusion in the scheme. Last night, people close to the discussions said it would see a new type of capital instrument devised that includes a dividend entitlement. However, because the new shares would not include voting rights, their issuance would not be dilutive to existing shareholders. The solution avoids the immediate prospect of outright nationalisation for the two banks, which are both likely to be charged billions of pounds for their participation in the Treasury scheme. A Treasury source said: "There will be some insurance provided for some assets, with the exact figure to be agreed and decided. Our priority is to get some conditions attached to that in the form of additional lending."

RBS has proposed including some non-toxic assets in the scheme in order to free up more capital for lending money into the economy. RBS, which is already 68pc-owned by the taxpayer, wants to include about £250bn of assets in the programme, while Lloyds is understood to have tabled plans to insure a slightly lower sum. Barclays is also likely to take part in the scheme, although it is waiting for an announcement about the details, expected alongside RBS's full-year results on Thursday. Details of the Treasury's plans come as momentum builds for a solution to help smaller European countries struggling to tread water through the financial crisis. Dominique Strauss-Kahn, the head of the International Monetary Fund, yesterday threw his weight behind the possibility of the European Union developing a common response to the crisis, including supporting struggling eurozone states through a bond scheme.

Leaders from the leading European countries, including Mr Brown, are meeting in Berlin today to discuss the ongoing response to the economic downturn.
"We have a big player which is the European Union and there is no reason why it shouldn't have its own way of financing and to issue bonds is a good idea," Mr Strauss-Kahn said. "It really depends on the European Commission and the EU authorities but I see no reason why the EU cannot do this." Mr Strauss-Kahn added that he saw "a lot of downside risk" to the IMF's forecast for a 2pc fall in gross domestic product in 2009 for the eurozone. This week, Mervyn King, the Bank of England Governor, will give evidence on the banking crisis to a Treasury Committee. The panel of MPs is likely to grill him about plans to stimulate the economy by pumping cash into the economy - known as quantitative easing - with interest rates are an all-time low of 1pc.

We will put people first, not bankers
Tough times like these test our character and values as a nation. So even in a recession, we have to act now, both to protect people from the downturn and to prepare and equip ourselves for every future challenge. Our future lies in low-carbon, high- technology manufacturing and services. Hence our investment in science, green jobs, skills and the digital backbone on which the rest of the economy depends. That is why we reject the idea of cutting spending now. But at root, the competitive edge that we need in the future requires an effective flow of credit through a reformed and more responsible banking system. I understand and share people's anger towards the behaviour of some banks. But anger on its own does not offer us a solution. Instead, Britain needs to lead the world in reforming and restructuring our banking system.

The basic functions of a bank are very simple - to provide a place where people can keep their savings safe and to provide funds for those who want to borrow to invest. But it is to meet these objectives in a new world that we must make changes both in the banks themselves and their regulation. Banks must act in the long-term interests of their shareholders and therefore of the economy as a whole, not in the short-term interests of bankers. That has to be the foundation on which a new system must be based. This starts with a rejection of the old short-term bonus culture. So, starting last week with RBS, we are changing the bonus system in the industry - with long-term incentives and claw- backs if future performance is poor. Another intrinsic part of the foundations must be better governance of banks. Their boards must have the expertise and power to challenge management and they must be able to understand the risks the company is taking.

So David Walker's review will look at whether board members have the necessary expertise and the right incentives to monitor executives. We also need both better national and global regulation. For example, where banks are speculating, long-term capital requirements will have to be higher. All markets and all jurisdictions that want to benefit from the global economy should play by the global rules. Institutions with global reach should be regulated in a global way, not by a patchwork of national regulators. But as we design this new regulatory system, we have to be clear as a nation about what we expect from our banks and clear, too, about how people, who depend every day of their lives upon banks, expect these vital institutions to be run. For, distant as the relationship between banker and client has become, the restoration of trust, the most precious asset of all, to the heart of that relationship must now underpin all that we do.

This should not be at the cost of Britain hosting big international banks. There is no room for parochialism or protectionism in our model of the future. Global financial flows and liquid capital markets have brought massive benefits to our economy since the dawn of global trade centuries ago. We are not evacuating, but rather entrenching, our place right at the heart of global commerce, finance and trade. A central problem we now have to deal with is that in the last year Britain has lost significant lending capacity from both foreign banks and lenders who relied on finance from the global capital markets now frozen over. Alongside thriving international and investment banking sectors, we need to ensure that the UK banking system that emerges over the coming months is refocused on providing strong competitive banking for domestically focused businesses, including start-ups and entrepreneurs, as well as mortgages for those who want to buy a home. In short, we need stronger business banks, mortgage banks and savings banks.

We do not envisage, as some have advocated, a rigid divide in future between "narrow banking" - retail and corporate deposit taking - and investment banking and trading conducted at an international level. But while no one is advocating a retreat to single-purpose, nationally focused banks, we do want to see the reinvention of the traditional savings and mortgage bank in Britain, for loans to be made on prudent and careful terms, not just to people with large deposits, but to first-time buyers and those on middle and modest incomes who wish to buy their home but who have not been able to save a huge deposit. We have got to get the balance right between serving home owners better and encouraging responsibility in the housing market. This is a duty on banks and building societies, but we have also asked the Financial Services Authority to look at how in the future we should control new mortgages for more than 100% of house value.

Banks need a clearer focus on making loans to UK businesses so that they can grow and take on more staff. In order to get lending going, we must continue to develop agreements that remove the uncertainty arising from banks being unsure of their losses in return for improved lending conditions for families and businesses. We need new institutions to support British start-ups, particularly those with innovative, high-growth potential. We want to ensure that the new banking system that emerges over the coming years meets all these requirements - and becomes the servant of our economy and society, never its master.

Rock to be reborn as a 'good bank'
Plans were being drawn up this weekend to transform Northern Rock into a "good bank" by injecting up to £10bn into the state-owned lender and hiving off its existing mortgage book. As the government tried to thrash out the terms of an insurance scheme for Royal Bank of Scotland that could involve the troubled bank issuing non-voting shares, attempts were also being made to turn Northern Rock back into a major player in the mortgage market. The details were still to be finalised over the weekend amid hopes they could be agreed in time for an announcement this week. Under the scheme being discussed, it is thought that the timetable of loan repayments Northern Rock is due to make will be eased or lengthened, which would free the bank to start offering new loans to homeowners.

The bank's troubled existing mortgage book might also be ring-fenced, to allow all the capital being released into the bank to be used to support new lending. The Newcastle-based lender has already warned it will account for one in every 10 repossessions this year and it has been estimated that as many as a fifth of its customers are in negative equity. Run by former Barclays executive Gary Hoffman, the lender has already embarked on a strategic review and is scheduled to announce its 2008 figures on 3 March, but it is thought that an announcement about the restructuring of the bank will take place before then.

Chancellor Alistair Darling has already signalled that he believes Northern Rock should be encouraged to step back into the mortgage market. But any change of course would probably require approval from the EU, which oversees state aid granted to banks and other companies. By pulling out of the mortgage market - which it dominated in the first half of 2007 before the credit crunch started to bite - Northern Rock has been able to repay more than £15bn of the £26bn in taxpayer loans it received when it was nationalised. But in doing so it has contributed to the slump in the supply of home loans, as illustrated by recent data from the Council of Mortgage Lenders showing that the number of mortgages taken out fell to its lowest level in 34 years during 2008. Just over 500,000 mortgages were granted for new home sales over the year, down 49% from 1m in 2007 and the lowest number since 1974.

As the government tries to find a way to reinvigorate Northern Rock, it is also attempting to finalise the asset protection scheme that is intended to insure the toxic assets of HBOS, now part of Lloyds Banking Group, and RBS. Both banks publish their 2008 figures this week and will be vying to report the biggest losses in UK corporate history. RBS is the guinea pig for the asset protection scheme and is expected to pay an annual bill of at least £4.5bn by issuing shares that do not carry voting rights. It is not thought the government's stake will need to increase beyond 68%. The bank buying the insurance will still suffer a loss on a percentage of the loans before the insurance takes effect. The Treasury has made it clear that any bank taking the insurance will be subject to conditions, which will, among other things, relate to staff remuneration.

RBS puts more jobs on the line in bid to avoid full-scale nationalisation
Tens of thousands of jobs will be put on the line this week when Royal Bank of Scotland unveils plans to dramatically cut costs and sell up to a quarter of its businesses in a desperate effort to stave off full-scale nationalisation. A senior executive will be given responsibility to wind down the £300bn of operations and assets earmarked for closure or sale and there are fears that up to 20,000 of the bank's 210,000 global workforce could be axed as part of the plan. News of further job cuts in the banking sector is expected on Friday when Lloyds Banking Group is due to unveil the scale of the losses caused by the rescue of the HBOS banking unit from collapse last year.

The management of Lloyds has warned it expects to make annual cost savings of more than £1.5bn by the end of 2011 - more than 10% of its current cost base - raising fears that up to 40,000 roles could be lost. Initially, the focus will be on RBS. In a presentation on Thursday, its new chief executive, Stephen Hester, will warn that the road to recovery could take three to five years. He will also unveil results showing an unprecedented £28bn loss for 2008. He is likely to demonstrate a commitment to sell many of the business acquired along with ABN Amro, the Dutch bank bought by the former chief executive, Sir Fred Goodwin, at the height of the credit crisis. That record-breaking takeover proved to be one step too far for RBS, which has now been rescued with £20bn of taxpayer funds, giving the government a 68% stake in the Edinburgh-based bank.

Hester, hired on a salary of £1.2m a year, has already signalled that more jobs will be axed on top of the announced plans to cut its workforce by more than 12,000 people. It is now expected that as many as 20,000 more could depart, and fears have been expressed this weekend that the axe will fall heavily among the bank's 80,000-strong workforce in the UK, where more than 2,000 jobs are already going. RBS is unlikely to set out a precise job cut figure during Thursday's announcement when it will reveal that the high street banks RBS and NatWest and the insurance businesses Direct Line and Churchill have remained profitable despite the economic downturn. In splitting off the non-core businesses, Hester will be trying to a give a new focus to the operations which can generate the most profit for the bank while producing the least risk.

