Wednesday, February 25, 2009

February 25 2009: Put it all on red

Alfred Palmer More New Economy February 1943
Readying a "Vengeance" dive bomber for landing gear installation at Consolidated-Vultee, Nashville.

Ilargi: As was evident in his State of the Nation speech last night, it has taken President Obama just one month and change to paint himself into a nigh unbearable conundrum located somewhere between, to the left, a hard place and to the right, a rock. If he tries to lie to the people about the real state of affairs of the nation, the people may believe him, but investors will not. If he would speak the truth to the power of the markets, he might restore confidence there, but the people would bring down his approval ratings to levels not seen for a president in, let's see now ... 6 weeks. Or so he fears, at least. For a politician low ratings are a deadlier sin than lying. It’s easier to simply rename it 'embellishing'. We're a talented species, we can even lie to ourselves about whether we lie or not. Here's a few bits:
The weight of this crisis will not determine the destiny of this nation.
Just the next two decades. After that, who knows?
The answers to our problems don't lie beyond our reach.
We just temporarily lost track of them, so we use substitutes whose effectiveness is completely unclear.
They exist in our laboratories and our universities; in our fields and our factories....
So what are we waiting for? A time of crisis?
And though all these challenges went unsolved, we still managed to spend more money and pile up more debt, both as individuals and through our government, than ever before.
So we've decided to spend trillions more and add trillions more in debt that we cannot pay back. Because this time we'll get it right. Put it all on red, Tim.
You should also know that the money you've deposited in banks across the country is safe;...
No choice there, or so it would seem. A necessary lie, but still a lie. Can't have bank runs, can you? Still, guaranteeing trillions in deposits instead of handing trillions to the banks that hold the deposits (but also even bigger amounts of toxic losses) would be, or have been, an option. People need access to their money, not to defunct institutions. A very open and transparent distinction. Much more so than the validity of the FDIC guaranteeing all deposits in Citi and BofA. I for one simply don't believe that. It means you guarantee people's deposits with their own money, or that of their children. I think the FDIC is nowhere near large enough to deal with America's two biggest banks. Which, looking at their present situation, constitutes a huge risk to all US banks. There's 8500 of them.
.... you can rely on the continued operation of our financial system. That's not the source of concern.
Well, it obviously is the main concern for the markets. It's the one big whopper. Why else are CIti and Bank of America shares so low that both companies should have been legally delisted?
.... credit has stopped flowing the way it should.
That’s a hard philosophical one. Who is to say how credit should be flowing? Is that knowable?
Too many bad loans from the housing crisis have made their way onto the books of too many banks. And with so much debt and so little confidence, these banks are now fearful of lending out any more money to households, to businesses, or even to each other.
Earth to Major Tom: They're broke, there is nothing left to lend. And you're trying to create an artificial situation, which does not, can not and will not work, in which people are invited to borrow their own money, given by the state to the banks, which will skim off their usual margins. Make that more than their usual margins: they have huge debts to pay off. For the taxpayer, all this constitutes the worst possible deal.
So businesses are forced to make layoffs. Our economy suffers even more, and credit dries up even further. That is why this administration is moving swiftly and aggressively to break this destructive cycle, to restore confidence, and restart lending.
Ehhh.. an economy that can function only by borrowing, by going into debt, may not be the most viable one to begin with. Maybe that's the lesson we learn these days. Whether this is a cycle, I don't know, and neither do you. Using that picture is merely a trick to make you feel good. And given what I see around me, I think we should ask if we want to go back to what caused the crisis. Which is what you want to do. As for restoring confidence: as I said before: you're not doing that at all, you're doing the opposite, just look at the markets today. Or in the time since your inauguration.

But then, that leads us back to where we started: if you choose to lie to the people because you're afraid of how they will react to the truth, you’ll lose the confidence of the financial markets. You can't fool all the people all the time. But then, politics is not an all-time religion. It's about tomorrow morning. Which makes problems that can't be solved by tomorrow morning, in weird way, almost unreal for politicians in other way we have organized our societies. In that same vein, restoring home values to recent levels, apart from the fact that it's not possible no matter how many billions are thrown at the issue, is not good in the long term picture (it makes them harder to afford and sell). It works in the short term though, or so it seems from a politician's point of view. And that is why as we need a long term view, we ain't getting any.

Here's another example:
Mr. Bernanke added there are cases in which the nation needs to "trade off the short-term moral hazard issues against the broader good."
Translation: the mighty shoudl be allowed to rob the nation blind, because that's good for the people in the long term. Bernanke is not a politician, but he is one of those in power. And they don't want to find a new and potentially better system, they want to restore the one that got them where they are. The political system is as dysfunctional as the economic one. And that''s why all that is done makes everything worse, not better. It's inevitable. It''s built into the structure.

Why Is Geithner Continuing Paulson's Policy of Violating the Law?
by William Black

Whatever happened to the law (Title 12, Sec. 1831o) mandating that banking regulators take "prompt corrective action" to resolve any troubled bank? The law mandates that the administration place troubled banks, well before they become insolvent, in receivership, appoint competent managers, and restrain senior executive compensation (i.e., no bonuses and no raises may be paid to them). The law does not provide that the taxpayers are to bail out troubled banks. Treasury Secretary Paulson and other senior Bush financial regulators flouted the law. (The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) are both bureaus within Treasury.) The Bush administration wanted to cover up the depth of the financial crisis that its policies had caused.

Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth. He was supposed to regulate many of the largest bank holding companies in the United States. Far too many of these institutions are now deeply insolvent because the banks they own are deeply insolvent. The law mandated that Geithner and his colleagues place troubled banks in receivership long before they became insolvent. Why are the banking regulators, particularly Treasury Secretary Geithner, continuing to disobey the law?

We need a Pecora investigation We can understand now why the administration and so many committee chairs are virulently opposed to the single most essential step we need to take to diminish future crises -- a modern Pecora investigation. Pecora was the prosecutor hired by the Senate banking committee to investigate the misconduct that helped cause the Great Depression. You must vigilantly study past failures to learn causation and to enact remedies. If we were dealing with a crisis of airplane crashes and someone opposed studying the causes of the failures we would (correctly) label him a lunatic. Congress largely stopped conducting meaningful oversight hearings of financial regulation during the Bush administration. The results were horrific. It appears that only intense public pressure will suffice to overcome congressional and administration resistance to a Pecora investigation. I hope readers will add their voices to this call.

The financial cost of Paulson's and Geithner's flouting of the law Paulson and Geithner's refusal to comply with the law has already cost the taxpayers scores of billions of dollars in unnecessary costs. Geithner indicated Friday, February 20 that he would continue to flout the law. If he is allowed to do so it will add hundreds of billions of dollars to the eventual cost to taxpayers. The amount of taxpayer money wasted due to Paulson and Geithner's violations of the prompt corrective action law will exceed the total present value cost of resolving the S&L debacle, $150 billion ($1993). The waste will take the form of the U.S. taxpayers subsidizing the officers, shareholders and subordinated debt holders of failed banks -- who are disproportionately wealthy, frequently profited from the accounting fraud that caused the banks to fail, and are often foreign. The prompt corrective action law was passed in large part to prevent such a subsidy.

The S&L debacle led to a new financial regulatory system premised on "prompt corrective action" (PCA). Future posts will explain more fully why this system failed, but it is remarkable that the system, the phrase, and the law have disappeared from the coverage of the banking crises. PCA's premise was that regulatory discretion led to cover-ups of failed banks and excessive losses to the taxpayers. The PCA solution was to require higher capital requirements and to mandate that the regulators take over troubled banks before they deteriorated to the point that the failure would impose a cost on the Federal Deposit Insurance Corporation (FDIC). PCA also recognized that failing bankers had perverse incentives to "live large" and cause larger losses to the FDIC and taxpayers.

PCA's answer was to mandate that the regulators stop these abuses by, for example, strictly limiting executive compensation and forbidding payments on subordinated debt. PCA's purpose is "to resolve... problems... at the least possible long-term cost to the [FDIC]." That means the least possible cost to taxpayers. Secretary Geithner's priority is protecting private shareholders:
We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system....
We have a law that says when banks are at or near insolvency private shareholders should be eliminated unless we can arrange a transaction that has no cost to the FDIC.

Receiverships produce "private institutions." The FDIC manages the failed institution only long enough to get it in shape to be sold at the least cost to the taxpayers. Receiverships end unnecessary bailouts of private shareholders, reducing the cost to the FDIC, as the law requires. Receiverships place banks back in the hands of new shareholders. Geithner has so twisted the framing of this issue that he is warning that a cheaper, more effective means of resolving failed banks used under President Reagan is some alien form of socialism that President Obama must slay before it destroys capitalism. Geithner is channeling Rove when he conflates receiverships with "nationalization."

Secretaries Paulson and Geithner subverted the PCA law by allowing failed banks to engage in massive accounting fraud (which also means they are engaged in securities fraud). Treasury is telling the world that resolving the failed banks will require roughly $2 trillion dollars. That has to mean that the failed banks are insolvent by roughly $2 trillion. The failed banks, however, are reporting that they are not simply solvent, but "well capitalized." The regulators flout PCA by permitting this massive accounting and securities fraud. (Note that by countenancing this fraud they make it extremely difficult to ever prosecute these elite white-collar frauds.)

William Black was a US bank regulator during the Savings and Loan crisis

How bank bonuses let us all down
by Nassim Taleb

One of the arguments one hears in the compensation debate is that the bonus system used by Wall Street – as John Thain, former Merrill Lynch chief executive, put it – is there to "reward talent". While I find this notion of "talent" debatable, I fully agree that incentives are the heart of capitalism and free markets – but certainly not that incentive scheme. In fact, the incentive scheme commonly in place does the exact opposite of what an "incentive" system should be about: it encourages a certain class of risk-hiding and deferred blow-up. It is the reason banks have never made money in the history of banking, losing the equivalent of all their past profits periodically – while bankers strike it rich. Furthermore, it is thatincentive scheme that got us in the current mess. Take two bankers. The first is conservative. He produces one annual dollar of sound returns, with no risk of blow-up.

The second looks no less conservative, but makes $2 by making complicated transactions that make a steady income, but are bound to blow up on occasion, losing everything made and more. So while the first banker might end up out of business, under competitive strains, the second is going to do a lot better for himself. Why? Because banking is not about true risks but perceived volatility of returns: you earn a stream of steady bonuses for seven or eight years, then when the losses take place, you are not asked to disburse anything. You might even start again, after blaming a "systemic crisis" or a "black swan" for your losses. As you do not disgorge previous compensation, the incentive is to engage in trades that explode rarely, after a period of steady gains.

Here you can see that this mismatch between the bonus payment frequency (typically, one year) and the time to blow up (about five to 20 years) is the cause of the accumulation of positions that hide risk by betting massively against small odds. As traders say, they have the "free option" on their performance: they get the profits, not the losses. I hold that this vicious asymmetry is the driving factor behind investment banking. If capitalism is about incentives, it should be about true incentives, those resistant to blow-ups. And there should be disincentives to remove the asymmetry of the free option. Entrepreneurs are rewarded for their gains; they are also penalised for their losses.

Now, by comparison, consider that Robert Rubin, the former US Treasury secretary, earned close to $115m (€90m, £80m) from Citigroup for taking risks that we are paying for. So far no attempt has been made to claw it back from him – only UBS, the Swiss bank, has managed to reclaim some past bonuses from its former executives. For hedge funds and medium-sized companies, the incentive problem might be a simple governance issue between private entities free to choose their contract terms. However, when it comes to banks and other "too big to fail" entities, the problem is severe: we taxpayers in our respective countries are funding these global monsters and are coughing up money for mistakes made by bankers who retain their bonuses and are hijacking us because, as we are discovering (a little late), banking is a utility and we need them to clean up their mess. We, in fact, are the seller of that free option. We should claim it back.

The Obama administration has been trying to set compensation limits for banks under the troubled asset relief programme. But this is insufficient. We need to remove the free option. Beware the following situations. First, those who are taking risks even outside Tarp or society’s protection can still be gaming the system – since their risk-taking can result in a collapse, with the taxpayer having to step in. For instance, Goldman Sachs, the US bank, might want to avoid the limits on executive compensation for its managers. That should be fine so long as society does not have to bail out Goldman Sachs (or, worse, its creditors) in the future. Second, Vikram Pandit, Citigroup’s chief executive, while claiming to want to earn one single dollar a year in compensation unless the bank returns to profitability, is still getting a free option given to him by society. He does not partake of further losses; we do. Third, leveraged buy-out companies used the free option by borrowing heavily from the banks and taking monstrous risks: they get the upside, banks (hence we taxpayers) get the downside. These partnerships made fortunes in the past on deals that society will have to bail out.

They too should have their past profits clawed back. Indeed, the incentive system put in place by financial companies has produced the worst possible economic system mankind can imagine: capitalism for the profits and socialism for the losses. Finally, I was involved in trading for 21 years and I can testify that traders consciously play the free option game. On the other hand, I worked (in my other job as risk adviser) with various military organisations and people watching over our safety. We trust military and homeland security people with our lives, yet they do not get a bonus. They get promotions, the honour of a job well done and the disincentive of shame if they fail. Roman soldiers signed a sacramentum accepting punishment in the event of failure. This is prompting me to call for the nationalisation of the utility part of banking as the only solution in which society does not grant individuals free options to look after its risks. No incentive without disincentive. And never trust with your money anyone making a potential bonus.

Bank of America fights to hide bonus payouts
Bank of America will launch a legal battle to keep secret the details of $3.6billion (£2.5billion) in bonus payments after John Thain, the former chief executive of BoA's newly acquired Merrill Lynch business, was questioned for a second time by the New York attorney-general's office. It is the latest chapter in a tit-for-tat fight between Mr Thain and BoA over the bonuses, which were rushed through by Merrill Lynch in December, weeks before Merrill's disclosure of a $15.3billion fourth-quarter loss.

Mr Thain, who was ousted from Merrill three weeks after its $50billion takeover by BoA, completed last month, yesterday gave the attorney-general's investigators information on payments made to individuals in the investment bank. BoA must now submit legal arguments to the New York State Supreme Court to prevent Andrew Cuomo, the attorney-general, from making public the details of the multimillion-dollar bonuses. The bank is expected to hand in its arguments by March 4. A BoA spokesman said that specifics on compensation "should remain private to protect the rights of the individuals and the competitive position of the company".

Mr Cuomo has until March 11 to submit a counter-argument for revealing the details of Mr Thain's testimony, before Supreme Court Justice Bernard Fried makes a decision on March 13 on the issue. Mr Cuomo is investigating whether the two banks breached securities law by failing to tell shareholders last September that they had agreed a bonus payout of up to $5.8billion to Merrill Lynch bankers as part of their takeover deal. The bonuses, which eventually came to $3.6billion, infuriated investors when it emerged that the money was paid in the face of the huge fourth-quarter loss.

Mr Thain was interviewed by investigators for six hours last Thursday, but declined to give Mr Cuomo information on individual bonuses, citing the threat of legal action from BoA and the bankers themselves if he breached privacy laws. On Monday, Justice Fried granted Mr Cuomo a court order compelling Mr Thain to divulge the information. Mr Thain's claim that he was gagged by BoA was at odds with statements by Kenneth Lewis, BoA's chief executive, who previously had distanced himself from the payments. BoA was forced to ask the US Government for an additional $20billion in taxpayer assistance to help it to cope with Merrill's larger than expected slide into the red.

Mr Lewis told Congress this month that he could urge Merrill Lynch to reduce the bonus payments in the light of its losses but could not prevent them being handed out. Mr Lewis is expected to be interviewed by Mr Cuomo's investigators this week. Mr Cuomo also asked Mr Thain why, when Merrill's impending loss became clear, he did not reduce bonus payments. Lawyers for Mr Thain have argued that although Merrill made a loss in the third quarter, much of the red ink came from writedowns in goodwill rather than from market-related activity. Also, the investment bank's performance picked up in December after a tough October and November.

Bank Of America Heiress: Bank Leaders Are 'Idiots'
The granddaughter of the man who founded Bank of America, or B of A, in San Francisco in the early 1900s called the bank's current condition "totally repulsive" and blasted the bank's management for being "idiots." The harsh criticism from Virginia Hammerness, the heiress to A.P. Giannini's family fortune and a significant stockholder in the bank he launched, reports CBS station KPIX-TV in Sacramento. She reflected on how her grandfather founded B of A as the Bank of Italy in San Francisco's North Beach neighborhood in 1904 as a reaction to the fact that the big eastern banks wouldn't lend to middle class immigrants like Italians.

Hammerness was outspoken about what has happened to the bank that is her family's legacy, saying she had little doubt that Giannini was "rolling over in his grave." She added that her father, who succeeded her grandfather as bank president and "gave his life for the bank," would have had a similar reaction upon seeing today's decline of the institution. "I think its totally repulsive," Hammerness said when asked what she thinks of Bank of America now. "What idiots, what kind of idiots are running that bank?" Hammerness directed some of her criticism at the bank's decision to go ahead with the purchase of the near-bankrupt Merill Lynch brokerage, even after learning that huge bonuses were paid out to Lynch employees right after the deal was announced.

"They bought it and then, you know, they found out before the deal was consummated that the head of Merrill Lynch paid all those bonuses to people. Bank of America should have said forget it," said Hammerness. Huge bonuses were not her grandfather's way of doing business, she said.  A.P. Giannini gave away millions, but died with an estate of only $500,000. He turned down a $1.7 million dollar bonus that the bank wanted to give him, saying they should use it to help their customers instead.  Gianniani became a legend right after the 1906 San Francisco earthquake. After his bank burned down, he set up a wooden plank on two barrels along the street and made loans. All it took was a handshake and he later said every loan was repaid.

But Hammerness wondered aloud whether she would even be able to get a loan today from Bank of America. "If i just went in as Mrs. Hammerness, I don't know, I might not be able to," she observed. "It's just bad, it's greed, greed, greed." While she doesn't favor nationalization — a government takeover of the banking industry — Hammerness said she is worried that the bank's ongoing decline could leave little in the future for the other heirs in her family. "I just think what's happening is just nauseating really. I feel so sorry for my children, my grandchildren, my great grandchildren and everybody else's," she said. When asked if she still puts her money in the Bank of America, the Giannini heiress responded: "Well, of course. But I have no loyalty to it. It's just there because I'm too lazy to go somewhere else... That's the honest to God truth, just too lazy to move it somewhere else."

Bernanke Warns Home Prices Could Fall Too Far
U.S. Federal Reserve Chairman Ben Bernanke warned that the "tremendous" problems in the housing market could drive home prices down far too low. Testifying before the House Financial Services Committee, Mr. Bernanke said that the challenges facing the mortgage market combined with the enormous supply in the housing market "could put us in real danger of driving housing well below fundamentals." Mr. Bernanke also defended the Fed's handling of the crisis so far. "We're not completely in the dark," he said in response to questions from Rep. Ron Paul (R., Texas), a frequent critic of Fed policy. "We know broadly speaking what needs to be done," Mr. Bernanke said. He also reiterated that he thinks the government's latest efforts will be successful. "We do have a plan here and I think it's going to work," he said.

In describing the events last summer that prompted him and then-Treasury Secretary Henry Paulson to call on Congress to give the federal government new power to rescue the financial sector, Mr. Bernanke said that the economy was "very, very" close to a major global meltdown. However, government efforts since then, such as new credit facilities and initiatives under the $700 billion financial rescue plan, have helped prevent a major collapse of the global economy, he said. Mr. Bernanke acknowledged that as the government aims to help stem foreclosures and help borrowers modify or refinance their home loans, some have raised concerns about moral hazard. But, he added that the housing market is grappling with millions of foreclosures. That's likely more detrimental, not just to the borrower and the lender, but to the larger system, he said.

"It has much broader socioeconomic effects," he said in response to lawmakers' questions. "I do believe there is a risk." Mr. Bernanke added there are cases in which the nation needs to "trade off the short-term moral hazard issues against the broader good." Meanwhile, Mr. Bernanke added that he doesn't see inflation as a near-term problem. "We don't expect inflation to be a problem for the next couple of years," he said. Mr. Bernanke repeated Wednesday that the recession should end this year and 2010 "will be a year of recovery," if actions taken by the government lead to some stabilization in financial markets. "If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability -- and only if that is the case, in my view -- there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery," Mr. Bernanke said in prepared remarks to the House Financial Services Committee.

On Tuesday, Mr. Bernanke testified before the Senate Committee on Banking, Housing and Urban Affairs, telling lawmakers that he doesn't believe any major banks are on the verge of failure and sought to quash speculation that banks would need to be nationalized, though he did leave open the possibility that some eventually will fall into government hands. The central bank chief acknowledged in Tuesday's testimony that some government capital could be placed into firms that need more cushion against losses. But public money flowing into banks would be structured to avoid triggering more federal ownership unless a worsening economy were to create more losses, he said."We don't need majority ownership to work with the banks," Mr. Bernanke said Tuesday. "We have very strong supervisory oversight. We can work with them now to get them to do whatever's necessary." The goal is to restructure firms, remove toxic assets and return the institutions to profitability, eventually drawing private capital back in, he said.

Some Democratic lawmakers have suggested that the government was heading toward nationalization, although the Obama administration has tried to discourage that speculation. Mr. Bernanke's views carry significant weight because the Fed, a bank regulator, plays a critical role in financial-sector rescues and because of the central bank's reputation as nonpartisan. The Fed chairman said Tuesday that more taxpayer capital may be placed into banks, but suggested the government would avoid measures that would give taxpayers a majority equity stake in a firm. "I don't see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn't necessary," he said. The Treasury Department has poured almost half of the $700 billion financial-sector rescue fund into banks to provide capital cushions to offset their losses.

On Wednesday, bank regulators plan to start "stress tests" of about 20 major financial institutions -- those with $100 billion or more in assets -- to assess whether they have adequate capital to ride out the downturn. The banks will be analyzed over a two-year horizon under hypothetical conditions that are significantly worse than the economy is experiencing today. Mr. Bernanke said none of those 20 banks are now on the verge of failure to the point where they would be subject to government procedures to intervene. Asked whether any would be in that position after the stress tests, he said, "No, I don't think so." "The outcome of the stress test is not going to be fail or pass," Mr. Bernanke added. "The outcome of the stress test is how much capital does this bank need in order to meet...the credit needs of borrowers in our economy."

Obama Showers Wall Street With Fees as Stimulus Waives Muni Tax
While U.S. President Barack Obama criticized Wall Street bonuses, his stimulus plan offers bankers the opportunity to boost fees with incentives that may lead to $65 billion in municipal bond sales. School districts and local borrowers from Pennsylvania to California have already sold $400 million of tax-exempt bonds since Feb. 17 under revised rules in Obama’s stimulus package, signed last week, according to data compiled by Bloomberg. Municipal Market Advisors, a Concord, Massachusetts-based research firm, estimates the new measures may drive more than $65 billion in new bond sales through 2010. Banks that advise state and local governments and market their debt may collect $314 million in fees as a result of the sales, based on Bloomberg data. Municipal bond offerings, which totaled $392 billion last year, may expand as underwriters urge clients to take advantage of the stimulus tax breaks.

"Bankers can make the argument to their issuers that it’s good now to accelerate multiyear borrowing plans into issues this year and next year," said Matt Fabian, managing director at Municipal Market Advisors. Local governments paid about $1.9 billion to underwriters in 2008, according to Thomson Reuters and Bloomberg data. The fees provided support as financial companies suffered credit losses and writedowns totaling $1.1 trillion and dragged the global economy into a recession. Obama, 47, called bonuses at banks getting taxpayer-funded bailouts "shameful" on Feb. 4, while proposing a $500,000 annual pay cap on some bankers who receive U.S. bailouts.

The stimulus law promotes municipal bonds by removing the alternative minimum tax, or AMT, penalty from debt sold to fund private activities such as airport runways and student loans. It also increases the size of bond issues qualified for tax exemptions when bought by commercial banks. Obama spokeswoman Jen Psaki said there is a difference between "excessive compensation for Wall Street CEOs" and the benefits that the stimulus program may provide. The president "believes that giving a break to middle class families currently paying additional taxes under AMT, providing essential help to cities and towns, school districts and vital public services across the country and freeing up the markets so that we can return to fiscal solvency are essential steps to getting our economy back on track." Psaki said.

The Phoenixville Area School District, located in Philadelphia’s suburbs, sold $13.5 million of so-called bank- qualified bonds with fixed interest rates Feb. 19. A unit of Zurich-based UBS AG was the winning bidder at an auction to decide underwriters, with an interest cost of 3.91 percent. The deal refinanced variable-rate debt that cost the district as much as 4 percent and will save more than $200,000 next year, said Bill Gretton, acting business administrator. The South Bay Union School District, on the Pacific coast near California’s southern border, sold $16 million of bank- qualified bonds approved by voters in November to fund improvements and repairs at seven schools. The borrowing cost of 5.29 percent compared with estimates of 5.5 percent, said Scott Buxbaum, assistant superintendent of business services.