RBS has already asked investment bank Morgan Stanley to seek out buyers for the Asian business and Hester is thought to be keen to reduce some of the loans inside the Charter One business bought in 2004. Crucially, though, Hester is not planning to pull out of the US where RBS has is one of the biggest players through its Citizen's bank. He has already reversed the sale of the insurance businesses and sold the stake in Bank of China bought by the previous management. Hester feels RBS was "overleveraged at the wrong time" and will now set out to the City and the taxpayer how he intends to address that by unwinding much of the expansion carried out by Goodwin and his team. He intends to avoid full-scale nationalisation of RBS by paying for a new insurance scheme to cover the most problematic £250bn of its loans through the issue of a new class of shares which do not carry voting rights.

The market remains concerned that full-scale nationalisation will be difficult to avoid, reflected in Friday's closing share price of just 19.3p. The taxpayer bought in at 65p, which was already barely 90% of the figure of the shares' trades the year before. The £28bn loss will comprise £8bn of credit crunch writedowns and the £20bn spend on paying too much for previous deals, notably ABN Amro and Charter One. Almost the entire value of the £10bn paid by RBS for ABN Amro is expected to be written down.

After the crash, Iceland's women lead the rescue
Iceland's spectacular meltdown was caused by a banking and business culture that was buccaneering, reckless - and overwhelmingly male. Business editor Ruth Sunderland travelled to Reykjavik to meet the women now running the country, and heard how they are determined to reinvent business and society by injecting values of openness, fairness and social responsibility On Bondadagur, or Husband's Day, the menfolk of Iceland are spoiled by their wives and girlfriends, who serve them with traditional delicacies such as ram's testicles and sheep's head jelly, a recipe for which is handily included in the latest online edition of Iceland Review, alongside the latest bulletins on the economic meltdown.

Icelandic women, however, are more likely to be studying the financial news than the recipes - and more likely to be thinking about how to put right the mess their men have made of the banking system than about cooking them comfort food. The tiny nation, with a population of just over 300,000 people, has been overwhelmed by an economic disaster that is threatening its very survival. But for a generation of fortysomething women, the havoc is translating into an opportunity to step into the positions vacated by the men blamed for the crisis, and to play a leading role in creating a more balanced economy, which, they argue, should incorporate overtly feminine values.

The ruling male elite is scarcely in a position to argue. The krona has collapsed; interest rates and inflation have soared; companies and households which have borrowed in foreign currency are overwhelmed by their debts and unemployment is at record levels. An exodus of young people is feared from the capital only recently held up as a centre of cutting-edge cool. Walking along Laugavegur, touted until a year or so ago as the Bond Street of Reykjavik, the gloom is palpable. The idea that Reykjavik, an attractive, low-rise provincial place, could be a financial nerve centre on a par with the gleaming skyscrapers of Canary Wharf and Wall Street now seems utterly absurd. Over the past 10 years, however, little Iceland became a test-bed for the new economic order. Led by businessmen such as Baugur boss Jón Asgeir Jóhannesson, a nation previously best known for cod and hot springs reinvented itself as an Atlantic tiger. The Icelanders bought stakes in huge tracts of the British high street, including House of Fraser, Whistles and Karen Millen. Their banks were equally buccaneering, adopting free market reforms with gusto and moving with relish into financial engineering. The upshot: they now owe at least six times the country's income for 2008 and have been taken into state hands.

Unlike in the UK, Iceland's women are at the forefront of the clean-up. The crisis led to the downfall of the government and the prime minister's residence - which resembles a slightly over-sized white dormer bungalow - is now occupied by Jóhanna Sigurdardóttir, an elegant 66-year-old lesbian who is the world's first openly gay premier. When she lost a bid to lead her party in the 1990s, she lifted her fist and declared: "My time will come." Her hour has now arrived - and the same is true for a cadre of highly accomplished businesswomen. Prominent among them are Halla Tómasdóttir and Kristin Petursdóttir, the founders of Audur Capital, who have teamed up with the singer Björk to set up an investment fund to boost the ravaged economy by investing in green technology. Petursdóttir, a former senior banking executive, and Tómasdóttir, the former managing director of the Iceland Chamber of Commerce, decided just before the crunch to set up a firm bringing female values into the mainly male spheres of private equity, wealth management and corporate advice.

Tómasdóttir says: "Our Björk fund is to focus on sustainable growth. Iceland was the first in the world into the crisis, but we could be the first out, and women have a big role to play in that. It goes back to our Viking women. While the men were out there raping and pillaging, the women were running the show at home. "We have five core feminine values. First, risk awareness: we will not invest in things we don't understand. Second, profit with principles - we like a wider definition so it is not just economic profit, but a positive social and environmental impact. Third, emotional capital. When we invest, we do an emotional due diligence - or check on the company - we look at the people, at whether the corporate culture is an asset or a liability. Fourth, straight talking. We believe the language of finance should be accessible, and not part of the alienating nature of banking culture. Fifth, independence. We would like to see women increasingly financially independent, because with that comes the greatest freedom to be who you want to be, but also unbiased advice."

Men are in a minority at Audur, but Tómasdóttir is keen to hire more. "There are fewer of them, but they are not tokens, we have hired them on merit. Now, if we have two equally competent people, we would positively discriminate in favour of the man because we want balance," she says, without a flicker of irony. Even before the credit crunch, Iceland scored highly on measures of sex equality, coming fourth out of 130 countries on the international gender gap index (behind Norway, Finland and Sweden). The rate of female participation in the labour force runs at more than 80%, compared with just over 90% for men; there is generous maternity and childcare provision from the state, along with paternity leave. Most Icelanders remain geographically close to their extended families, making childcare easier, and the distances in Reykjavik are small, so mothers can easily get to their children's schools in a crisis.

Differences between Iceland and the UK are immediately obvious at all levels: the drivers of the coaches taking me to and from the airport were both female, the massage therapist at the female-friendly health spa, male. Similarly the debate about how - rather than whether - women should participate in the reconstruction of Iceland's shattered financial system is a mainstream discussion, whereas it is seen as a fringe issue here. This egalitarian backdrop has given Icelandic businesswomen a self-confidence their equivalents in the UK quite simply lack, according to one senior British female executive who frequently does deals with Reykjavik. "There is never a problem with me being a woman, whereas in the UK there is always an undercurrent. Most Icelandic men genuinely view women as equal. They are not shackled with our social and class history, and they don't have all-boys public schools which breed chauvinism. Corporate women in the UK can be very aggressive, because they are defensive and because they have to be. I'm sure Icelandic women will play an even bigger role now because the men have so spectacularly fucked up. We have a lot to learn from them, but we are so entrenched I don't know if it will ever happen."

Jóhanna Waagfjörd, 50, the chief executive of Hagar, which invests in food and fashion retail, is an economist by training. Perched in her third-floor office above the shops in the pristine but near-deserted Smaralind shopping mall in Reykjavik, wearing a chic white shirt and trim fitting jeans, she, like the other Icelandic business women I encounter, looks a good decade younger than her years. If she looks nothing like the standard-issue British woman boss in her sober dress or a navy skirt suit, she sounds nothing like them either. While senior women in the UK are extremely reluctant to introduce feminine, let alone feminist, themes into the conversation, Waagfjörd and her Icelandic sisters talk openly about the womanly and maternal qualities they bring to the boardroom table.

"I don't have children - I decided that because I wanted to be free to pursue my career - but motherhood is a value for all women. Ten or 15 years ago I wouldn't have wanted to say that motherhood was something important, because that was not the rule of the game. But the value you bring as a woman is the maternal aspect, the strength that comes from motherhood." Tómasdóttir, whose company shares a name with her five-year-old daughter, agrees. "Audur was one of our foremost Viking women, the name means wisdom, strength and happiness, and a clear space. We talk of the company as a daughter." Tómasdóttir is also unabashed at promoting middle-aged women as a force for good in the boardroom - a taboo in this country, where female executives are more likely to be grabbing, panic-stricken, at the anti-ageing creams than celebrating their midlife energy surge. "I have recently turned 40 and Kristin is 43. We are going through a midlife transition; for men it is a midlife crisis. At 40 most women undergo a self-exploration, and they look at everything: they look at their body and ask, 'am I in the shape I want to be?' They look at their husband, and ask: 'Is this the guy I want to spend the rest of my life with?', and they look at their career and ask: 'Is this really satisfying?' You get to the point where you see there is emotional capital that is never measured or valued in the way it should be. I just want to live in congruence with that side of myself."

The British businesswoman, who, tellingly, prefers to remain anonymous, says this Icelandic attitude to midlife femininity is unimaginable in the British boardroom. "I am in the same age bracket and I cannot conceive of discussing the positive power of the fortyish woman with male colleagues," she says. "They would freak out." Waagfjörd points a finger at young, inexperienced men who, she says, became too dominant in the boom. "I was in the US for six years, and when I came back 10 years ago, at the age of 40, things had really changed. Suddenly there were a lot of young men about 35 or 30. They used to call to try to sell me derivatives which were really complicated. They thought they were really clever, but they were still living at home with their parents."
Elín Jónsdóttir, a 42-year-old lawyer with two children, worked at the Icelandic financial regulator until 2005 and is now managing director of Arev, an investment firm set up by Jón Scheving Thorsteinsson, the former chief executive of Baugur UK. She believes the boom and bust is not a men versus women situation but a question of different value systems. "During the boom we saw what we would typically say are masculine values, but it is dangerous to stereotype. These so-called masculine values are common in women as well, and the variability within each group is much larger then the variability between the groups."

Nonetheless she believes Icelanders accept women will play a major role in the reconstruction of the economy. "We all feel it is strange when you looked at the banks and the directors were all male, and this is in Iceland where female participation in the workplace is higher than anywhere else in the world. We are beginning to look at companies as old-fashioned if they have only male directors. There is still a bit of a boys' club, with women as outsiders - people know the rules and are comfortable with that - no one was asking the difficult questions. But the boardroom should not necessarily be too comfortable."
Although there is a group of self-confident women taking centre stage in Iceland, the country is still far from being a businesswoman's Utopia. Hrund Rudolfsdóttir, a 40-year-old mother of three, is a director of Milestone, a company specialising in strategic investments in financial services, and sits on the board of Iceland's confederation of employers. She is concerned that, although women her age may benefit from the crisis, younger women could suffer.