Yields on 30-year general obligation bonds rated A+ like the South Bay debt fell to 5.22 percent last week from last year’s high of 6.32 percent, a Bloomberg index shows. The yield still represented about 142 percent of taxable 30-year Treasury bond rates, compared with a 10-year average of 100 percent. A total of $24 billion of the municipal bonds sold last year were subject to the alternative minimum tax and $15 billion offered tax breaks for commercial bank investors, representing 6 percent and 4 percent, respectively, according to Thomson data. Banks were given tax incentives to invest in municipal bonds under 1986 rules aimed at helping issuers who sold no more than $10 million in bonds a year. The stimulus lifted the limit to $30 million for 2009 and 2010. At least 22 issuers have taken advantage of the new provisions, Bloomberg data shows.

The stimulus law will also help McCarran International Airport in Las Vegas and other issuers of so-called private- activity bonds because one of the provisions allows borrowers to refinance debt issued from 2004 through 2008 in addition to borrowing for new projects through 2010. McCarran will be able to sell tax-exempt bonds when the Clark County, Nevada-owned facility refinances $400 million of one-year notes subject to the AMT, due July 1, 2009. "Without this fix, McCarran would be at a disadvantage trying to sell its bonds because the interest would not qualify for this AMT relief," said Jon Summers, spokesman for Senate Majority Leader Harry Reid of Nevada, one of the Democrats who championed the measure.

The AMT was created in 1969 to prevent 155 wealthy Americans from avoiding any tax by claiming excessive deductions, credits, and exemptions. The measure now affects about 4 million households, prompting Congress to pass annual patches that index the levy to inflation. Interest from most municipal bonds isn’t counted toward income when calculating the AMT, except for private-activity bonds. The new exemption applies to bonds issued through 2010. The Metropolitan Washington Airports Authority, which operates Dulles International and Reagan National airports, plans to sell $400 million of bonds as soon as next month that previously would have been subject to the AMT. "We expect a lower interest rate," said Lynn Hampton, authority chief financial officer. Thirty-year, tax-exempt bonds to fund transportation and rated A+ yield about 0.9 percentage point less than similar AMT debt, versus a 10-year average of 0.4 point, according to Bloomberg Fair Value indexes.

TARP Said to Be Ripe for Fraud
The U.S. government's rescue of the financial system is vulnerable to fraud that could potentially cost taxpayers tens of billions of dollars, government watchdogs warned lawmakers Tuesday. Neil Barofsky, the special inspector general for the $700 billion Troubled Asset Relief Program, told a House subcommittee that the government's experiences in the reconstruction of Iraq, hurricane-relief programs and the 1990s savings-and-loan bailout suggest the rescue program could be ripe for fraud. He also said fewer than 5% of banks receiving government aid have responded to a request about what they have done with their bailout money. The comments come as the Obama administration prepares to pour more money into the financial sector. Federal banking regulators begin a series of "stress tests" at the largest U.S. banks this week to determine whether they need greater infusions of government funds to survive a worse economic downturn.

"History teaches us that an outlay of so much money in such a short period of time will inevitably draw those seeking to profit criminally," Mr. Barofsky said. Gene Dodaro, acting comptroller general of the U.S., told the subcommittee that a reliance on contractors and a lack of written policies could "increase the risk of wasted government dollars without adequate oversight of contractor performance." The Treasury Department "has yet to develop comprehensive written policies and procedures governing TARP activities or implement a disciplined risk-assessment process," Mr. Dodaro said. Mr. Barofsky didn't specify the scope or type of fraud he was talking about. Mr. Dodaro said the Treasury has made progress in its oversight of independent contractors, but that the department has identified "high risk issues that still need attention."

He said the Treasury's frequently changing strategy for dealing with the financial crisis has hurt efforts to restore stability. Federal officials have already alleged TARP-related fraud. In January, the Securities and Exchange Commission charged a Nashville, Tenn.-based firm with defrauding investors of at least $6.5 million by claiming their money was invested in TARP and other securities that didn't exist. Mr. Barofsky's office is working with the SEC in investigating the case. A Treasury spokesman said the agency has acted "to implement all of [the Government Accountability Office's] recommendations, and we look forward to continuing to work closely with the oversight bodies to ensure taxpayer dollars are spent wisely. The administration has already imposed new rules to enhance transparency and accountability and restrict lobbyists' influence to make sure that investments are based solely on the merits."

Congressional watchdog slams bailout
In the first watchdog criticism of the Obama administration’s handling of the financial bailout, the head of a congressional oversight panel said the new Treasury Department plan “lacks crucial details,” especially about how it will treat toxic securities held by banks. Treasury Secretary Timothy Geithner, like his predecessor Henry Paulson, also has failed to articulate a clear strategy for the $700 billion rescue of the financial services industry, said Elizabeth Warren, head of the Congressional Oversight Panel for the Troubled Asset Relief Program. The bailout is now called the Financial Suitability Plan. “These general frameworks do not provide an adequate foundation to oversee Treasury’s activities, or to measure the success of the TARP or the suitability plan,” Ms. Warren, a Harvard Law professor, told the House Financial Services subcommittee on oversight Tuesday.

A Treasury spokesman did not immediately respond to a request for comment. Ms. Warren’s criticism of the new plan’s lack of specificity echoed that voiced by a number of analysts and economists after Mr. Geithner’s Feb. 10 presentation. Stocks, led by bank shares, tumbled after he spoke. Still, Ms. Warren’s remarks carry extra heft because she is a consumer advocate appointed by congressional Democrats. Her criticism of Mr. Paulson’s handling of the bailout had been withering. Separately, the inspector general who also is helping to oversee the bailout Tuesday asked lawmakers to push legislation that would enable him to hire staff more quickly. “We desperately need more hiring flexibility,” Special Inspector General Neil Barofsky, a former federal prosecutor, told the House panel today.

He has nine permanent staff members, nine federal employees detailed from other agencies and six people who have been hired but have not yet started. Mr. Barofsky asked the subcommittee to advance a bill that unanimously passed the Senate this month. It would permit his agency to hire up to 25 retired investigators and auditors without having to offset their pensions, he said.  Ms. Warren, whose panel coordinates with Mr. Barofsky’s office, said Mr. Geithner hasn’t responded to a series of questions that her panel posed a month ago. Most of these questions had been left unanswered months ago by Mr. Paulson. Among the questions was whether the Treasury was getting the best possible value for its investments in troubled financial institutions such as Citigroup Inc. of New York and Bank of America Corp. of Charlotte, N.C.

The oversight panel’s report this month found that the Treasury under Mr. Paulson had overpaid by $78 billion and had received back only about 66 cents worth of obligations for each dollar it paid. “We believe this is an important issue,” Ms. Warren said. She did commend Ms. Geithner for outlining a commitment to transparency and accountability in the future administration of the bailout. Among the main new components of Mr. Geithner’s plan are a joint public-private fund to buy up to $1 trillion of troubled bonds held by banks and a $1 trillion program to back new credit to consumers and businesses.

Japan's trade deficit hits record as exports fall 45%
Japanese exports contracted 45.7% in January, surpassing the previous record decline, set in December, and stoking a record trade deficit, as the deepening global recession crimps overseas demand for Japanese goods. The deficit swelled to 952.6 billion yen ($9.92 billion), up from 320.7 billion yen in December, the Ministry of Finance said Wednesday. The trade gap was the largest in a data stream dating back to 1979. January's figures mark the fourth straight month of deficits, each one larger than the preceding month's. Economists had expected a deficit of 1.167 trillion yen, according to Credit Suisse calculations.

Exports for the reporting month were 3.482 trillion yen, compared with 6.408 trillion yen a year earlier. Imports fell 31.7% to 4.435 trillion yen. January's contraction in exports tops the previous 35% decline in December as the biggest on record. "It was almost as bad as we have expected," said Barclays Capital's chief economist, Kyohei Morita, in Tokyo. Morita added that the export downturn was accelerating in magnitude and in the breadth of goods. He forecast that exports would continue to decline in coming months before a modest rebound in the October-to-December period. Japan's Nikkei stock index was up 1.2% at 7,357.07. The U.S. dollar traded at 96.90 yen in early afternoon in Tokyo, up 0.2% from its opening level of 96.65. The dollar traded as high as 96.73 in New York overnight, up 2.4% from Monday's level.

"We see a pause in the yen's fall," wrote Dariusz Kowalczyk, chief investment strategist with SJS Group in Hong Kong, noting that the trade deficit was slightly smaller than had been expected. Data released Tuesday by the Bank of Japan showed a gauge of prices paid by Japanese firms fell to a near 21-year low in January, as prices eased for transportation, insurance and advertising services. Economists warned the declines were being exacerbated by a negative-feedback loop of falling corporate profits, declining wages and sluggish consumption. "We expect to see a gradual buildup of deflationary pressure as we move further into 2009," wrote Credit Suisse economists headed by Hiromichi Shirakawa in Tokyo in a note to clients late last week.

Japan's economy shrank 12.7% annualized in the October-to-December period, the sharpest pace of slowing since the 1974 energy crisis. Calculations by J.P. Morgan reveal Japan's industrial output had contracted by one-third in February from the levels recorded a year earlier -- or about the same size as it was during the late 1980s. Credit Suisse cut its growth estimate for Japan's economy to minus 4.7% for 2009. It warned that the estimate may be too optimistic owing to uncertainties over the success of the government's stimulus measures and the outlook for personal consumption. "The recent deterioration in the corporate earnings and the likelihood that the global economy will be slow to regain momentum suggest to us that the Japanese economy will probably start to lose speed once again in the second half of this year," Shirakawa said.

Ilargi: Not a particularly great article, but some headlines are too good to miss.

Obama insight: Being realistic on economy maintains credibility
When the waiter reached for the plate, President Obama shook his head and smiled as he asked for a few more minutes. He had been talking to his guests, and had barely taken a bite of his lunch. The new president was keeping with a longstanding tradition on days when the commander in chief delivers an address to a joint session of Congress: Around the table Tuesday sat television anchors and the Sunday morning interview program hosts and two senior aides. The location was the dining room in the White House residence.

Over lunch of lobster bisque and striped bass, it was a chance for the president to share his thoughts on the goals of Tuesday night's big speech and the challenges ahead. There were ground rules for the discussion: We are not allowed to quote the president or his senior aides directly. In Washington journalism parlance, this is called "background" -- what we heard was attributable to "senior administration officials." Or, the ground rules allow such constructions as, "The president is known to believe ..." or "The way the White House sees this is ..." Some things we learned were policy-related, some more personal. Some highlights:

• In describing the economy, the overwhelming focus of the speech, Obama's goals include helping the American people better understand the connection between different ailing sectors; the crisis in financial institutions, for example, to the reluctance of small businesses to hire new workers because, perhaps, the credit crunch is limiting their ability to expand.
• The president is mindful of the criticism he has been too negative in talking about the economy. But he believes being realistic is the best way to keep credibility with the American people. Look for a description of the economy as a sick patient who needs a lot of urgent care yet has a good long-term prognosis.
• The White House team, from the top down, believed speed was critical to getting stimulus funds into the economy. The price they knew they would pay, however, is that without any significant Republican support, the debate played straight into the enduring divide between Democrats and Republicans over spending and the role of government.
• Obama exudes confidence. But he and his team are clearly mindful that there is a danger, from both a policy and a political perspective, in trying do to so much so fast. One of the officials acknowledged there are many credible voices who take issue with the administration's approach, and noted in dealing with the stress on the financial system and other early decisions, Obama was making a series of "judgment calls" mindful of the fact that any time one acts so quickly it is inevitable some mistakes will be made. The president's take is that if 98 percent of a program is a success, and the need was urgent, then the 2 percent that goes awry is an acceptable tradeoff.
• He believes it is realistic, based on current economic projections, to pledge to cut the record annual federal budget deficit in half by the end of his first term. The White House budget out this week, Obama's first, will project that some of that deficit reduction will come through slicing the costs of the Iraq war by bringing troops home and by increased revenue as a result of allowing the Bush tax cuts for Americans making more than $250,000 a year to expire. But the White House also promises to take the knife to some Democratic "sacred cows" as it searches for spending cuts.
• Look for education as a potential issue on which Obama will reach out for bipartisanship that was missing from the stimulus debate. The president sees an opening on issues like bonuses for exceptional teachers to work with Republicans.
On a more personal note:
• The first movie Obama viewed in the White House theater was "Slumdog Millionaire." He loved it, and parts of the movie reminded him of his childhood days in Jakarta, Indonesia.
• He enjoys the "baubles" that come with the presidency -- Air Force One, Marine One and Camp David, for example. But he already finds the "bubble" too restricting and wishes it was easier to just take a walk, or attend his daughters' school and sporting events. One way of trying to better stay in touch with everyday Americans: Obama has instructed his staff to bring him 10 letters a week from citizens writing with a complaint or an observation.
• He cherishes family dinner in the White House, where "thorns and roses" is now the favorite family game. Each family member describes the day's highlight, or rose, and the day's worst moment, the thorn. We were told after describing one particularly challenging day at the White House, Malia Obama had this to say to her father the president: "You have a really thorny job."