"Women of my generation with experience will see more opportunities than ever before, because now the whole nation has realised how important it is that you have a diverse group of managers who can ask critical questions. We are seeing unemployment on a big scale for the first time. Young women who should be making their way into middle management may be pushed back. After they have their children they might find it hard to get back into the job market, and some women may choose to opt out." There is also a fear of the "glass cliff": the worry that, if women do win top jobs, they will inherit very difficult situations, some will inevitably fail, and the cause of equality will be set back. Research from Exeter University has found that companies are more likely to appoint a woman when they are experiencing a crisis, because they are seen as more consensual and less abrasive, though these qualities are not valued so highly at other times. The danger is that, if women become associated with failure, it could actually hinder their advancement. But as Rudolfsdóttir says: "There is a risk, but as women we cannot claim we are capable and then turn away because of that risk."

As the Icelanders are discovering, it can be hard to find women who are entirely unbesmirched by the crisis, since those of sufficient seniority to be credible leaders have themselves come up through the old system; of the two women recently promoted to run Iceland's nationalised banks, Landsbanki and Glitnir, one has already been elbowed aside for these reasons. Not everyone in Iceland has bought into the idea that women will revolutionise capitalism. "Women would like to think it's their turn now, but it won't be - there will be a bit of fuss for a while but men will keep the real power at the top," said a local taxi driver in his sixties. "I'm not giving you my name, though, because my wife speaks English and she would kill me if she read that." That is not a view that gains much traction with Halla Tómasdóttir. "If the institutions are under the control of a single group - and now it is men - and they all think the same way, we are not going to make positive changes. For the first time in 100 years we have the chance to create a company, a society, a country, and hopefully a world that is more sustainable, more fair for men as well as women. If we are not going to do that now, then when will we?"

Pimco's power play
On the wall of his office overlooking the Pacific Ocean, Bill Gross has hung a poster of Jesse Livermore. In the early decades of the last century Livermore made and lost several fortunes on Wall Street before killing himself in 1940. Alongside the picture is an adaptation of a quote from the deceased: "An investor has to guard against many things and most of all against himself."  It's a warning that Gross, 65, founder and co-chief investment officer of Pimco, the world's largest and most influential bond investment house, says he thinks about a lot these days as Wall Street legends all around him lose their money and reputations. "Human nature means that institutions at some point lose their sense of mission," he says. "That sense of vulnerability drives Pimco."

So far Gross and Mohamed El-Erian, 50, who serves as both CEO and co-CIO, have deftly navigated the most treacherous bond market in memory. Thanks to enormous bets on mortgage bonds backed by Fannie Mae and Freddie Mac, Pimco had an outstanding year. Total Return, the firm's flagship mutual fund, earned 4.8% in 2008 while the typical intermediate-term bond fund lost 4.7%, according to Morningstar. That gain, plus investor inflows of $14 billion, help cement Total Return's position as the world's largest mutual fund, with $132 billion in assets (as of Jan. 1). Pimco, which since 2000 has been a subsidiary of German financial conglomerate Allianz, now manages $747 billion in assets. But Pimco is much more than just a big bond house. For one thing, it has become the U.S. government's partner in reviving the credit markets. It runs the Federal Reserve's $251 billion commercial paper program, which keeps short-term loans flowing to corporate America. It is also one of four asset managers picked to run the government's $500 billion program to purchase mortgage-backed securities.

With many traditional bond market players - like investment banks, insurers, and pension funds - on the sidelines, Pimco is serving as a buyer of last resort for hedge funds and others seeking to sell bonds to raise cash. "They don't want to, and often can't, sell their bond portfolios in bits and pieces," says El-Erian, "but we are big and liquid enough to buy the entire thing." Pimco also will be among the few institutional investors able to soak up the coming onslaught of Treasuries, as well as mortgage paper backed by Fannie Mae and Freddie Mac, and municipal bonds. In short, thanks to the missteps of its rivals as well as its own success, Pimco has become essential to the functioning of the credit markets - and the revival of the economy. "If Pimco didn't exist, the government would have to create it," says Paul Kedrosky, a senior fellow at the Kauffman Foundation and a strategist with institutional money management firm Ten Asset Management. "It needs an entity that can provide the market liquidity that Pimco can provide."

Gross is well aware of his firm's special status. "Our role now is to make money for Pimco, but it is also much greater," Gross tells Fortune. "We efficiently allocate capital around the U.S. and the world. We are in the business of capitalism." Not everyone is comfortable with Pimco's growing power and prominence. Peter Cohan, a venture capitalist and management consultant, says he's concerned that Pimco may have too much sway over Washington and be in a position to dictate policy choices that might be good for Pimco but bad for taxpayers. "This is a bilateral monopoly with one big seller and one big buyer," he says. "Gross, a famously good gambler, knows that winning in this type of market means threatening not to buy when the government needs to sell. Gross has the government in a weak negotiating position." Josh Rosner of research firm Graham Fisher is not happy with Pimco's dual roles as private investor and manager of government bailout programs. "Gross is a deeply conflicted player given undue sway in matters of public interest that are potentially at odds with his positions."

Indeed, Pimco's success stems from shrewd bets on government intervention. Rewind the clock to May 2004, when Pimco managers gathered at the firm's Newport Beach, Calif., headquarters for an annual brainstorming event called the Secular Forum. It's an opportunity to hear outside speakers and develop macroeconomic theses that will determine investment strategies for years to come. At the 2004 session a view emerged that although the world looked calm, the economy was being fueled by an unsustainable borrowing binge. At some point it would have to end, and this so-called deleveraging process would trigger an economic storm, beginning with housing and financials. Ultimately the government would have to step in to ease the pain. That vision of the future has guided Pimco's investments - though not even Gross and company foresaw just how big Uncle Sam's role would become.

For example, in 2008 Gross shifted from Treasuries and corporate bonds into mortgage debt backed by Fannie and Freddie because he believed that the government would ultimately keep those government-sponsored enterprises (GSEs) afloat. By May, Gross had moved 60% of Total Return into GSE-backed bonds, up from 20% the year before. "In a way, we've partnered with the government," says El-Erian. "We looked for assets that we felt the government would eventually have to own or support." Pimco also made a bet on GMAC, the struggling finance arm of General Motors, reasoning that Washington would not let the lender fail for fear of crippling the U.S. auto industry. "We tried to move ahead of the government," says Gross, "to purchase assets before we believe they will have to." Once the financial crisis hit, Gross was not shy about calling for a bailout - and he is an especially effective advocate for his causes. Where many big money managers try to keep a low profile, Gross has always maintained a forceful public persona, making regular television appearances to promote his views. An excellent writer, he delivers influential market commentaries on the Pimco website and in newspapers and magazines.

In a Pimco newsletter published on Sept. 4, 2008, for example, Gross wrote: "We, as well as our sovereign wealth fund and central bank counterparts, are reluctant to make additional commitments" to troubled companies unless the Treasury essentially guarantees their solvency. Later that day Gross made the same argument to CNBC's Erin Burnett. "You can say that I'm talking my book," Gross told Burnett. On Sept. 7, three days after Gross's CNBC appearance, the government placed Fannie and Freddie under conservatorship. That move trashed Fannie and Freddie's common and preferred equity but provided a huge boost to their bonds - and to Pimco. The Total Return fund jumped 1.3%, or $1.7 billion. Well, money managers often make statements that would help their investments. But a number of critics contend that Gross was giving the government an ultimatum. "He convinced the Treasury to keep his bonds from going to zero, or else he would stop lending money to distressed companies dthat were important to the economy," Cohan says.

The U.S. government will need to raise lots of capital to fuel efforts to end the recession. That will mean issuing lots of bonds. Since Pimco is one of the few buyers capable of absorbing such vast amounts, Washington "can't afford to let him walk away," says Cohan. "The government should recognize that just as some institutions are too big to fail, Pimco is too big to talk its book," says Rosner. He thinks that the government should have clipped bondholders as well as shareholders when it took over Fannie and Freddie. The case of GMAC also raises questions about Pimco's power. Last fall GMAC executives applied to make GMAC a bank holding company so that it could access federal funds. Before they would approve the move, federal regulators insisted that 75% of GMAC's bonds be swapped for equity to shore up the company's capital base. Offering 60 cents on the dollar, GMAC was able to buy 59% of its bonds. But Pimco, which held a big chunk, refused the deal. The government blinked, allowing GMAC to become a bank holding company in late December even though it hadn't met the 75% threshold. After the conversion, GMAC bonds rose in value; Pimco says it plans to hold them to maturity.

Are the criticisms fair? Is Pimco simply pursuing selfish goals in the guise of aiding the markets? Gross thinks for a long time before addressing that question. "If you're in a marriage, each person has his or her own concept of what the argument is about. That's because they perceive reality differently, and not always because one is right and the other is wrong," he says. "The policy prescriptions I've proposed were a realistic attempt to assist the markets. In my eyes, they had nothing to do with bailing out our positions." And to be sure, many economists and bankers agree with Gross's view that a failure at Fannie or Freddie would have had disastrous effects, spreading more pain throughout the housing markets and the asset-backed securities market, and hitting China, a huge holder of Fannie and Freddie debt, and other central banks. And as far as Pimco's participation in federal bailout programs goes, Gross says he has no contact with the Pimco employees managing government money. Gross is not about to pull in his horns. He says that he has been criticized within the firm for his numerous television, radio, and print appearances. But, he says, he speaks out because he believes in his ideas. And he, El-Erian, and other Pimco executives are still on the stump, talking up the mortgage market.

In the pages of the Wall Street Journal, on Bloomberg, and on CNBC, they have recently said that the government should buy mortgage-backed securities and agency debt rather than long-dated Treasuries, as the Treasury officials have proposed. They've also supported the idea of the government's buying bad assets from banks. These opinions support the firm's book: Pimco still has a huge position in GSE-backed mortgage debt, as well as the preferred stock and debt of big banks. But that doesn't make the views wrong. As with other aspects of this financial crisis, we seem to be in uncharted waters here. Rarely, if ever, has one firm occupied such a pivotal role in the nation's financial system; but rarely has the system been in such distress. Some critics, of course, may simply be envious of Pimco's success. "It could be a case of attacking the leader," says Lawrence White, the Morningstar analyst who covers Pimco. For his part, Gross has no illusions that Pimco's recent good fortune is any kind of guarantee. "I do yoga to forestall the inevitable," he says. "I do what I do here at Pimco to forestall it too. But even though I wish we did, no one has license to live forever."

Stringent Hiring Rules Leave Treasury in Need of Staff
The Obama administration's tough rules about who it will hire and its increasingly rigorous vetting process are complicating Treasury Secretary Timothy Geithner's team-building efforts, government officials say, at a time when his agency faces a punishing workload brought on by the worst financial crisis in decades. The delay leaves Mr. Geithner without many chief lieutenants while the Treasury is spending hundreds of billions of dollars to try to blunt the financial crisis -- and hustling to stay abreast of unfolding events. Mr. Geithner himself is taking on a bigger workload and relying on a skeleton crew of advisers, including some holdovers from former Treasury Secretary Henry Paulson's staff. As a result, the agency has had only limited communication with Wall Street about the most effective ways to structure the government's bailout plan and maximize lender and investor participation.

Mr. Geithner's unveiling of his plan to address the crisis in banking was widely criticized for being shy on details, a problem in part caused by an overstretched team simultaneously grappling with a bailout for homeowners, a giant stimulus package and calls from Detroit auto makers for more aid. The hiring pace at the Treasury is somewhat slow by historical standards. The Bush administration nominated several Treasury officials to serve under Paul O'Neill in February 2001, though Congress didn't confirm most until much later in the year. While Mr. Geithner actually has more troops on hand than many agencies -- most others also lack top deputies, or even secretaries -- it is an especially trying time for the Treasury, given the economy's fragile state and Mr. Geithner's pledge to move quickly and forcefully to confront problems.

Treasury spokeswoman Stephanie Cutter said Friday, "The Obama administration has taken an unprecedented level of action toward economic recovery in a very short period of time....There's a significant amount of work being done, regardless of the normal personnel hurdles that happen during a transition in government." After a series of tax-payment issues, which derailed Tom Daschle's nomination to run the Health and Human Services Department and hurt Mr. Geithner as well, the Obama administration has ratcheted up its scrutiny of potential nominees. Lawyers are poring over several years of potential Treasury appointees' tax returns and other financial and personal information, such as the legal status of household help. President Barack Obama also curtailed the ability of lobbyists to work in the administration. The Treasury wants to avoid hiring anyone with ties to a bank that received bailout aid.

The tough rules scuttled the agency's hiring of at least one top official. The appointment of John Molot, a well-respected Georgetown University law professor, was undone by his personal financial interests, according to people familiar with the matter. The exact problem couldn't be learned, and Mr. Molot didn't return a call seeking comment. Mr. Geithner has identified several people he would like to serve in top posts, and the nominations could be announced soon. Several are already working for Mr. Geithner in an advisory role, but many haven't yet come on board, including those expected to be tapped for the key posts of deputy Treasury secretary and undersecretary for international affairs. Among those Mr. Geithner has brought on board in a counselor role are Alan Krueger, who is expected to be chosen as assistant secretary for economic policy; Lee Sachs, who is expected to serve as undersecretary for domestic finance; and Mark Patterson, who will be nominated as Mr. Geithner's chief of staff.

Mr. Geithner is also relying on a crew of Paulson holdovers, including Seth Wheeler, who helped craft the recently unveiled housing plan; Neel Kashkari, who heads the office running the $700 billion Troubled Asset Relief Program; James Lambright, the TARP chief investment officer; and Steven Shafran, an adviser on financial issues. "There is a need to get staffed up," said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable. In particular, many banks say they haven't been able to get answers from Treasury about how new executive-compensation limits will apply to banks that get government aid. C. Fred Bergsten, a former Treasury official who is director of the Peterson Institute for International Economics, said the lack of a staff is a particular problem for the Treasury with the approach of the Group of 20 industrial and developing countries meeting in London April 2. "We all know this is a global economic crisis, the response has to be global, the relations for the G-20 summit are proceeding full blast, and the Treasury does not have its international team in place," Mr. Bergsten said. "I have met personally with the top British officials organizing the summit. They are eagerly looking for cooperation from U.S. officials, but they couldn't really get anything until very recently."

Dairy Cows Head For Slaughter as Milk Prices Sour
Hundreds of thousands of America's dairy cows are being turned into hamburgers because milk prices have dropped so low that farmers can no longer afford to feed the animals. Dairy farmers say they have little choice but to sell part of their herds for slaughter because they face a perfect storm of destructive economic forces. At home, feed prices are rising and cash-strapped consumers are eating out less often. Abroad, the global recession has cut into demand for butter and cheese exported from the U.S. Prices for milk now are about half what it costs farmers to produce the staple, and consumer prices are falling. Unless the market can be bolstered, industry officials project that more than 1.5 million of the nation's 9.3 million milking cows could be slaughtered this year as dairy operators look to cut costs and generate cash.

"This could destroy our dairy infrastructure," said Mike Marsh, CEO of the United Western Dairymen trade association. Three months ago, mature milkers would sell for $2,500 to another dairy, but with nobody buying, dairymen are selling them on the beef market for only $1,100 each. It is not just elderly cows that are going to slaughter, said Jon Dolieslager, owner of the Tulare County Stockyard in the heart of California dairy country. The 262,500 slaughtered nationally in January is 43,500 more than in January 2008. Since September, federal livestock reports show that dairy cow slaughter is up 30 percent, while beef cow slaughter is down 14 percent. "If milk was worth something, they'd be keeping them," said Dolieslager. Some dairymen have become so desperate that they are not even bothering to haul to feedlots the newborns whose births keep milk flowing at higher levels.

Investigators in San Joaquin County are trying to determine who dumped 30 dead bull calves on country roads to avoid rendering costs or hauling them to auction, where they fetch $5 each but cost hundreds and hundreds more to bottle feed special formula. The group Farm Sanctuary is offering a $2,000 reward for the culprit. "Apparently it was someone trying to save money who just dumped them," said Susie Coston, the group's national shelter director. As of Feb. 2, the price farmers receive for a gallon of milk has been 80 cents a gallon, less than half the $1.65 a gallon the California Department of Food and Agriculture estimates it costs to produce. "I don't ever remember being able to produce milk at that price," said dairyman Ray Souza, who got into the business in 1963. The new price was the biggest one-month drop in 54 years in California and doomed cow No. 4424, a fat Holstein who instinctively lumbers to her place in the milk line but has become an economic liability at Souza's dairy.

"She's not giving enough milk," Souza said as he scanned computer records showing output for each of his 900 milkers. "She can't stay here." The price is set by the Chicago Mercantile Exchange and is based on the price paid for powdered milk, where 37 percent of California's milk is sold. Only 14 percent goes into sales as liquid milk. U.S. milk, butter and cheese, which enjoyed record worldwide sales last year, no longer are in demand because of the triple whammy of decreased international consumption in a falling economy, a stronger dollar that makes exports less attractive and the scare over melamine contamination in Chinese milk. Those trade issues have coincided with a three-year California drought that has increased the price and availability of alfalfa hay, and corn costs that have doubled because of competition from ethanol producers. "We need to get supply and demand into alignment as quickly as possible so this economic trainwreck isn't strung out," said Marsh of the industry association.


redcatbiker said...

In yesterday's comments section, there were many comments discussing Peak Oil, which brought to mind the following documentary that I think many of you might find interesting, enlightening, and educational:

The Power of Community: How Cuba Survived Peak Oil

"When Cuba lost access to Soviet oil in the early 1990s, the country faced an immediate crisis -- feeding the population -- and an ongoing challenge: how to create a new low-energy society. Cuba transitioned from large, fossil-fuel intensive farming to small, less energy-intensive organic farm and urban gardens, and from a highly industrial society to a more sustainable one."

Note: My local public library system has the documentary in its inventory; you may find that your library system has the DVD, too.

Stoneleigh said...

Phil (from yesterday's thread),

Nuclear power is indeed a Faustian bargain in my opinion. It's likely to become even more of one when we're living in a society that has very little available money or energy. Just like the Eastern Europeans 10 years ago, we will be forced to live with increasingly dangerous plants that we can't even afford to maintain properly. At least they had the rest of the world to help with the safety effort, but we won't.

In Russia, most of the nuclear operators weren't paid regularly after the collapse and had to moonlight where they could. Alcoholism was also very common, and this was among a group of people who had been trained to think that nothing could go wrong with wonderful Soviet nuclear plants.

So much for safety culture, but the local people were the ones most insistent on keeping plants open as they had the most to lose from seeing them closed. Some of the plants, like Kozlodui 1 and 2 in Bulgaria, were practically held together with rubber bands.

Stoneleigh said...


In the same vein I would recommend Dale Allen Pfeiffer's book Eating Fossil Fuels. It contrasts the Cuban and North Korean experiences with suddenly losing one's oil supply. It's very sobering reading.

Anonymous said...


Regarding the focus on America theme, I think you are right that Americans should concentrate on their own troubles, but for those of us not in America, and for those who are interested in the global picture, your thoughts on the general global state would be most welcome...

Chaos said...


If this is how you write when your brain is missing (or on vacation), maybe mine should go missing more often too. I do think you do a bit better when you're challenged, in this case, by a few flag wavers yesterday, but I haven't yet run across anyone who can effectively challenge you on your basic premises. I've often thought that the character of the American public makes it extremely difficult, politically, to tell anything close to the truth, whether it be peak oil or the economic debacle. Add to that the mindlessness and short attention span of the national culture, and you have probably one of the worst places ever to experience the types of hardship discussed here.

Anonymous said...

One good cop!

Anonymous said...

Romulus Obamulus
The end of Rome draws nigh
Stimulus ignores the pus
What to do but sigh?
Incise and drain
The only way
To bring an abscess down
Greenspan's panacea
Turns the green land brown
That paper in your billfold
Legal tinder to keep you warm
Out beyond in snowy forest
Starving hordes in anger form
Where our Theodoric
Our gleaming Byzantium?
Alas, we all are Yorick
Horatio, pour the rum

(With apologies to all)

Anonymous said...

@ redcatbiker

Cuba "surviving" peak oil is an overstated myth.