FOMC's forecast for recovery is very rosy
Ben Bernanke, the chairman of the Federal Open Market Committee, seems to be at odds with his colleagues about how strong the economic recovery may be next year. The official FOMC forecast calls for healthy growth next year and robust growth in 2011, but the chairman of the Federal Reserve has his doubts that a depression can be averted. In his semiannual testimony on Wednesday to the Senate Banking Committee, Bernanke stressed the depth of the economic crisis and the fragile nature of consumer and business confidence, despite the desperate measures that the president, the Congress, the Fed and the Treasury have taken.

After noting incremental progress in credit markets since September's narrowly averted meltdown, Bernanke warned that "significant stresses persist in many markets." And he repeated what the FOMC said after its last meeting: "Economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time." The fed funds target has been set as close to zero as possible. Bernanke expressed hope the Troubled Asset Relief Program and Troubled Asset-backed Security Lending Facility, and all other programs over time, "should further stabilize our financial institutions and markets, improving confidence and helping to restore the flow of credit needed to promote economic recovery."

If everything goes right, if the government's actions are successful in restoring stability -- "and only if that is the case, in my view" Bernanke said, "there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery." But the chairman warned that a lot could still go wrong. "The downside risks probably outweigh those on the upside," he said, pointing to the global nature of the downturn and to the possibility of "the destructive power of the so-called adverse feedback loop, in which worsening economic and financial conditions become mutually reinforcing." There is no official definition of a depression, but that is as close as any: An economy that is not self-healing but is instead self-destructing. The FOMC may be predicting 2.5% growth in 2010 and up to 5% growth in 2011, but the chairman is still worried about a depression. A recovery may be the most likely outcome, but it is not the only possibility.

Bank Nationalization Is Done Deal, Let's Move On
The nationalization debate is a smoke screen. We’ve already nationalized the big banks. Let’s just accept it and move on. Once that happens, the government can give investors clarity on whether nationalization will do more than dilute shareholders’ common stock. It can stop wasting time trying to fashion support mechanisms that don’t give the appearance of ownership. And it can get about the business of forcing weak banks into the hands of the strong, or the Federal Deposit Insurance Corp. Instead, the government is trying to craft a plan that "uses nationalization to prevent nationalization," according to a research note Tuesday from Christopher Low, chief economist at FTN Financial. In other words, the government, if it has to take common equity in banks, wants to avoid owning more than 50 percent so it can sidestep claims of nationalization.

In the meantime, officials try to bluff their way past the issue. During congressional testimony Tuesday, Federal Reserve Chairman Ben Bernanke said there was no rush toward nationalization. Senate Majority Leader Harry Reid struck a similar note when asked about nationalization in an interview with Bloomberg television Monday, saying there is "no need to even talk about it. It’s not necessary." Reid’s remarks followed comments Friday by Senate Banking Committee Chairman Christopher Dodd that short-term nationalization was in fact a possibility. On Tuesday, Dodd said his remarks should have been "better thought out." No wonder investors are confused and fleeing markets. Fundamental analysis of banks is now nearly impossible; it is all down to government whim. Investors may as well read chicken entrails to divine prospects for bank stocks.

The nationalization chatter also ignores one of the hard lessons banks learned during the financial crisis: even if you make it look like you don’t own an off-balance-sheet vehicle, it can still be your problem. The key issue with these types of vehicles -- as Citigroup Inc. discovered with one form, known as structured investment vehicles, or SIVs -- isn’t whether you technically own them. It is whether you control them, or are on the hook when things go wrong. That is certainly the case today for the government and banks like Citi, Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co., which are now Uncle Sam’s own off-balance- sheet vehicles.

The government has guaranteed debt issued by the banks, agreed to absorb losses of some of their toxic assets and taken ownership stakes through preferred stock in exchange for emergency cash. The government drew another line under the big banks Monday with a statement from bank regulators, the Treasury Department and the Federal Reserve. "We reiterate our determination to preserve the viability of systemically important financial institutions," the government said. In other words, it will not let the Big Four fail. If that’s the case, the government is certainly in the driver’s seat. And as new accounting rules under consideration for off- balance-sheet vehicles make clear, if you control it, it’s yours.

That is why the government, even if it continues to side- step ownership tests, has already nationalized the banks. Semantic contortions designed to ignore this are a waste of time. Even worse, they fail to clear the air about nationalization and its implications for markets. Right now, investors can only assume the worst about nationalization -- it will toast all debt and equity and allow government bureaucrats to swarm the banks like Mao’s revolutionary guards. So investors are forced to ponder every word in government communiqués, much as analysts once did with utterances from the Kremlin, or still do with the Federal Reserve. A case in point: Monday’s statement of support from regulators.

In a research note, analysts at research firm CreditSights were forced to contemplate the meaning of the word "commitments" as it was used in the statement. "On one hand, the word ‘commitments’ could mean that the government wants to ensure these banks are able to continue making new loans and provide credit to the economy," the report said. "On the other hand, a more optimistic interpretation of this statement could be that the government would support these institutions to meet all of their commitments, including debt obligations such as interest payments and principal and preferred dividends."

No wonder investors are feeling frustrated. The antidote is to make clear what nationalization actually entails. Only then can investors make rational decisions about what bank securities they want to buy and sell. That will give banks, and markets, a chance to find their feet. Make no mistake, bringing about such bank stability won’t end the financial crisis. It is needed, though, before the government can deal with deeper problems in housing, credit markets and banks themselves. To get it, the government needs to be honest about nationalization.

Bernanke Spurns Outright U.S. Control of Banks in Rescue Plan
Federal Reserve Chairman Ben S. Bernanke spurned outright federal control of U.S. banks in favor of a public-private partnership that the government would eventually exit. Bernanke told lawmakers yesterday the government would use supervision instead of shareholder control to guide major banks, and warned against dismantling their franchises. The remarks eased concern Treasury Secretary Timothy Geithner’s financial plan would push aside private shareholders, and spurred the biggest gain in financial shares in a month. "Bernanke was a voice of reason and he provided clarity in areas where others have failed," said Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co. LLC in New York. The Fed chairman assured markets that "the nation’s banking regulators were not proposing nationalizing banks."

The Fed chief’s remarks countered a growing drumbeat among some economists and lawmakers in favor of government takeovers of major financial firms to cleanse them of distressed assets and ensure they keep lending. Establishing ownership control poses legal issues and could undermine banks’ value with private investors, Bernanke warned. President Barack Obama last night signaled the administration will likely need to expand the $700 billion financial-rescue program to break the back of the credit crisis. "This plan will require significant resources," the president told a joint session of Congress. "And, yes, probably more than we’ve set aside." The Treasury will buy convertible preferred stock in the 19 largest U.S. banks if stress tests determine they need more capital to weather a deeper-than-forecast recession, Bernanke said yesterday.

The central banker spoke out amid signs of increasing challenges surrounding the government’s September seizure of American International Group Inc. -- a takeover that predated the government’s $700 billion bank-rescue fund. While AIG planned to repay a $60 billion federal loan by selling businesses, a failure to find enough bids means it may have to hand some operations over to the government, a person familiar with the matter said. Bernanke said at the Senate Banking Committee hearing yesterday: "I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary."

Geithner on Feb. 10 provided just an outline of the Obama administration’s plans for buttressing the financial industry. The lack of details led some investors to speculate on their own that a recapitalization of banks would involve substantial government control. The Standard & Poor’s 500 Banks Index surged 15 percent yesterday to 68.20, taking back more than 40 percent of the losses incurred after Geithner’s presentation. Senator Christopher Dodd, of Connecticut, the banking panel’s chairman who helped to stir concern about government takeovers in a Feb. 20 interview, said his remarks should have been "better thought-out." He told reporters yesterday that "banks run by private hands are far more desirable," after last week saying nationalizations might be needed "at least for a short time."

"There seems to be a growing sense of relief that nationalization was de-emphasized and put into perspective by Bernanke and some of the people in Congress," said Marshall Front, who oversees $500 million as chief executive officer of Front Barnett Associates LLC in Chicago. Regulators late last year put a priority on preventing the failure of some financial firms, at the expense of common shareholders if necessary. Stockholders of Fannie Mae, Freddie Mac and AIG were all mostly wiped out. "They learned a hard lesson -- if they nationalize, we are going to find ourselves in a bunch of AIGs," said Kevin Fitzsimmons, managing director at Sandler O’Neill & Partners LP in New York. "He acknowledged that if the government owns it, the franchise value goes down."

Bernanke said "the best sign of success" will be when the "government can start taking its capital out or the banks can start replacing the public capital with private-sector capital." Joshua Rosner, an analyst at the investment research firm Graham Fisher & Co. in New York, said the government may not run banks with the same sort of control it now has over mortgage finance companies Fannie Mae and Freddie Mac, which are under federal conservatorship. "But I don’t think we can ultimately resolve the problem without taking some kind of control and forcing the winding down or the sale of certain business units," Rosner said. The Treasury’s new convertible preferred stock would be converted to common-equity stakes only as extraordinary losses materialize, Bernanke said yesterday.

"We don’t need majority ownership to work with the banks," said Bernanke, who testifies today to the House Financial Services Committee. Bernanke also said the so-called stress tests that regulators will run on the 19 banks will look at potential losses over a two-year horizon if the economy worsens. The assessment will use "both a consensus forecast -- where we think the economy is likely to be based on private sector forecasts -- and an alternative which is worse," Bernanke said. The Treasury is expected to provide further information about the stress tests today.

There are no zombie banks, Bernanke says
Despite operating in a regulatory grey zone, the nation's largest banks are not "zombies," Federal Reserve Chairman Ben Bernanke said Tuesday. The term "zombie" has become popular to describe a bank that exists but is only alive because of government support. The term was first used to describe Japanese banks during the "lost decade' in the 1990s. Bernanke said that was not an "accurate description" for top U.S. banks. "They all have substantial franchise value. They are all lending -- all active. All have substantial international franchises," he said. Bernanke made the comments during testimony at the Senate Banking Committee. The top U.S. banks have been hammered by the sudden sharp decline in the value of many of the assets on their books, especially the value of complex mortgage-backed securities. Just how damaged the banks are remains a mystery, even though the government has pumped billions of dollars into them in return for partial ownership stakes. The government is going to begin the process Wednesday to uncover exactly how big the "hole" is at the banks and has agreed to provide additional capital to fill the gap.

Just how much capital is needed is also a mystery. Bernanke said that zombie banks imply that there is no control over the institutions. "But we're not just giving these institutions capital and letting them do what they want," Bernanke said. "We're going to be very tough on them to make sure that they take whatever drastic steps are necessary to restore them to profitability." Nationalization would cause more damage than good, he insisted. Nationalizing the banks would only "destroy the franchise value or create high legal uncertainty," he said. "We don't need majority ownership to work with the banks - we have very strong supervisory oversight we can work with them now to get them to do whatever is necessary to become profitable again. We don't have to take them over to do that," he said. But in extensive comments to the Senate Banking Committee, Bernanke did describe a regulatory limbo for these institutions.

Regulators do not have clear authority to shut them down. "We're following the law. We just can't go shut down a bank ... that meets capital standards," Bernanke said. And there are no roadmaps for shutting down one of these complex, global institutions down in a "safe way," he said. Moving to curtail their operations could roil global financial markets. "The implications for market confidence would be enormous," Bernanke said. Bernanke acknowledged that some banks have become so big that their failure would be catastrophic to the economy. "There is a-too-big to-fail problem. It is very severe," he said. But now is not the time to stop and ponder what this means. "Right now we're in the middle of a crisis," Bernanke said. But Bernanke stressed that there was a path out of the thicket. At some point, private capital will be willing to return, he said. That's when we'll know the recovery is just around the corner.