"going by EIA figures, their oil consumption didn't drop to nothing, or even "halve overnight" as the PowerOfCommunity site claims, but fell from 224,800bbl/day in 1989 to 180,000bbl/day in 1992, that is a drop of about 20%. It's now about 203,000bbl/day, thus a drop of only about 5%. But natural gas consumption went from just 1.1 billion cubic feet in 1989 to 26.4 in 1997 and is now 14.126 billion cubic feet annually. And coal consumption went from 254,000t in 1989 to 41,000t today.

Overall, total Cuban fossil fuel energy use went from a high of 0.51 quadrillion BTU in 1989 to 0.458 today, a drop of 10%. This is rather less than is commonly implied by groups promoting the success of Cuba's "solution to peak oil"."

Anonymous said...

Better is

Alas, we're all poor, Yorick

Anonymous said...

This article is definitely worth a read!! I've quoted a particularly funny and interesting excerpt. It provides a very clear explanation of the shit piles that lie in banks all over the world.

And yet many of these CDOs – the ones at the top of the food chain – had tranches rated AAA, on the grounds that diversification (buying many little pieces of shit) and overcollateralization (giving some investors less shit than others) would protect the senior tranches from harm. My mouth still hangs open in awe over this.

The point I’m finally getting around to making is that these collateralized securities – not the underlying mortgages and loans – are what has made Big Shitpile such a great big pile of shit. The 20% decline in national housing prices we’ve already seen hasn’t produced a linear 20% decline in the value of the shitpile. Thanks to the embedded leverage these "legacy" assets contain, a 20% price decline has resulted in 80% or 90% or even 100% losses on many of them. Ditto for the serial implosion of poorly structured, ridiculously optimistic LBOs. Ditto for the tidal wave of commercial real estate loans that can’t be refinanced. Ditto for the recession-induced surge in credit card defaults.

Bottom line: great big chunks of Big Shitpile aren’t "impaired," or "illiquid," or "distressed," they’re worthless, now and forever – unless the peak real estate values of the bubble can miraculously be restored and a whole bunch of deceased LBOs can be raised from the tomb.

But, of course, it gets worse. Instead of passing all that bad paper on to investors (which I thought was the whole point of the securitization con) the banks kept vast reams of the stuff on their own balance sheets – either because they didn’t really understand how shitty it was (i.e. they drank their own Kool-Aid) or because they felt they had to be seen to keep some of their own skin in the game to attract the marks.

Anonymous said...

If you want to read the story of a man who succeeded in the American Dream in Spain, from sewer-cleaner to property tycoon, ladies and gentlemen: Paco the Drain Man !

He's now off to Africa to do what he knows, the only thing he knows, build houses. 'My country needs me. All materials will be Spanish, even the bricks and concrete. I’m taking my army with me, some 6,000 workers. We’ll hire two or three planes to ferry them back and forth.’ 'I’ll go anywhere they allow me to work. I’ll continue doing things until my body won’t take it any longer, you’ll see.’

The country he's going to, some years ago the son of Thatcher and an 'Old Etonian' tried to it take over, murder Obiang Nguema the ruler, put a puppet in place, steal their oil, in short, a colonial xix century nightmare. They failed.

Paco the Drain Man goes there to build houses, and make more money, normal, like a capitalist should, and spread riches and well-being.
There's a moral here, somewhere.

John Hemingway said...

I found the Peggy Noonan article very interesting. I mean, here is a woman who's been a republican speech writer for as long as I can remember (Reagan, GHW Bush) and yet she's talking about "systemic collapse" and "survival strategies"! Amazing. the times are truly changing...

Anonymous said...

ilargi says:

the reason people react like that is the very exact same one that distorts the bank nationalization theme. There is a huge and concerted effort underway to not see what is happening

Hey you should listen to His highness Rex Murphy on CBC Checkup.

Rexwald, The High Handed, did not want to hear someone talking about Glass Siegel , Obama and our economic problems at all, yet the commenter was polite well spoken and very lucid in what he managed to say before getting the hook.

For anyone intrested in wading through the mostly mindless verbiage on Checkup, to find that lucid commenter, it should be posted as a podcast on

Anonymous said...

The comeback will be from the ground up and will start with innovation. No one trusts big anymore. In the future everything will be local. That's where the magic will be. And no amount of pessimism will stop it once it starts. – Peggy Noonan

Eventually ... think Company Town

Anonymous said...


I think the ones that take offence to criticism of America are either in denial or surprsingly enough, still ignorant as to what is has been happening to their country.

As things continue to unravel revealing to even the sleepiest of inhabitants of this world what the owners of the system have been up to, it amazes me that some people still defend a system has been corrupted beyond repair.

Below is a comment someone posted on another board about the so-called free market:

"I continue to see some people blame “free markets” for this mess. One guy made a comment that said former treasury sec Paulson believed in capitalism and free markets. Who in their right mind believes this nonsense ? You can have true free markets only when you have sound/hard money. Free markets cannot and do not exist in a debt based, fiat money, fractional reserve system where the value of your currency and short term rates are in the hands of the bankers. You also cannot have free markets with a large government. What you have now and over the last 38 yrs or so (since 1971, some say since 1913) is a mercantilist or crony capitalism system where bankers and the government as well as the corp elite use the central banks and government policy to concentrate economic power and benefit themselves. This is not true capitalism nor free markets. Make no mistake, buying cars for 0 % over yrs, buy now and pay 2 or 3 yrs from now, buy a house for 0 or 5 down, and the like are not signs of free markets, but rather solid evidence of the crony system in place. Blatant distortion of money and credit markets for the benefit of the elite and government..."

Anonymous said...

Noonan is one of the most infamous enabling Tarts in the whole 'March to the Meltdown', starting with her role in 'polishing the turd' other wise known as Ronald McDonald Reagan.

The fact that she is having a 'death bed' conversion is very amusing. Hey Peggy, what goes around comes around, Aye?

Wyote said...

Warren Peace continued..

Bunny Marty: “I found him. Over here!”

Bunny James: “Blinky, we’re here for ya. Easy now, tell us what happened.”

Blinky: “We left. They made us get out. They said they had to show the house tomorrow. We were told we could leave our stuff in the shed and come back later and get it. It was dark. We, we..”

Bunny Winthrop: “ Steady Blinky, hold on. Just let you heart slow down... Tell us what happened then.”

Blinky: “ We ran. We were scared. Everything seemed different and strange. We thought we were being followed. We thought we heard the wolf dogs. We hid in the branches. Later, we became seperated and, and I don’t know what happened to Kari. I heard the wolves again and I dug in. Did you see her?”

Lila: “ No blinky, we haven’t. We’re so sorry.”

Winthrop: “Everybody, spread out and search. We’ll find her, Blinky, stay here and rest.”


Blinky: “Did you find her? Please...”

Winthrop: “Blinky we found some of her fur. And we found holes where the wolf dogs got in a ways. I’m sorry Blinky.”

Blinky: “Why? Why did this happen? We were behind on payments but they, they never told us they’d put us out. We never broke any laws. And now Kari’s gone I, I Aha, Aha...A,ah, ahhh...”

All: “Blinky, Blinky!” Draws breath, exhales.

Winthrop: “His eyes don’t move! Ahhh Blinky! Somebody’s gonna pay for this!”
At the auction: “ For sale today we have a beautiful split level burrow that has been well cared for and has that “lived-in” look. We’ll start the bidding at 8100 dollars.”

Anonymous said...

Fan's of communism said Stalin and the USSR wasn't 'really' communism.

Fan's of Hilter said he wasn't bad or the 'real' problem with Fascism, it was the 'people around him' who were evil.

And Now in the Eleventh Hour(drum roll), Fan's of capitalism say that what we have been doing for the last (what,40 years) wasn't Really free market 'capitalism'.

Gosh, what was it then, and where the hell were their voices during this 40 year interval? Shut? Silent?

I sure didn't hear a peep from these day-late and dollar-short folks way back when. They were too busy puffing up their chests and spouting jingoistic platitudes about how bad 'socialism' was and how superior our 'growth economy' is. Hmmm.

They thought private retirement funds were far better than that 'collective' Social Security solution. Guess what? The private retirement funds are going to shitthebed before SS does. Ain't Life Ironic.

"Capitalism's" brand name is like utterly soiled diapers.

A heavy load to carry.

Anonymous said...


What's amazing to me is the timescale here.

Last December, one of my predictions for 2009 was that Banks were going to be nationialized this year. Then, it seemed very far off, and I was going out on a limb. A wacky prediction. None of the top business publications were predicting it at all. They were saying that things would get better by the end of 2009.

Now it's a hot topic on the MSM.

And it's only been two months.

So, the 64 Trillion dollar question is: When?

Anonymous said...

Ilargi, great intro!

I have always found that foreigners see the reality of the US Empire with much more clarity than Americans. When the US invaded Iraq, 70 to 80% of Americans supported the invasion, whereas 70 to 80% of Europeans and practically the whole world were against the invasion. The US populace is politically very naive, perhaps due to the propaganda of the corporate media, the short history of the United States, the ethnocentrism, racism and arrogance of Anglo-American culture, the lack of viable political parties in the US political spectrum, too much bread and circuses, etc.

Anonymous said...

Mr Anonymous 8.24, unless you have your tongue placed firmly in cheek, in which case, ignore this, please, may I point out that at least since 1932 and perhaps earlier, the US has been a hybrid economy, most often defined as essentially Capitalist but with very heavy Socialist tempering. Indeed, prior to 1865, it was a slave economy and a genocide economy as well as other unsavory things, things that the British might have thought, well, terrorist. Probably since about 1980 it has gradually become more of a corporate paradise {vs. a worker's paradise} and in the last eight years it is positively Oligarchic with recent dark overtones of political and corporate Fascism.
In short, the US is no more Capitalist than China is Communist. Now, back to our regularly scheduled programming, but first, these commercial messages about consuming!

Anonymous said...

getting back to the banks and nationalization, didn't Hank Paulson mandate that all banks must accept the bailout money?
no buts. and there was one bank that did not want the baiolout money but was forced to sign on. which one was that?

and the conspiracy side of me thinks this nationalization was planned all along, the elite just needed to get their money they had lost, which paulson got for them. FDIC garuanteed up to $250,000, which occurred just before the bailout, so that the people wouldn't pull out all their money.

it may start with citi and BofA, but like a wildfire it will sweep all the banks. with sucky interest rates, nickle and dime fees and penalties. which will likely cause a run on the banks for sure as we all empty our accounts.

but i can't help but think this was preplanned.

Starcade said...

I still honestly believe that TSHTF the moment the banks are nationalized.


Because the entire shit-fest basically goes bank-run at that point -- anyone who's seen what's happened to Western finance in the last six months knows that all too well.

Anonymous said...

@anon: 9:05 PM

"there was one bank that did not want the baiolout money but was forced to sign on. which one was that?"

Wells Fargo. They were complaining heavily about it, but caved into the intimidation tactics.

Anonymous said...

If BoA and C are nationalized tomorrow, or next month, do you really think 99% of the people would care? Or even notice?

If their ATMs function, their credit cards function, their checks clear, why would they care?

If anything, nationalization would make bank runs less likely. People will feel that what needs to be done is being done.

Although I have to admit, I loved seeing the photos of the lines outside IndyMac after they were taken over. What exactly is the point? Demanding your money before receivership may be useful, but afterword you get whatever they give you.

It might cause people to think about whether they have more than the FDIC limit at their bank and move it if necessary, but I bet most of them wouldn't even do that.

Anonymous said...

GreenMan, I think your right. most people will not know, and likely won't care. too complex for them. as long as the atm still works. party on dude!

don't know what i was thinking, guess i thought there were more informed people than uninformed.

Anonymous said...

In reference to your comments yesterday, Stoneleigh, about being the object of propositions: I didn't understand that the goal of the proposition was emigration. Here in PR the population is passport ready, they are citizens of the Empire. The propositioning here is of a purer variety, they just want sex, or perhaps they'll throw in a little romance. And the women qualify for these activities, too. It's a wonderful festival of racial and cultural miscegenation and apparently has been for over 515 years. But I found NYC to be similar in this regard {melting}, however, there I WAS often propositioned by would be immigrants, and here it seems to be only the Dominicanas. I'm an anarchist, so I never married and never will. I'm a poor prospect for immigration fraud. However, I do have a French citizen daughter and the other kids have a Puerto Rican mother, so anarchy has not deterred my trajectory.

Anonymous said...

Stoneleigh, I just watched a documentary about Chernyobyl and found it the most optimistic thing I have seen in very very long time. Humans were gone and the planet was healing itself, systems were being established and life was going without great genetic problems.
I worry more about the chemical stew we are inflicting on all life than I do about radiation. In the 70's I made a sign 'Save the plankton and the whales will take care of themselves.' Needless to say it did not go over very well.
Maybe LATOC's vision of world nuclear holocaust will do a crazy clown trick of turning everything on its head and becoming the world's salvation. Wouldn't that make Matt Savinar figure life a trifle tiresome?

Anonymous said...

Appears the govt is not nationalizing the banks after all. Citi is merely getting more cash which is going to make the preferred's and bond holders convert to cash.

Financial are going to bounce big time here and bring the indices with them.

Anonymous said...

"To increase revenue, Obama will propose taxing the investment income of hedge-fund and private-equity partners at ordinary tax rates, which are now as high as 35 percent and may rise to 39.6 percent under the administration's plan, the New York Times reported today"

Go! Obama! Go. Should the world how you can topple the US, a nation of 300+ Million, and 232 years old in a mere two years! Raise taxes on capital so that every single investor pulls their capital out of the US markets! Go!Obama Go! Putting a 35% or higher on capital gains will make the current credit crisis look like a firecracker, compared with a 10 Megaton Nuclear detenation.

When Obama promised Change no one thought he meant that literally. When Obama's Financial policy is set in place, all that will be left of the US financial empire is pocket Change!

Anonymous said...

"Raise taxes on capital so that every single investor pulls their capital out of the US markets! Go!Obama Go!"

Your absolutely right! ... Obama should only tax the poor who do not have any money or savings.

I wonder who will make money and increase their saving as a result of the stimulus?

There is no reason for the rich to leave their money in the US because it has become a dry well.
As a matter of fact they should retreat to their Dubai strongholds.

All that will be left of the US will be a socialist paradise. It won't be a place for a capitalist to enjoy life.

Anonymous said...

America's Municipal Meltdowns


Anonymous said...

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Anonymous said...

Tough times have even reached tony Greenwich, Connecticut, which, the Greenwich Time reports, is looking to cut $5 million from its proposed 2009-2010 budget, in part through layoffs as well as a wage freeze for public employees. This famed haven for the rich is also experiencing joblessness "near a record high that has not been seen since the withering downturn of the early '90s."

from America's Municipal Meltdowns linked above.

Anonymous said...

more from the same article:

Times are tough in Dillon, South Carolina, too, the town where Federal Reserve Chairman Ben Bernanke grew up. Just recently, his childhood home was purchased at a foreclosure sale -- an all-too-common occurrence in a town already long battered by the decline of the local tobacco and textile industries. Now, writes the Wall Street Journal, it's "facing a fresh assault of plant closings and layoffs that have pushed its unemployment rate to 14.2% -- almost double the national average." As in so many other places, the catastrophic housing and automotive markets have hit Dillon with hurricane force. Mohawk Industries, which made yarn for carpeting and employed 137 people in town, shut down, while Wix Manufacturing, which produces automotive filters, has slashed employee hours and some jobs. In fact, just outside of town, at South of the Border, a faux Mexican-themed "village" of souvenir stops, restaurants, and low-rent attractions where Bernanke once worked, business -- which depends on vacationers trekking down the East Coast to Florida -- is off 10%, the worst downturn since the 1973 oil crisis, according to Richard Schafer, the patriarch of the family that runs the tourist trap. "People are losing their home and jobs," he says, "and they're not traveling as much."

Wilmington, Ohio, is another company town whose fortunes have plummeted. After overnight shipper DHL shut down its domestic courier service, the town went into a tailspin. Already, 3,000 jobs have been lost at the local airport. Within months the number is expected to rise to 8,000, according to an Associated Press report. As a result, in the town of 12,000, new claims for unemployment benefits are the highest they've been in 26 years and many businesses are facing the prospect of closing down, as is its hospital. "I think one in five small businesses will fail or could fail," says Wilmington's mayor David Raizk. As a result, more and more families are visiting local food banks, while community leaders are promoting backyard gardens as an inexpensive way to help feed families. In fact, Wilmington College is even opening up gardening plots on its property for needy townspeople.

Anonymous said...

Are malls a dying breed?
Some former titans of shopping are coping with vacant storefronts
Sunday, February 22, 2009
By Mark Belko, Pittsburgh Post-Gazette

Anonymous said...

a bit more:
... the Des Moines County jail is contemplating unpaid furloughs or layoffs and a scheme by which inmates would pay for their own toilet paper.

Anonymous said...

Re: Tax the rich.

People forget that at the peak of American culture, in the 1960's, the top tax rates were far, far higher than now. 90% at the top, IIRC. And the society was a LOT better off then.

The complaints of a 35% tax rate are rediculous leftovers from the failed Bush legacy.

Laize-faire died in September, and its advocates belong in the museum of failed economics along with Communism.

Re: Obama's quote "But today does mark the beginning of the end.”

Bull. We're not even at the end of the beginning.

Re: The "Winning a Cyber War" article

We are so open here to hostile attacks that it's incredible. Not only has the US Government done its absolute best to insure that we remain that way, but they have also been actively hostile to Federal Employees who try to catch cyberattacks from China in the process.

The name of the game is to keep us that way. Anything to the contrary always turns out to be pure propaganda.

Re: The article "High-skilled foreign migrants entering Britain to halve"

Jeez, that's disgusting. They are still trying to promote importing cheap labor no matter what the cost to society. It's all about cheap labor, and has nothing to do with the skills.

On one personal note, I've seen a guy who was here on an H1-B who went back to India, got fired remotely, and come back. His reason? He couldn't find a job there. So he comes back here and takes away a job from a U.S. Citizen.

Thank you, President Obama.

Anonymous said...

@Greenman - "If BoA and C are nationalized tomorrow, or next month, do you really think 99% of the people would care? Or even notice?"

I hope you're merely being facetious or have just stumbled unto this topic of conversation and are trying to come up to speed.

To put it simply, the FDIC has a mere fraction of the reserves necessary to back $1-2T of depositor losses. And that's up to $250k limit; there are reports that the various agencies, states, districts, et al have $500b or so in uninsured deposits.

Now, what about stockholders & bondholders? We're talking another $1-2T of losses for pension funds and foreign investors if any/all of the big 4 go down.

If .gov tries to cover either the depositor or investor losses, they'll need foreign buyers to buy Treasuries. It's not even clear if there's a market for the $800b porkulus bill, let alone $2-4T. Alternatively, if they attempt to print, then you can say good bye to the $USD.

So, for individuals, no FDIC, no money when you go to the ATM. For larger institutions that need to fund things like schools, police, fire, etc, no money when they write a check.

In short, people will notice very, very quickly when the SHTF. For knowledgeable observers, we're actually rapidly nearing the end game where events will begin to cascade out of control much like how the towers came down on 9/11.

Anonymous said...

Re: Alternate energy
China's solar boom could dim Oregon's efforts

"Soon, we'll be able to sell to our customers for just $1 per watt," says Sha, crossing the floor in towering heels. Little does Sha know her sky-high ambitions threaten to cast a shadow as far as Oregon.
At a buck-a-watt, solar — the world's most expensive energy — would beat today's cheapest power, coal-fired electricity. That would pave the industry's way to the rooftops of the masses, giving it a surefire edge in the world's race for affordable clean energy.

Anonymous said...

Thank you for Tragedy and Hope.

Anonymous said...

This just popped up on the WSJ:

"U.S. Eyes Large Stake in Citi"

"Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.

Taxpayers Could Own Up to 40% of Bank's Common Stock, Diluting Value of Shares

Greyzone said...

How California Became France

California is in a French-like bind: unable to afford a welfare-type state, and unable to overhaul it. "The people say they want all these programs, then there's nothing they want to pay for," says Hector De La Torre, a Democratic assemblyman. "The schizophrenia in the legislature reflects the peoples'."