Paths to Repudiation
As readers of this blog and my newsletter are aware, I have laid out the case whereby the United States eventually repudiates its public debt. The means by which this happens is unclear. There are several paths to the same place however, and it’s not necessary to choose only one method of ultimate default. All the usual methods will do, and I am now confident we’ll witness most of them in the next five years. For example, we now know that an industrial depression will collapse tax revenues to Washington. This is already in the pipeline, as States from California to Kansas cannot even issue their own tax refunds. So the first path to repudiation comes from a collapse of GDP.

We also know that flagrant monetization will not be allowed to go on forever. That too is in the pipeline, as the FED has expanded outright non-sterilized purchases of financial assets. They have backed-stopped trillions in assets already with Treasury lending, but have since moved on to outright purchases. It’s likely that any month now they will start classical monetization of Treasuries. The FED has told us so. Thus, the second path to repudiation will come via quantitative easing, and inflation. Now comes the populist response to the financial crisis. This is the third pressure that will come to bear on both tax revenues to Washington, and Washington financial policy. One face of the populist response is Liquidationist. The other face is Keynesian and Interventionist. The Liquidationist movement, to the extent its successful, will promote default in the private sector. (It will also be associated with Tax Revolts). The Interventionist movement will seek to move default into the public sector. In the end, it doesn’t really matter which pipeline is the conduit for default. And here’s why…

Default in the private sector deepens the crisis, and further reduces tax revenues to Washington. Default and losses in the public sector forces increased monetization and Treasury borrowings. The result is obvious: an ever greater quantity of Treasury securities, backed by ever decreasing cash flow to the government, and topped off by ever increasing monetization of both Treasuries and Agency debt. Nationalisation of financial entities such as Fannie Mae, AIG, or the impending takeover of Citigroup and Bank of America are no longer that important. The only dynamic that is altered with nationalisation is how exactly the debt will be mitigated. Again, in the private sector it’s liquidated. But in the public realm it’s mitigated politically. Fannie Mae and Freddie Mac are already political vehicles that will be used to mitigate private debt through rescheduling. If Citigroup is taken over, then all commercial loans, credit card loans, and other debt held by Citigroup will be mitigated by Congress.

Let’s be clear: United States house prices, as one example, will now and for years to come be known as “The Prices of the Previous Era.” There will be no restoration of those price highs for a long time. Accordingly, Congress once it is in control of Citigroup and Bank of America will do just as they are doing now with Fannie Mae and Freddie Mac–they will reschedule the debt. The private sector debt in the United States exerts the same power over the banking system as the public debt of the United States exerts over our international creditors. Collectively, the debtors are in control. Not the creditors. This is why the the Creditors, not the Debtors, will be making most of the concessions in the years ahead. Whether the US public debt is inflated away, rescheduled, or repudiated–or some combination of all three–it doesn’t matter much. The process is already underway. And only an improbably quick return to a very high GDP in the United States could halt the process. We’d need a pace of growth that the United States has not experienced in decades. I don’t see a quick return to high GDP in the US anytime soon, do you?

As A.I.G.’s Losses Grow, Its Survival Options Shrink
The American International Group faced two distasteful options on Tuesday: selling prized assets to competitors or handing over a big part of its business to the federal government. Grappling with huge losses, A.I.G. appears to have few choices as the government focuses on trying to keep the giant insurer from toppling and perhaps injuring other institutions. The insurer has received a preliminary offer of $11 billion from MetLife for its American Life Insurance Company subsidiary, called Alico, according to people with knowledge of the discussions, who asked not to be identified because the details of the deal were not public.

But they said MetLife’s offer might slip to about $8 billion, as more became known about how the global downturn is affecting Alico, which has operations in more than 55 countries. The same sources said A.I.G. had received an offer from AXA, for all of Alico except its operations in Japan. The price was not disclosed. But A.I.G.’s need for capital appears to be growing so quickly that $8 billion, or even $11 billion, would not come close to filling the hole. A.I.G. is expected to report fourth-quarter losses of perhaps $60 billion early next week, and losses on that scale could initiate a domino effect like the one that flattened the company last September. First would come a credit downgrade, then calls from trading partners to post the billions of dollars in collateral that their contracts stipulate after a downgrade.

If A.I.G. failed to produce the required amounts, the financial institutions holding its contracts would have to recognize losses of their own. That would erode their capital, leaving them at risk of downgrades as well. Facing a deadline at the end of this month, A.I.G. and the government are looking for a way to get more value from the insurance subsidiaries than they think could be captured in a sale to a competitor like MetLife or AXA. One person close to the discussions said it might resemble a private equity arrangement, in which the federal government would take ownership of A.I.G.’s operating units, then later sell them in an initial public offering.

The goal of such a government purchase would be to inject capital into A.I.G. and to keep it from having to sell valuable assets when prices are depressed. But it would also put the federal government in the incongruous position of owning one or more insurance companies and competing with insurers in the private sector. “They wouldn’t like that, but they wouldn’t have a heck of a lot of choice,” said Douglas J. Elliott, a fellow at the Brookings Institution. “It’s not like the government went out of its way to get these companies.” Edward Liddy, A.I.G.’s chief executive, has said since he was brought in during last fall’s crisis that he wanted to sell dozens of operating units to raise money to pay off the federal government’s loans. But the sales have come slowly. A.I.G. is so large there are few buyers to begin with, and financing for deals has been scarce in the credit squeeze.

Shrewd buyers also appear to have been biding their time, expecting to get better deals as the pressure mounts on A.I.G. While they waited, the economy has soured and A.I.G.’s operating units have lost value. Its customers have been shifting their business elsewhere, and competitors have been poaching executives. “It looks like they’re in a downward spiral,” said Andrew J. Barile, an insurance industry consultant. “They’re in a position where they’re almost forced into selling.” Another possibility being discussed for A.I.G. is the conversion of the government’s holdings of A.I.G.’s preferred stock, worth $40 billion, into common shares. That would provide some relief because the preferred stock gets a 10 percent dividend, and the company would not pay any dividend on the common stock.

Christina Pretto, an A.I.G. spokeswoman, said the company could not provide information about its finances or possible deals in the quiet period just before its earnings were released. An AXA spokesman said the company would not comment on reports of an offer for Alico. A MetLife spokesman did not respond to a call seeking comment. MetLife, the largest American life insurer, raised $2 billion in a stock sale last October, when its capital position was relatively strong. Market watchers took it as a sign that MetLife was getting ready to move as other companies’ share prices fell and acquisition possibilities emerged. Alico could serve as a springboard into dozens of countries, including some that have big untapped consumer markets because insurance products are not yet in widespread use.

AIG may still be too big for government to let it fail
American International Group is still too big and inter-connected with the rest of the financial system, so the U.S. government will likely take more drastic steps to help the insurer avoid what could be fatal credit ratings downgrades in coming weeks, analysts said Tuesday. AIG is expected to report a quarterly loss of roughly $60 billion next Monday, the Wall Street Journal reported, citing unidentified people familiar with the matter. "The loss would most likely result in credit rating downgrades which would in turn lead to additional collateral calls," CreditSights, an independent fixed-income research firm, wrote in a note to investors. Downgrades last year by Standard & Poor's and Moody's Investors Service almost felled AIG and forced the government to bailout out the insurer with an $85 billion loan in return for an equity stake of almost 80%. The bailout ballooned to $150 billion in a November package that included a new $60 billion loan and $40 billion of government investment in perpetual preferred shares issued by AIG.

The government is going to such great lengths to prop up AIG because it is one of the world's largest counterparties in the market for credit default swaps, a common type of derivative that protects investors against default. If AIG collapses, counterparties including several major European financial institutions could be left waiting to be repaid along with other creditors in bankruptcy. Such a scenario could bring the financial system to its knees as nearly happened when Lehman Brothers collapsed in September. "The Federal government is maintaining a life support system for AIG," said Sean Egan, president of Egan-Jones Ratings, a rating agency that's paid by investors rather than investors. "If they pull the plug, they are dead. We don't want that to happen yet." An AIG spokesman said Monday that the insurer is evaluating "potential new alternatives" with the Federal Reserve Bank of New York to tackle its problems. He declined to comment further, as did an AIG spokeswoman and a New York Fed representative on Tuesday.

Under the new plan being considered for AIG, the $60 billion government loan will be repaid with a combination of debt, equity, cash and operating businesses, Wall Street Journal reported. The re-organization, which amounts to a debt-for-equity swap, will be announced next Monday when AIG reports fourth-quarter results, the newspaper added. Assets, such as AIG's Asian life insurance businesses, would be transferred to the government instead of cash to repay some of the $60 billion loan, the newspaper explained. AIG shares slumped 26% to 39 cents on Tuesday. The government is trying to buy more time to unwind some of AIG's operations and sell other assets, so that if the insurer collapses or shuts down in future it won't affect the broader economy much, Egan explained. "In 12 to 24 months there will be a decision to shut AIG down or allow more private capital in. By then, AIG will hopefully not pose such a threat to the broader economy," he said. The government is "doing the right thing" to try to maintain order in financial markets and the broader economy, but it made a serious strategic mistake several years ago when it allowed AIG to "massively mis-assess and mis-price risk." Egan stressed.

In November, AIG estimated that if Moody's and S&P downgraded its long-term senior debt ratings one notch, the insurer would have to come up with almost $8 billion in collateral and termination payments for counterparties. A two-notch downgrade would let counterparties terminate CDS contracts that cover $47.8 billion in debt. AIG said in November that the cost of replacing those contracts could not be reliably estimated. The government has helped AIG unwind a lot of these contracts since November, but some of the agreements are tougher to settle. It's also unclear whether the reported re-organization of the government's loan will avoid a ratings downgrade of AIG. A debt-for-equity swap is often considered a "de-facto default" Egan said on Tuesday. Under normal circumstances, that would be very bad for a company's creditworthiness and ratings, he explained. However, ratings for large, important companies like AIG involve political as well as credit analysis, Egan added. The government has some influence over leading rating agencies like Moody's and S&P, however any attempt to persuade them to delay a downgrade of AIG would undermine confidence in ratings in general, Egan said.

"We're in the twilight zone of credit analysis," he continued. "AIG clearly cannot meet its obligations, but the Federal government has shown willingness to backstop the institution." Spokesmen for Moody's, S&P and Fitch Ratings declined to comment on Tuesday. Moody's and S&P said in October that they were reviewing AIG ratings for a possible downgrade. In January, Moody's made it clear that continued government support was crucial. "The current ratings on AIG and its subsidiaries reflect Moody's expectation of continuing support from the US Government," the agency said on Jan. 14. Such support helps AIG meet short-term liquidity needs, while giving it time to sell businesses and unwind contracts written by AIG Financial Products Corp., its derivatives unit, the agency explained. "Without such support, the ratings of AIG and many of its subsidiaries - including core operations and businesses identified for sale - would be lower," Moody's warned.

Ilargi: Another great headline. Yeah, sure, homes are not sold because the owner don't WANT to sell.

U.S. Home Resales Drop to 4.49 Million Rate as Owners Wait Out Price Slump
Sales of previously owned U.S. homes unexpectedly declined even as falling prices made them more affordable, signaling that the housing slump is further from a bottom than previously estimated. Purchases fell 5.3 percent to an annual rate of 4.49 million, the fewest since 1997, the National Association of Realtors said today in Washington. The median price dropped 15 percent from a year ago to a six-year low of $170,300. Distressed properties accounted for 45 percent of all sales. "This is actually a very disappointing set of numbers," Ethan Harris, co-head of economic research at Barclays Capital Inc., said in a Bloomberg Television interview. "We’re still in this phase of the recession where it’s really kind of a dramatic pulling back" in purchases of big-ticket items, due to a "tremendous loss of confidence in the economy."

Americans may have been waiting for details of President Barack Obama’s plans aimed at stemming foreclosures and declining home values that are at the core of the economic slump, the NAR said today. The report sent stocks lower, with the Standard & Poor’s 500 Stock Index heading for its seventh decline in eight days. It was at 753.24 at 10:48 a.m. in New York. The government initiatives to boost housing and the economy may lift home resales by about 900,000 this year, Lawrence Yun, the group’s chief economist, said during a press conference. That will help trim inventory and may stabilize prices by the end of the year, he said. Economists had forecast resales would rise to a 4.79 million annual rate from 4.74 million in December, according to the median of 70 projections in a Bloomberg News survey. Estimates ranged from 4.5 million to 4.91 million. Sales were down 8.6 percent compared with a year earlier.

The number of unsold homes on the market at the end of January represented 9.6 months’ worth at the current sales pace, up from 9.4 months at the end of December. Resales of single-family homes decreased 4.7 percent to an annual rate of 4.05 million. Sales of condos and co-ops dropped 10 percent to a 440,000 rate. Purchases declined in three of four regions, led by a 15 percent decline in the Northeast. Sales were unchanged in the West. Home sales have been falling since 2005 and prices peaked in 2006. The S&P/Case-Shiller home-price index of 20 metropolitan cities was down 18.5 percent in December from a year earlier, a record decline, the group said yesterday.

"It’s going to be very difficult for the housing market to find its footing with the unemployment rate continuing to trend higher," said Carl Riccadonna, a senior economist at Deutsche Bank Securities in New York. "There is a huge inventory overhang, so we need prices to come down further." The drop in prices and declining mortgage rates have made buying a home more attractive. The National Association of Realtors affordability index reached a record high 158.8 in December. The average rate on a 30-year fixed mortgage fell to a record low 4.96 percent in the week ended Jan. 15, according to Freddie Mac. Prices are likely to keep falling. Home foreclosures were up 17.8 percent in January from a year earlier, according to RealtyTrac Inc., an Irvine, California-based seller of default data. A total of 274,399 properties got a default or auction notice or were seized by banks, the 10th straight month that foreclosures topped 250,000.

Obama last week introduced a plan to help as many as 9 million people restructure their mortgages to avoid foreclosures. The Treasury Department last week also said it will double the amount of stock purchases of Fannie Mae and Freddie Mac to as much as $200 billion for each company. Mounting foreclosures triggered a credit crisis which in turn has deepened the U.S. recession that began in December 2007. Economists surveyed by Bloomberg this month projected the economy will continue to contract at least through the first half of this year and that unemployment will rise to a 25-year high of 8.8 percent by the end of 2009.

Federal Reserve officials don’t see labor markets improving until 2011, after economic growth gains traction. Fed Chairman Ben S. Bernanke yesterday said the U.S. economy is in a "severe" contraction, and warned the recession may last into 2010 unless policy makers can stabilize the financial system. The competition from distressed sales is hurting builders. Standard Pacific Corp., based in Irvine, California, reported its ninth straight quarterly loss on Feb. 13. New home deliveries fell 47 percent, backlogs declined 50 percent and the cancellation rate was 33 percent, the company said. "We saw our sales absorption rate, our cancellation rate and general traffic levels deteriorate beyond normal seasonal changes," Chief Executive Officer Ken Campbell said in a statement. He said he expected home prices to decline further.

US home Prices Post Biggest Drop in 21 Years
The S&P/Case-Shiller U.S. National Home Price Index plunged 18.2% during the final quarter of 2008, the biggest annual decline in the closely watched index's 21-year history. Separately, for the month of December alone the Case-Shiller 20-City Composite Index fell 18.5% compared with the previous December, also a record decline. The most severe declines were in Phoenix, Las Vegas, and San Francisco, which all dropped by more than 30% in December compared with December 2007.

But the financial crisis has helped to spread the pain across the nation. Other cities that were holding up relatively well until recently are now seeing a quickening pace of declines. The year-over-year price decline in the New York metro area, which is at the center of the financial meltdown, was 9.2% in December, compared with 8.6% in November and 7.7% in October. Home prices in Charlotte, a major banking hub, fell by 7.2% in December. In October, Charlotte prices fell at just 4.4% compared with a year earlier. And home prices were actually increasing on an annual basis as recently as March 2007.

Stuart Hoffman, chief economist for Pittsburgh's PNC Financial Services Group (PNC), said home prices will probably fall for years to come (though the declines will get smaller and smaller). Most metro areas won't start to see price increases until 2011 or 2012, he said. "I think people would be happy if both home prices and stock prices just stopped going down," Hoffman said. The speed of the declines in several metro areas, including Denver, Los Angeles, Miami, San Diego, and Washington, improved slightly in December or at least remained stable. But in many cases, it's just because prices are already falling at such a rapid pace.

A notable exception, however, is Denver, where prices dropped by just 4% in December compared with a year earlier. In the Miami metro, for example, prices fell at an annual pace of 28.8% in December—almost the same pace as in November. Miami real estate agent Zoila Perez-Chanquet said investors willing to pay cash are bidding down prices for foreclosed homes, which make up much of the inventory. But sales are picking up now that prices are so low, and sellers can sometimes hold firm on already rock-bottom prices, she said. One of her clients offered $65,000 in cash for a two-bedroom home listed at $79,900 in the Hialeah Gardens area of Miami-Dade County. The property sold this month for $90,000. "Buyers need to understand that prices are low enough as it is," Perez-Chanquet said. "They need to offer either listing price or above because the sellers are taking the highest offer."

Ilargi: So Shiller and Standard and Poor's say prices came down 18.2%, and teh government regulator syas it's only 8.2%. Broader reserach blah blah blah. But does the US government really want to state that S&P and a Princetin professor are 60% off?

U.S. Home Prices Slide 8.2% In Fourth Quarter, FHFA Says
Prices on homes sold across the U.S. fell 8.2% in the fourth quarter from the year-earlier period and slid 3.4% from the third quarter, the Federal Housing Finance Agency said Tuesday. The government survey, which reviews a broader spectrum of home sales than the S&P Case/Shiller index released earlier Tuesday, gained a seasonally adjusted 0.1% in December from November, after a downward adjustment for November. Prices have tumbled 10.9% from their April 2007 peak, FHFA said. All nine census divisions had price declines in the latest quarter, with the Pacific division the weakest. Of the 20 cities with the greatest price declines over the last four quarters, all but one was in California or Florida.

Ilargi: I know who not to listen to if Roubini starts saying taxpayers may make a profit from nationalizing banks.....

Nationalizing Banks is 'Market Friendly'
Nationalizing insolvent US banks is the best solution to avoid a Japan-like scenario in which 'zombie' financial institutions would eat up public resources while the US economy would teeter on the brink of depression, Nouriel Roubini, economics professor NYU and chairman at RGE Monitor told CNBC Tuesday. Bank shares have fallen on news of abysmal losses and on fears that governments across the world would step in and wipe shareholders out, dragging global stock markets down, but temporary takeover by the state of the sick institutions will insure the survival of the system, Roubini said.

"The market friendly solution is temporary nationalization," Roubini told "Worldwide Exchange". "Doing something surgical and radical actually may improve the market sentiment," he said. "If we don't do it, we risk ending up like Japan, that had zombie banks for a decade," he added. Furious banking consolidation that took place in the years preceding the crisis has made matters worse, as it had created banks that were too big to fail but also too big to save, according to Roubini. The US government has already provided between $7 trillion and $9 trillion in explicit or implicit support for banks, and taxpayers would actually benefit from nationalization, as they wouldn't have to bail out shareholders as well, he said.

"If you don't nationalize them on a temporary basis the fiscal commitments will be bigger," Roubini said. "The alternative is actually a dangerous debt spiral. We risk ending up in a near depression for the US and the global economy if we don't take this radical action as necessary." Taxpayers could even make a small profit when the nationalized banks will be privatized again, he said. AIG, which is seeking more government cash after getting ready to report a $60 billion loss, the highest in US corporate history, is bankrupt despite the tens of billions in taxpayer funds already pumped into it, he said.

"AIG is effectively insolvent. Rather than saving AIG, we've been saving the counterparties of AIG - firms like Goldman Sachs and other broker-dealers would have been gone bankrupt without that," Roubini said. Nationalization of insolvent banks should be done in Europe as well, all major central banks' rates should be slashed to zero and quantitative easing should take place, and the housing sector crisis should be solved for a depression to be avoided, he warned. "You need to do massive fiscal stimulus, Europe is not doing enough, Japan is not doing enough," Roubini said. "That's the risk right now, of an L-shaped recession. This is what we are facing right now, the risk of a near depression, and unfortunately policymakers are really behind the curve. It's time to act, right now."

Robert Prechter Advises Closing Short Positions on Stocks
Elliott Wave International Inc.’s Robert Prechter, who advised shorting U.S. stocks three months before the bear market began, said investors should end that bet after the Standard & Poor’s 500 Index tumbled to a 12-year low. He warned of a “sharp and scary” rebound for anyone still wagering on a retreat, according to this month’s “Elliott Wave Theorist.” Short selling is the sale of borrowed stock in the hope of profiting by buying the securities later at a lower price and returning them to the shareholder. “This is an environment of escalating financial chaos,” wrote Prechter, famous for cautioning that stocks would crash two weeks before the Black Monday retreat in 1987. “Our main job is to keep the money we have. If we exit now, we will do that.”

The 60-year-old former rock-and-roll drummer is an advocate of the wave principle, a theory developed by accountant Ralph Nelson Elliott during the Great Depression. Elliott concluded that market swings, or waves, follow a predictable, five-stage structure of three steps forward, two steps back. In addition, the waves share a variety of features: Wave two never falls below the starting level of wave one; wave three is never the shortest; waves one and five tend to be of equal length; and wave sizes are often related by a series of numbers known as the Fibonacci sequence, wherein each number is based on the sum of the two previous ones.

The S&P 500 has sunk 52 percent since its October 2007 record as financial firms worldwide posted $1.11 trillion in credit-related losses and the U.S., Europe and Japan fell into the first simultaneous recessions since World War II. In July 2007, Prechter advised shorting U.S. stocks, saying “aggressive speculators should return to a fully leveraged short position.” Although Prechter has now reversed that call, he said the S&P 500 may keep plunging.
“Am I saying that the market has reached its final bottom? No!” he wrote. “The wave count is not quite finished, and ideally the S&P should continue down into the 600s.” The measure jumped 4 percent to 773.14 today.

Prechter’s recommendation follows the advice of JPMorgan Chase & Co.’s U.S. equity strategist Thomas Lee, who today issued a “trading buy” recommendation on the S&P 500. The index fell to 743.33 yesterday. Lee set a “short-term” forecast of 800. “The market is compressed,” Prechter said in the note published yesterday. “When it finds a bottom and rallies, it will be sharp and scary for anyone who is short. I would rather be early than late.” He has written or edited 13 books, including “Elliott Wave Principle: Key to Market Behavior” in 1978 and “Conquer the Crash” in 2002. His 1995 book “At the Crest of the Tidal Wave: A Forecast for the Great Bear Market,” was published five years before the Internet bubble burst, driving a 49 percent retreat in the S&P 500 through October 2002. Still, investors who followed his advice missed out on the index more than doubling.

Ambac Posts $2.34 Billion Net Loss on Mortgage Debt
Ambac Financial Group Inc., the second-largest bond insurer, posted its fifth net loss in six quarters, setting aside more money for soured home-loan debt and $1.53 billion because it may be unable to use tax credits. Ambac’s fourth-quarter net loss narrowed to $2.34 billion, or $8.14 a share, from $3.27 billion, or $32.03, a year earlier. Excluding changes in the value of securities it holds, issued or insures, the New York-based company said in a statement today that its loss was $6.79 a share, compared with an estimate for a loss of $1.80 from the one analyst surveyed by Bloomberg.

Seeking to rebound from mortgage losses that stripped the seven top-rated bond insurers of their AAA grades, Ambac last year won agreements with banks to cancel contracts at discounts, and today reiterated it hopes to start a municipal-only insurer. Rival MBIA Inc. this month won the right to split its public- finance business and structured-finance guarantees, as it seeks to re-enter a shrunken market for backing state and city debt. "Whether Ambac can succeed at doing that or not remains to be seen," Gary Ransom, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in Hartford, Connecticut, said in a telephone interview yesterday before the earnings. "There’s definitely room for a couple of municipal insurers, maybe three," compared with essentially only one today.

Ambac whose shares have fallen almost 99 percent from their 2007 peak, declined 11 cents to 90 cents in early New York Stock Exchange trading. The insurer’s market value has dropped to less than $300 million from more than $9 billion at the start of 2007, just before the subprime-mortgage market began to unravel. During the fourth quarter, total stockholder equity, a measure of what would be left for shareholders if Ambac used all its assets to pay off all its liabilities, fell to negative $3.8 billion, from positive $2.38 billion. MBIA, the largest bond insurer by outstanding guarantees, Ambac and the rest of the industry have posted record losses after expanding from guarantees on municipal bonds that rarely default to insuring securities tied to mortgages ahead of the U.S. housing slump. David Wallis, Ambac’s former chief risk officer, became chief executive officer in October, with Michael Callen agreeing to stay on as chairman.