If people really want to understand what's wrong, most of them can start by looking in the mirror.

redcatbiker said...

Debtors Union and Bank Strike

Momentum is building for an anti-capitalist solution to the financial crisis.

Thu, 19 Feb 2009 1:09 pm
Posted by Micah White

February is becoming the month of anti-capitalist solutions to the financial crisis. In an earlier post I outlined a plan for a Blackspot Debt Collection Agency that would buy, then forgive, debt. Now others are calling for a Debtors Union and some activists associated with Enric Duran are organizing a Bank Strike. Here is a quick summary of these two big ideas.

A Debtor Union has been proposed by Keith at the Pirate Caucus. Keith writes that "A debtors union is open to all who are indebted--credit cards, car loans, mortgages, student loans, medical bills etc. and once we organize ourselves we can refuse to pay and organize a mass default and force the debt to be written off, or we could decide to renegotiate the debt at a steep discount maybe twenty cents on the dollar. That will be for the union members to decide for themselves. In any event, we can take our destiny into our hands —Let’s 'bailout' ourselves, lets ‘recapitalize’ ourselves, lets get out of debt!" (full post)

The daring anti-bank Spanish activist Enric Duran who reached international fame by borrowing and then refusing to pay half a million Euro is promoting the idea of a Bank Strike. His organization, Crisis, has already spawned a North American Bank Strike Chapter. Here is how they explain their plan for a Bank Strike:

"We must withdraw our support for the financial system. Everyday it exploits our debts, our savings, and our paychecks--to fund speculation, predatory lending, environmental destruction, and corporate expansion. This will be an indefinite strike which will not end until people’s debt is cancelled just as Wall Street has been bailed out. It won’t finish until the current international financial system is abolished and alternatives are created that cover people’s needs and not those of speculators."

"If hundreds of thousands of people around the arranged to stop paying their debts—and if they supported one other—they could not be stopped. If there are a many more participating in this call by withdrawing the money from the banks, this system that enslaves us would be stopped."

"What meaning would a delinquencies list have if everybody was registered
in it? What strength will the seizure of foreclosed property represent if affects millions of people? What will they speculate with if we take all of our money out of the banks? Let’s begin this indefinite strike! Let’s withdraw our money from the banks and put it in alternatives that don’t speculate with our paychecks! We won’t pay our mortgages and we will stay in our homes; we will not pay personal debt. Let this crisis be paid for by the richest!" (more information)

Buying debt and forgiving it, a debtors union, and a bank strike are just a few of the possible alternatives. What are your ideas for an anti-capitalist escape from this financial crisis?

Anonymous said...


Thanks for the article on Solar. The Chinese version is probably junk right now, but it's a very interesting starting point.


One of the biggest problems in California is the Gerrymandering which goes on. The guy who broke the stalemate has a very silly boundary that he represents.

Here's the best picture of California's Governator

That picture is perfect for what's going on. The article sucks though. It is too shallow and very poorly done; not going into the real issues. A quick hack job.

The picture is the best part of the entire article.

And Jeez, the news just keeps on coming:
Britain faces summer of rage - police

"Middle-class anger at economic crisis could erupt into violence on streets.

Police are preparing for a "summer of rage" as victims of the economic downturn take to the streets to demonstrate against financial institutions"

It looks like they should've sent their Guest Workers back earlier. At least the U.K. doesn't have the same problem with Illegal Immigrants that the U.S. has.

Anonymous said...

Re: Cuba & Oil

Cuba did reorganize farm collecives to low or no petroleum use. Some of them use oxen, but many still use tractors. It was a success story of sorts, if you want to live like the Cuban people must.

I can go on a bit but will leave it with these tidbits:

Cuba is dotted with oil derricks. They are pumping as much as they possibly can from their own reserves.

Cuban people are forced to live on wages that do not cover food. The only option is to grow their own or have an illegal side job.

There are many state created myths about Cuba. Good health care is one. Being nearly oil-free is another.

Anonymous said...

Is it too late to buy Kool-Aid shares?

goritsas said...

Starcade, now from Leviathan,

Your relentless doom mongering has gathered a degree of support from my corner. However, I don’t think the immediate effect of Citi’s or BoA’s demise will be bank runs. Globally, governments have reassured their citizens that hold bank deposits those deposits will be guaranteed in the event of a bank failure. Second, if the citizens understood the way the system works now, they would have already started withdrawing deposits simply because the debt owed to their respective governments far outweighs their current capitalisation and this is unlikely to change in the near- or medium-term. Why would anyone invest in an enterprise that would appear to be doomed to fail without the express guarantees offered by governments. Third, the citizenry writ large seems to be unable to connect the relationship between government guarantees and the taxes required to fund those guarantees.

Until the realisation dawns upon a sufficient number of tax paying citizens regarding the above, I think they will be content to accept the government pronouncements assuring them their cash and investments are suitably protected. That’s why I believe this thing could run for months, or years, steadily heading to oblivion but in steps sufficiently small that most folk won’t recognise just how dramatically the landscape has changed and just how much they’ve lost, across the social and material spectrum. I think by the time the connections are made it will be far too late in the proceedings for most people.

I understand your position regarding the poor’s benefits money being stopped and them rioting outside wherever those benefits are paid. But, these people will be dismissed as leaches, and good riddance and be damned. If anything, early agitation and rioting by those most vulnerable will do more to shore up the failing legitimacy of the government as they step in to “deal with” the “problem.” Hopefully to the satisfaction of those tax payers “subsidising” said benefits, for said leeches. For some reason, and for some time to come methinks, they will remain compelling silent about the relationship between guarantees today and the requisite future tax receipts required to underwrite those guarantees.

Lastly, I have a great respect for your commentary, even when the “predictions” are false. There are few among us living as close to the edge as you do and that have access to the web, and I find your “I am not 401K material” observations and commentary refreshing and thought provoking.

Anonymous said...

@ centiare

There is a distinction between peoples' reactions and consequences.

People will not care because they will see nationalization as an improvement.

Anyone who is paying attention and is concerned about their funds has already moved them out of BoA and C. The depositors who are left (millions of them) are inattentive or unconcerned. Nationalization might cause a few more people to pay attention. It will reduce the number of people who are concerned.

I think the odds that the banks would be nationalized without keeping retail services functioning is approximately zero.

Backstopping deposits is easy as long as people aren't pulling their money out. The FDIC will need more guarantees, which will happen as needed, and show up as another unfunded government liability, somewhere, and nobody will care. Sure, if there was an actual run on the bank the money would have to materialize and it would be a big problem. But once the bank is nationalized people will quit worrying about it and there will be no run.

Stockholders have been substantially wiped out already.

Bonds held in pension funds are indeed an issue, but this consequence will not be visible to most for some time. They are really worthless now, but nationalization would most likely force them to admit it.

"porkulus"? Really? Rush, is that you? Or did you mean to post at freerepublic?

Anonymous said...

From bloomberg:

Stocks in Europe and Asia climbed, sending the MSCI World Index higher for the first time in 10 days, and U.S. futures gained on speculation the U.S. government will increase its control over Citigroup Inc. Treasuries fell.

Citigroup surged 24 percent in Germany after the Wall Street Journal said the bank is in talks with federal officials that may result in the government holding as much as 40 percent of its common stock.

Our shares are being diluted! We're saved! Buy buy buy!

el gallinazo said...


Please contact me at

hpaulfuchs at gmail dott commm

Anonymous said...

Probably most at TAE would agree that giant dead-banks-walking like Citi and BofA should be seized and liquidated (a.k.a. "nationalized with extreme prejudice"). Most also seem to think that seizing them would end the world as we know it, but whatever.

As for the cost of seizing these banks, there are some clear costs for which various large numbers are thrown around in discussion:

1) FDIC coverage for insured deposits
2) Uninsured deposits for sympathetic holders like local governments
3) Bonds, preferred, and common stock held by pension funds, insurance companies to back life insurance and annuities, etc.

Are there any hard figures published anywhere about the magnitude of these costs, per bank? Of course it's hard to be exact considering that the size of their balance sheet holes is concealed -- but some hard boundary conditions at least, published anywhere?

Anonymous said...


can you provide the site link for the ship designer/builder you mentioned yesterday? thanks!


Anonymous said...

"Our shares are being diluted! We're saved! Buy buy buy!"

This illustrates Stoneleigh's point about markets being driven by herd behavior, not the rational mind.

Boiling the Frog one degree at a time is Imperative. As long as the ATM's work, life is not so bad. Hey, why not make the ATM's into actual little printing presses, then they'll never run out! High Five!

Most people don't want to be informed, it more often than not scares them, they've learn by experience that flipping over rocks yields very few treasures.

Willful Ignorance is the watch word going forward into this not-so-brave new world. Hear-no-evil-see-no-evil-speak-no-evil should be on the new reserve currency notes.

The trial balloon 'denials' by Dodd et al about never nationalizing went rather well thank you. Another day in the life, another degree higher for the sauce pan.

Anonymous said...

Hey, Ilargi

Don't know if you saw my post at TOD,

But I put up the quigley quote saturday I think.

Thanks for amplifying it.

The two party system was another quote in my link from Quigley.

Unknown said...


Keep up the good work. Would you believe I have got people who work for oil companies in Fort McMurray to read TAE? And they actually like it?

That was unexpected.

The message you are trying so hard to get out is reaching folks. You're doing good.

Anonymous said...

Re: Thorium reactors

IEEE Interview with the Indian Thorium Reactor designer:

This reactor will provide a platform for further research and development. In nuclear technology, the biggest emphasis is always on proven concepts. We have to have the timely development of thorium-based technologies for the entire thorium fuel cycle.

The supply of uranium is not perpetual. With the rate at which nuclear programs are growing worldwide, it is projected that by 2028 any new power plant will not have a guaranteed lifetime of uranium supply. So, one has to go for recycling as well as thorium. I don't see any shortcut as such.

Course the IEEE has been known to admit crackpots from time to time and there is only one *working* reactor in the world so far (removes cheek from tongue)...

Anonymous said...

After watching this video, I don't think Ilargi is adequately pessimistic

Anonymous said...