Today, Ambac said it incurred a net loss provision of $916.4 million for home-loan securities and a $594.5 million charge to reflect a decline in the value of securities it had guaranteed using credit-default swaps. The company’s deferred tax asset valuation allowance grew $1.53 billion from Sept. 30. Ambac said that it won’t mimic MBIA when creating a new municipal-only unit by assuming the benefits of the company’s existing public-finance business. The unit, to be called Everspan Financial Guarantee Corp., is expected to open in the second quarter. "There are no current plans for Everspan to assume any of Ambac’s legacy public finance or other exposures," Douglas Renfield-Miller, the planned unit’s CEO, said in the statement. "We believe Everspan’s capacity is best utilized for new business and that the market will value a clean entity."

To erase potential losses, Ambac has sued mortgage lenders, and in November reached a deal to cancel $3.5 billion of collateralized debt obligation contracts tied to U.S. mortgages for $1 billion, after paying $850 million to Citigroup Inc. to tear up a similar $1.4 billion guarantee. Both payments represented discount to the company’s expected losses.The company set aside $348 million less in reserves for home-loan bonds, mainly Alt-A and second mortgages, in the fourth quarter because it expects to be able to win relief on some loans due to lender misrepresentation, according to the statement. Ambac has lowered reserves by $860 million so far in anticipation of loan recoveries it said may take several years for "ultimate collection."

MBIA’s restructuring, announced Feb. 18 and approved by New York Insurance Superintendent Eric Dinallo, resulted in Moody’s Investors Service cutting ratings on its unit that will cover mortgage bonds and other complex securities to B3, or six levels below investment grade. The downgrade suggests the split hurts holders of that debt while allowing shareholders and municipal investors to benefit more from Armonk, New York-based MBIA’s public-finance revenue. Ambac’s insurance ratings have fallen to Baa1, or three levels above junk, at Moody’s. Standard & Poor’s has been reviewing its A rating on the insurer’s main unit, which is five levels above non-investment grade, for downgrade since November.

Last year, municipal borrowers used insurance on 18 percent of the bonds they sold, down from 47 percent in 2007, according to data compiled by Thomson Reuters. As bond insurers’ ratings collapsed, cities and states saw the value of their borrowing drop and banks that had purchased protection against a decline in the securities they held were forced to take writedowns. The portion of new municipal issues that were insured last month slid to 15 percent, according to Thomson Reuters. Assured Guaranty Corp., the insurer backed by billionaire Wilbur Ross, said it provided 81 percent of the guarantees, or $2.8 billion. Municipal & Infrastructure Assurance Group, an insurer set up by Macquarie Group Ltd. and Kenneth Griffin’s Citadel Investment Group LLC, is seeking licenses to sell insurance in all U.S. states and territories, according to a statement yesterday. Warren Buffett’s Berkshire Hathaway Assurance, a AAA insurer created in 2007, is only "opportunistically" seeking new-issue business, according to Ransom and other analysts.

New York’s Dinallo told Bloomberg Television on Jan. 14 that the federal government should inject capital into existing bond insurers to calm credit markets and bolster financial companies. MBIA and Ambac each have said that they may accept the funds or other U.S. aid if offered. In September, a Moody’s ratings review prompted Ambac to reconsider a plan to bankroll a new municipal insurer. Ambac’s contribution of $850 million of capital to the unit was postponed because it may need the cash to terminate or post collateral for its guaranteed investment contracts. A fresh start may allow Ambac to compete for guarantees on debt issued by cities and states, a business it pioneered in 1971.

EU Says Bank Nationalization Is an Option in Toxic-Asset Cases
The European Union said nationalizing banks is an alternative for governments in their efforts to clean so-called toxic assets from financial institutions’ balance sheets. "This is one of the options to solve the problem of banks in distress," EU Monetary Affairs Commissioner Joaquin Almunia said today in Brussels as the European Commission issued guidance to governments on dealing with impaired assets. The 27 EU nations have several other alternatives, notably asset purchase, including "bad bank" scenarios, and asset-insurance programs, the commission said.

"We haven’t taken an option here in favor of bad banks, in favor of good banks, or in favor of insuring assets," Almunia told journalists in Brussels. "It’s up to each member state to decide what is the best instrument to utilize." Governments are studying how to clear banks’ toxic assets, or illiquid investments, that are clogging banks’ balance sheets and discouraging them from boosting lending. Economist Nouriel Roubini says bank write-offs could triple to $3.6 trillion, and the European Central Bank is seeking to provide a framework to deal with further woes. The commission said governments should agree on the criteria for valuing impaired assets "to prevent undue distortions of competition and to avoid subsidy races between member states."

"What we’re establishing here is a level playing field and the political will to avoid financial protectionism when dealing with impaired assets," Almunia said. The commission said governments should give banks a six- month window to enroll in asset-relief programs. EU Competition Commissioner Neelie Kroes said in a statement that the guidelines ensure "transparency, disclosure and correct valuation of impaired assets in order to clean the balance sheets of banks and address the root cause of lack of confidence." Kroes said banks should also contribute adequately to the costs. "They may have to be restructured in exchange for the state aid they receive."

Call for early warning system for European banks
New pan-European bodies need to be established to beef up the supervision of financial institutions in Europe and better monitor risks to financial stability, a closely-watched high-level report recommended on Wednesday. A taskforce, headed by former French central banker Jacques de Larosiere, suggested that a new "European Systemic Risk Council" should be created. This would collate and analyse issues and information relating to systemic risk and financial stability. It would be chaired by the European Central Bank, but include representatives of central banks and financial suspervisory organisations from the EU’s 27 member states. There should also be new "European System of Financial Supervisors", which would provide more central coordination for regulators overseeing large financial institutions, but leave day-to-day supervision to the member state authorities.

The ESFS would be made up of three European authorities - a European banking authority, a European insurance authority and a European securities authority - whose chairs and director-generals would be full-time independent professionals. The authorities, however, would be managed by boards made up of the chairs of the national supervisory authorities. Mr De Larosiere envisages that these authorities could be created from three existing committees - the so-called "level three" committees - which already attempt to coordinate the approach of national regulators across the EU. However, he suggests that they should be given some extra powers - for example, to impose legally-binding mediation if there were disputes between national supervisors.

They should also be able to licence and supervise some specific EU-wide institutions, such as credit rating agencies. "We need to ensure that the level three committees are given some authority, some limited powers," the banker said. On Wednesday. Asked why he had not opted for creating a single pan-EU "super-regulator", Mr De Larosiere said: "We might have been accused of being unrealistic". He added that such a structure could have been very costly and created problems for enforcement, which would still have to be done locally. Such an idea would also face considerable political opposition in some member states. In addition, Wednesday’s report contains recommendations for:
  • a fundamental review of the Basel II banking rules, to gradually increase capital requirements, reduce pro-cyclicality, and introduce stricter rules for off-balance sheet items;
  • the adoption of the so-called Solvency II legislation, overhauling the way insurance companies are regulated;
  • the simplification and standardization of over-the-counter derivatives, with the introduction of at least one central clearing mechanism in the EU for credit default swaps
  • continued use of colleges of supervisors for large cross-border financial groups, but paying greater attention to banks’ internal risk management practices.
Mr de Larosiere was called in by European Commission president José-Manuel Barroso in the wake of the financial crisis, and his report was formally unveiled at midday on Wednesday. His committee - comprising seven other senior industry figures - has received submissions and suggestions from numerous players and regulators in the financial services industry. The European Central Bank has also entered the debate, suggesting that it could assume a stronger role in macro prudential supervision - developing early warning systems for risks in the financial system, for example, or conducting stress-testing exercises.

However producing solutions which are politically saleable across the 27-country bloc is difficult, given member states’ traditional reluctance to cede authority in this area. Largely for this reason, Europe operates today with a mix of local supervision and then various coordinating committees and "colleges", which do not have binding powers, superimposed on top. The fact that a major financial centre - London - is outside the eurozone is a further complication. The current financial crisis has shaken political leaders, and may provide an opportunity for reform. At the weekend, European leaders endorsed a plan to create a comprehensive regulatory framework that covers "all financial markets, products and participants".

EU Officials Concerned About Risks of Pound Drop
European Union officials are concerned that the pound’s slide to a record low against the euro could destabilize the British economy, according to a document prepared last month by European Commission and EU finance ministry officials. The pound’s "very rapid" drop "raises questions about the financial stability of the British economy," said the document, which was prepared ahead of the Feb. 14 Group of Seven meeting in Rome and obtained by Bloomberg News. The currency’s weakness "is a source of concern for the euro area." The report contradicts Prime Minister Gordon Brown’s argument on Feb. 13 that a weaker currency helps rather than hinders the economy. With the pound down 18 percent against the euro in the past year, it also underscores investors’ concern about Britain’s fiscal health as the government racks up debt to fund bank bailouts.

The one-page document, titled "Recent exchange rate developments - G7 preparation," was circulated at a meeting of EU officials before the G-7 gathering in Rome. The document also outlined the EU’s position on the U.S. dollar, the yuan and the yen before discussing the pound. The Obama administration’s expressed support for a "strong dollar" is "reassuring," the document says. It also calls for a "continued real effective appreciation" of the yuan against the euro. Japanese authorities "should not intervene to reverse the past appreciation of the yen," it says. The document signals concern among euro-area policy makers that the pound’s slump could push their 16-nation economy deeper into a recession by undermining exports to its biggest trading partner.

Gross domestic product in Britain contracted 1.5 percent in the fourth quarter, the most since 1980, as companies and consumers reduced spending, the Office for National Statistics said today. The economy shrank 1.9 percent on the year. A U.K. Treasury official who declined to be named said the government doesn’t comment on movements in currency markets. Policy makers "should be alive to the possibility that weakness in the pound will just scare off foreign investors," Neil Mackinnon, chief economist at ECU Plc in London and a former U.K. Treasury official, said in an interview on Bloomberg Television today. "The U.K. economy is certainly in a recession if not a mini depression."

The U.K. currency fell 23 percent against the euro last year as confidence in Britain’s fiscal health weakened, export demand dried up and Bank of England cut interest rates to records. The pound reached a record low of 98 pence per euro in late December. It traded at 88.87 pence per euro at 12:12 p.m. in London. "As the pound has gone down, we’re more competitive," Brown said Feb. 13. "We’re not trying to target the exchange rate like people used to do." At the same time, his government has taken on liabilities that may amount to 1.5 trillion pounds ($2.2 trillion) as it tries to prop up the financial system and rescue banks such as Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc. Nigel Lawson, the longest serving chancellor of the exchequer under Margaret Thatcher, said yesterday the U.K. government may have to introduce "a short period of nationalization" for some banks.

Europe’s officials are concerned that global currency volatility could roil markets and destabilize their economies. "Exceptionally high volatility and unprecedented sharp moves in the foreign-exchange market have adverse implications for economic and financial stability and are especially unwelcome in the current economic environment," the draft document said. "In a context of low inflation in all major economies, any large moves will translate into big real exchange rate swings that could lead to competitive distortions." French and Irish finance ministers have already openly questioned the U.K.’s management of its currency. France’s Christine Lagarde said Jan. 21 that the Bank of England’s monetary policy "isn’t very efficient in providing more support" for the pound. Ireland’s Brian Lenihan said that Britain is engaging in "competitive devaluation."

UK mortgage lending sinks 43% in January
The number of mortgages approved rose slightly during January but lending levels were still 43 per cent lower than in the same month a year ago, figures indicate today. A total of 23,376 mortgages were approved for house purchases during the month - the highest for four months and up from 22,416 in December, the British Bankers’ Association said. However, net mortgage lending, which excludes redemptions and repayments, fell to its second-lowest level since April 2001 at £2.9 billion in the month - nearly half that in January 2008. The value of total mortgage advances made in January was unchanged from December at £9.9 billion.

There was also a slight increase in the number of people remortgaging, with 30,710 loans approved for people switching to a better deal during the month, up slightly from 30,500 in December but still 60 per cent lower than 12 months earlier. There has been a steep fall in the number of people taking out a new mortgage when their current deal ends, partly because house price falls have left many people without the big equity stakes lenders now demand to get the best rates.
Historically low interest rates have also led to steep falls in lenders’ standard variable rates, which most borrowers revert to when they come to the end of a deal, meaning many homeowners are better off staying where they are.

The BBA said: "January’s approval activity, both in volume and value, was marginally above December but continued to be at a very low level." It added that lower borrowing costs and falling property prices had "underpinned" demand for mortgages from the high street banks, which it said were providing more than two-thirds of new mortgage lending. Howard Archer, chief UK and European economist at IHS Global Insight, said that the modest rise in approvals last month was further evidence that housing market activity may have bottomed out. But he warned that further "significant" falls in prices were likely: "Furthermore, while latest survey evidence indicates that buyer inquiries are now picking up significantly as people are attracted by lower house prices and the Bank of England slashing interest rates, we are sceptical that this will lead to a marked rise in actual sales soon."