Now that's called a building spree!! What collective madness. Insane!,0,1213023.story?page=2&track=rss

By Rodman's calculations, 500 million square feet of commercial real estate has been developed in Beijing since 2006, more than all the office space in Manhattan.

And that doesn't include huge projects developed by the government. He says 100 million square feet of office space is vacant -- a 14-year supply if it filled up at the same rate as in the best years, 2004 through '06, when about 7 million square feet a year was leased.

Anonymous said...


Yes, I dug these numbers up, and have posted these numbers several times before.

1) FDIC coverage for insured deposits: $100 Billion. Actually less than that, as it's been used, and they had to bump it up from $50 Billion.

2) Uninsured deposits for sympathetic holders like local governments: The total amount of uninsured deposits is 38% of $7 Trillion. The majority of that is due to State and Local Governments, as well as Corporations.

Per Bank, these are somewhat published at, IIRC. These aren't broken down that I've seen. My numbers come from the WSJ.

But I did note that JP Morgan has about $200 Billion in insured deposits in the NYC area alone.


Anonymous said...

Aitrader said: "There are many state created myths about Cuba. Good health care is one. Being nearly oil-free is another."

Of course, all nation states create some kind of myth about themselves, but without a doubt Cuba has an excellent health care system. Cuba's infant mortality rate and life expectancy are as good or better than in the US, for a per capita fraction of what is spent in the US. Cuba emphasizes prevention and uses alternative methods of healing as well, including herbs, acupuncture and homeopathy. Cuban and the many Cuba-trained (for free!) physicians are welcomed everywhere on the planet for their competence and compassion. Med schools in Cuba teach that sick people are not a commodity to be exploited but rather fellow human beings to be healed.

And, yes, Cuba is not nearly oil free. However, 80% of their agriculture is organic and their best scientists are working toward increasing organic, fossil-free agriculture, which is good for our health and the planet.

I highly recommend the film mentioned by Redcatbiker: "The Power of Community: How Cuba Survived Peak Oil." A must-see film on Cuba's fine health care system is "Salud!"

Anonymous said...

I'm in agreement that defacto Nationalization is underway for Citi. Only they won't explicitly use the "N" word.

This is how Washington operations.. E.g the "PATRIOT" Act (strip citizens of their rights), and so many other distract-and-implement-the-opposite efforts.

Citi will be nationalized without calling it that. BofA is probably next, after they learn from the Citi Nationalization effort.

Iconoclast421 said...

I dont understand how Ilargi can be more pessimistic than I am, considering how long I've been saying humanity is being mutated and enslaved by chemical and mind control weapons. And we're being rapidly marched toward even more brutal forms of enslavement... just imagine being in one of those pods from the Matrix, except you dont even get to pretend like you're eating a juicy steak for dinner.

The web is two years from being shut down. Youtube accounts are being suspended for absurd reasons. Blogs like these are only a stones throw away from being vanished. Then what happens? Then they can create any reality they want. Then we get 9/11 part deux. And the no doubt overwhelming evidence for it too being an inside job will not be able to reach the masses through ANY channel. (Or so "they" would think. Of course they cant stop the signal, but it is important to note that "they" do not quite understand this.)

Anyway the point is that I can sound pretty damn pessimistic.... I am at the point where I cant say for certain whether or not these forces at work are even human in origin.

Yet I also understand that this has been going on for a very long time. And I know there is an awful lot of fat and excess that can be trimmed. We have incredible tools available, and if people could actually start using their brains, the innovations to come will be tremendous. I do believe we have passed the all time peak in crude oil production, but like I said there is plenty of fat to cut before we have to worry about getting to the meat, let alone the bone. It is laughable to look at 70+ mbpd and think in terms of "scarcity". It is enough energy to allow 100 billion humans to live better lives than even the most wealthy of us do now. If people cannot see how that is possible then they are simply not thinking. Possible, yes, likely under the current system? No. But it is important to focus on acheivable long term goals. A 200 mpg car that costs less than 1/2 of one persons annual income is an extremely achievable goal.

Also, about the dollar... the Federal Reserve system was designed to export our financial problems. It is what makes the Icelands of the world collapse rather than ourselves. Just something to keep in mind. I dont agree with that system, but we have to accept the fact that it does serve US interests from a cold tactical/strategic point of view.

Anonymous said...

Re: Flag wavers.

I have a unique perspective as I am a Canadian and my wife American (from the south). My inlaws own a business in the south and became quite prosperous. About three years ago we tried to talk them into selling it and enjoy their golden years.

They had a generous offer and turned it down because they thought the party would go on forever. They did not want to hear any talk about TSHF. Now they couldn't give it away.

While I always enjoy visiting the south; I am always treated with kindness by family and friends, I find that you are in dangerous territory when you question the current economic, foreign policy and military paradigm.

They have been bombarded by corporate media to support this paradigm since they were old enough to sit in front of a TV.

It is embedded as a faith in the mind of many. Criticizing or doubting it's validity is akin to an Athiest walking into a church questioning the existence of Jesus.

I think it is going to take a long time and much misery before they see it.


Anonymous said...

* Nationalization of Citi and BofA is only a question of when. Will it cause a market crash and bank runs or will no one care?
* TAE is aware of reindeer and overshoot and is here to help people prepare
* Correction: Humans are dumber than reindeer
* Some like it hot, some like it cold. Also, I and S not welcome in the caribbean (Note: They are welcome in upstate Montana)
* Thorium may be a cleaner nuclear fuel and may be more sustainable (Ilargi dissents)
* All nuclear power is a Faustian bargain and unsustainable and unsafe in a collapse
* Men in the caribbean favor propostion 8 (women per day that is)
* Agriculture without oil: See you in C U B A (or is it overrated?)
* Americans should concentrate on their own problems
* Ilargi writes better than most with his brain on vacation (but not in the Caribbean). Also, Ilargi is accused of not being pessimistic enough
* The stimulus/ignores the pus/Rome's end draws nigh/We pine and sigh (apologies to Oarwell)
* CDOs are excrement not worth composting (apologies to VK)
* Paco the Drain Man will build houses in Africa
* Peggy Noonan is economically born again: Heal! Heal! Heal!
* Joe and Mao spoiled Communism; Adolf and Benito spoiled Facism; Ronnie and George spoiled Free Market Capitalism; Next up?
* Alternate opinion: It is Communism and Facism that have failed in the US. Free markets have never been tried here.
* Blinky has been found but Kari has been eaten by wolf dogs named Ben, Hank and Tim
* Chernobyl has driven out the people and nature is thriving
* Obama may raise capital gains taxes: Bad for capitalists, good for socialists
* Municipal Meltdowns - Bernanke's home sold in foreclosure. Ben and Blinky considering co-habitation (apologies to Wyote)
* California: The new France. Viva la Governateur!

Anonymous said...

“What's worse -- some of the same clowns who opened the gates to the financial crisis are in control of fixing it... many of them with full immunity!

It's high time, then, to take a step back... and take stock of the "pointmen"... the players at the table in a trillion-dollar bet that led to the financial Collapse of the Century.

From the financial "mad scientists" who concocted the toxic instruments in the first place... to the brokers who peddled them... to the mortgage companies that baited wanna-be homeowners of all stripes... to the politicians and lawmakers who enabled the death vortex that the housing crisis would become... to the SEC, which left the door wide open.

On display below are some of the villains themselves... their crimes, abuses, mistakes, and ignorance... and their subsequent "golden parachutes."

So here we go...”

The Architects of Destruction

Anonymous said...


Been to Cuba, speak the language, yada yada.

The health care bit is from a gent I met who was a professor of medicine at the Varadero Teaching Hospital. I met him at a resort where he ran a goat and a cart around the pool for the tourists. He made about $20 USD per evening with the goat and $25 USD a month (equivalent in Pesos) teaching medicine. We visited his hospital. The conditions were shocking and included chickens on the grounds that ocasionally wandered in while we were there.

Per oil, there are derricks everywhere. And I mean really everywhere. Driving out of Havana they are all along the highways, by the beaches, on the hills. Their oil production is eveidently quite low but they are trying like mad to produce what they can.

Per agricultural collectives, I saw quite a few tractors, especially nearer urban areas where fuel was available. We also saw oxen pulling plows.

I love the Cuban people. It's amazing the sh*t they live in and still manage to smile, word hard, play hard. They're the some of the best folks in Latin America in my book.

Don't wave PhD theses at me and tell me how nice they have it. Bunch o' pseudo intellectual horse puckey that...

Unknown said...

I wonder if the Dow will clear 7000 in the next half hour before trading stops. Anyone care to take that bet?

Unknown said...

Well, I guess it'll be another day before the Dow is below 6000. I remember when I used to read in the paper that the Dow falling below 10000 was some kind of barrier that, once crossed, signalled something terrible. Now it's struggling to maintain 75% of that. My how the times change so fast.

I don't know why I waste a few minutes each day watching the market. Morbid fascination, I suppose.

Unknown said...

Ahem, I meant below 7000 in the last post.

el gallinazo said...

@ Rumor

I don't bet on the DOW. It is a bullshit, rigged index. Not only is the S&P500 more representative, but it's more difficult for Da Boyz to manipulate on an hour to hour basis. The S&P500 closed within a quarter of a percent of it's November low. I cashed out half my SDS just before the close (up 6.81% for the day) because I see a deal coming from Geithner re CitiGroup tonight which will fill the lemmings with delight for a couple of hours or days at most. I think the US indices will open up tomorrow morning. We could even be close to the start of the suckers' rally. A born again Peggy Noonan means sentiment is at the bottom.

Anonymous said...

@ Noon Summary

That's quite a hilarious summary you have there. LMAO!!

@ Rumor

I share your morbid fascination with the DOW. It's already peaked (in real terms), a harbinger of things to come in the real world...

Stoneleigh said...

El Gallinazo,

I cashed out half my SDS just before the close (up 6.81% for the day) because I see a deal coming from Geithner re CitiGroup tonight which will fill the lemmings with delight for a couple of hours or days at most. I think the US indices will open up tomorrow morning. We could even be close to the start of the suckers' rally.

It's possible that we might see a near term bounce, but I don't think we've seen the low leading into the sucker rally yet. I still think that'll be somewhere in the 6000s. We could see a spike low near the end of March like we did last year, although that timing is highly speculative.