Demand for unsecured credit remained subdued during January. Consumers spent £6.1 billion on their credit cards, in line with previous months. But when repayments of £6.3 billion were taken into account, outstanding credit card debt rose by £253 million - slightly up on the previous six-month average. Borrowing through overdrafts and loans fell by £111 million in January, the third month in a row in which it has declined. There also was a steep fall in the amount of money people had saved during the month, with deposits dropping by £2.2 billion in January. The BBA said that this partly reflected people spending their savings but was also due to them moving their money into alternative, higher yielding assets, following the reduction in deposit rates.

UK household spending falls at fastest rate since 1991
Household spending declined at its fastest rate since 1991 during the last three months of 2008 as recession fears gripped the UK, official figures show. The 0.7pc decline was the worst since April-June 1991 and a third successive quarter of falling spending, according to the Office for National Statistics (ONS). There were "significant falls" in spending abroad by UK tourists as well as on cars, hotels, restaurants and leisure activities, the ONS said. The spending decline came amid a backdrop of financial crisis triggered by the collapse of Lehman Brothers, rising unemployment and a succession of deep interest rate cuts by the Bank of England which hammered the pound.

Howard Archer, IHS Global Insight economist, said further falls in household expenditure were likely this year, despite incentives such as the Government VAT cut and lower interest rates. "Many consumers are likely to retrench out of choice, reflecting their deep concerns about the economy and jobs," he said. Although the 1.5pc estimated fall in overall output - or GDP - during the final quarter of 2008 was left unchanged, defying market expectations of a 1.6pc decline, the ONS marked down the third-quarter contraction from 0.6pc to 0.7pc. This left the economy suffering a year-on-year fall of 1.9pc in the final three months of last year - also the biggest since the second quarter of 1991.

The figures confirm the UK is in its first recession since 1991. The widely accepted definition of a recession is two consecutive quarters of negative economic growth. The ONS said output from production industries shrank 4.5pc - the largest fall since the first three months of 1974 - mainly due to a slump in manufacturing. But the overall fourth-quarter figure was unchanged as services were not hit quite as badly as first thought, with output falling by 0.9pc instead of 1pc. Capital Economics economist Vicky Redwood said it was a "bit of a relief" that fourth-quarter output was not marked down, although there was "still plenty to be gloomy about". She said: "The economy still looks set to contract by around 3pc this year - and we think a further fall in 2010 is likely too."

Collapse in business investment puts UK economy into a spin
Britain's economy shrank even more dramatically than previously thought in the second half of last year, official statistics are expected to reveal today, after the latest data from the Office of National Statistics showed a disastrous fall in business investment during the final months of 2008. The ONS said yesterday that business investment in the final quarter of last year was 3.9 per cent lower than in the previous quarter and 7.7 per cent down on the same period of 2007. The slump in investment was particularly marked in the manufacturing sector, where the corresponding figures were 11 per cent and 15.7 per cent. Business investment also fell sharply during the third quarter of last year.

Howard Archer, chief European and UK economist at IHS Global Insight, said the fall-off in investment, the worst such decline since 1991, was so marked that the ONS's first estimates of economic growth for the second half of last year would prove over-optimistic. The ONS is due to publish its revised figures today.
"The sharp fall in business investment reinforces belief that the revised data will show that the economy contracted even more sharply in the fourth quarter of 2008 than previously estimated," he said. "Businesses are increasingly and substantially scaling back their investment in the face of sharply weakening demand, rising levels of spare capacity, worsening cash flows and very tight credit conditions, deteriorating profitability, and serious concerns about the potential length and depth of the recession."

IHS Global Insight now expects the ONS to say the economy shrank by 1.6 per cent in the fourth quarter of last year, worse than the 1.5 per cent previously announced. Andrew Sentance, a member of the Bank of England's Monetary Policy Committee, said the latest economic data underlined the need for policymakers to offer further help. "A persistent and prolonged period of deflation still remains an outside risk, in my view," said Mr Sentance, who is known for his hawkish views on interest rate policy. "But there is a strong case for providing additional stimulus to the economy to head it off more decisively." His comments will be seen as further increasing the likelihood that the MPC, which has already cut interest rates from 5 to 1 per cent over the past five months, will opt to begin using its "quantitative easing" powers when it meets next week, printing more money in an attempt to reflate the economy. Mr Sentance was speaking as further discouraging economic data was published yesterday.

The Confederation of British Industry said that just one in four retailers reported higher sales in the first half of February than in the same period last year, with a little over half reporting falls. The CBI said that while the rate of decline of retail sales had slowed compared with January, it was expecting a further deterioration in March. There was also little sign of any improvement in the mortgage market, where the British Bankers' Association said home loan approvals were 43 per cent lower in January than in the same month last year. Moreover, while the number of mortgages approved rose by a few hundred last month compared with December, the net value of mortgage advances fell from £3.3bn to £2.9bn in January. The BBA's figures also suggest that the recession has begun to have a dramatic impact on levels of savings, with banks registering a £2.2bn fall in personal deposits last month.

Such a marked withdrawal of savings is likely to reflect bank customers' unhappiness with interest rates, which have fallen sharply as the base rate has been slashed, but may also indicate some cash-strapped households are beginning to draw down emergency funds. The dismal performance of the economy is also continuing to act as a drag on the stock market, which fell by almost 1 per cent yesterday. At one stage, the FTSE 100 index of shares in leading companies fell to its lowest level of any time since the beginning of the credit crisis, before recovering some ground later in the day as the US stock market posted modest early gains.

British savers withdraw record amount as interest rates fall
Savers withdrew a record £2.3 billion from their accounts last month as historically low interest rates forced millions of investors to look elsewhere for better returns on their money, official statistics showed. The figure was the largest monthly withdrawal since the British Bankers Association (BBA) started to keep records 12 years ago and broke the previous record by £800 million. As the Bank of England has reduced interest rates to a 300-year low, many savers have seen the return on their money fall to almost nothing. The figures were the latest evidence that savers, who outnumber borrowers by six-to-one, had been cut adrift by the Bank of England, which cut interest rates from 5 per cent in the middle of last year to just 1 per cent in an attempt to stimulate the economy.

The "cash drain", as the BBA described it, was also a worrying symptom of rising unemployment. People who had lost their jobs were being forced to dip into their savings to pay for everyday expenses. Professor Merlin Stone, of Bristol Business School, said: "In a recession, one of the upsides is usually that people save just in case things get worse. But I am afraid that this time, prudence is outweighed by lack of income." Last month’s withdrawals reduced the total amount of personal bank deposits from £571.5 billion to £568.2 billion. The cuts in the Bank Rate were intended to kick-start the moribund mortgage market and help businesses to keep afloat, but so far they have had little effect. The Bank of England said the average instant-access savings account paid out an annual interest rate of just 0.51 per cent, while so-called notice accounts paid a mere 0.29 per cent. This meant that a saver with £100,000 deposited in a non-notice account would have seen their annual return fall from £3,700 to just £290.

The figures came after The Daily Telegraph launched its Justice for Pensioners campaign last December, which calls for pensioners to be given a tax cut on the income earned from their savings and investments. Elderly savers have since been promised help in the next Budget. Among the measures under consideration were an increase in the tax threshold for over-65s and an increase in Individual Savings Account (Isa) limits. Earlier this month, a survey by uSwitch, the price comparison website, suggested that 4.3 million savers were planning to withdraw £9.5 billion over the next year from Isas and lose their tax free status in search of a better home for their cash. There were some signs that housing sales had picked up as cash buyers, tired of watching their money fail to grow in savings accounts, dipped their toes back into the property market. The Royal Institution of Chartered Surveyors said that inquiries from new buyers had increased for the last three months in a row. Ben Yearsley, an investment manager at Hargreaves Lansdown, said savers were moving funds to the stock market as well as to corporate bonds and gold. He said: "There was a big shift in January, and February is running on a par with January."

ING Bank on stock market roller-coaster
Investors appeared to have lost all confidence in ING on Tuesday. Shares in the Dutch financial services group plummeted by more than 21 percent. Yet when trading closed they were up by 2.4 percent. In early trading on Wednesday morning ING shares bounced back again, rising by as much as 12 percent, though the gain rapidly dwindled to hover around 5 percent. In the final moments of trading on Tuesday, more than four million ING shares changed hands. This was a sign of trading by major players who evidently thought the value had hit a low. In total more than 41 million ING shares were traded on Wednesday. The group came under pressure on Thursday last week, going on to lose a third of its value within a few days. At its lowest point on Tuesday, ING’s total value was less than 6 billion euros. A year ago the bank and insurer was worth 50 billion euros. There was no obvious reason for the volatility in the ING share price. The company has already received a 10 billion euro state cash injection, and the Dutch government has agreed to guarantee 22 billion euros-worth of investments in high-risk US mortgages. But speaking on Dutch television on Tuesday evening, ING chairman Nick Jue described ING as "a healthy company in heavy weather". He said there was no truth in recent rumours that ING was likely to be nationalised.

The only explanation for the volatility seems to be a general aversion to investment in financial institutions. In particular this is fuelled by trouble in the United States. There the country’s largest bank, Citigroup, is presently in need of a fresh injection of government cash, having already received two multi-billion dollar bailouts. And the world’s biggest insurance corporation, AIG, is also said to need a financial lifeline. At the same time, credit rating company Standard & Poors announced on Tuesday that it may downgrade its rating for seven financial institutions due to their worsening profitability. Among them were ING, and Dutch-based insurance and pensions group Aegon, which lost 9.4 percent of its value on Tuesday. ING, which since taking over the Dutch Postbank has a total of 8.8 million account holders in the Netherlands, says it has received 1.5 billion euros in savings deposits since January in the Netherlands alone, and reportedly a billion a week worldwide. When Benelux-based bank Fortis got into trouble on the stock market last year, many investors and savers were prompted to switch their accounts.

Fraud squad raids offices of Anglo Irish Bank
Irish police staged a raid yesterday on the headquarters of the controversial Anglo Irish Bank, which has been at the centre of a series of allegations and revelations over recent months. The bank was nationalised last month in an as yet unsuccessful attempt to restore stability to the Irish financial system. In the Irish Parliament yesterday, the Taoiseach, Brian Cowen, said the case would be "conducted and concluded and pursued vehemently and vigorously in the shortest possible time-frame". Dozens of police moved in after search warrants were obtained by the Bureau of Fraud Investigation. Officers remained for much of the day on the premises, which are at a prestige location on Dublin's St Stephen's Green.

Examinations are expected to take place of records which are on paper and in computers. No indication has yet been given of whether arrests might follow. The bank has been the focus of public and political anger as a series of questionable transactions, involving millions and in some cases billions, of euros have come to light. Anglo Irish's former chairman, Sean FitzPatrick, and other bank bosses have resigned their positions. Mr FitzPatrick has refused to appear before a parliamentary committee to be questioned about his behaviour. The government said it had been advised against naming 10 individuals who were part of a "golden circle" of wealthy Irish businessmen who received multimillion-euro loans from Anglo Irish which they invested in its shares. But a clamour persists for them to do so.

The government has struggled to cope with a severe downturn which has led to many public protests. On Saturday, an estimated 100,000 people marched in Dublin city centre, many of them condemning Irish banks' behaviour. Government minister Noel Dempsey called those involved in wrongdoing at Anglo Irish as guilty of "economic treason". He said: "You have to collect the evidence. It has to be investigated thoroughly and I and my colleagues want to see the people responsible pay for that."

German Economic Contraction Driven by Export Slump
German exports slumped in the fourth quarter, causing Europe’s largest economy to contract the most in 22 years. Exports dropped 7.3 percent from the previous quarter and company investment in plant and machinery declined 4.9 percent, the Federal Statistics Office in Wiesbaden said today. Gross domestic product fell a seasonally adjusted 2.1 percent, the office said, confirming an initial estimate from Feb. 13. That’s the third consecutive quarterly drop and the biggest since the first three months of 1987. Companies are scaling back production and cutting jobs as global growth grinds to a halt and demand for exports wanes. The German government expects the economy to contract 2.25 percent this year, its worst performance since World War II.

"When the world economy marches into recession it has considerable consequences for an export-oriented nation like Germany," said Alexander Koch, an economist at UniCredit MIB in Munich. "The decline in investment and exports was impressive and incoming data show that prospects for the first quarter aren’t any better." From a year earlier, the economy shrank 1.7 percent when adjusted for calendar effects. The International Monetary Fund expects the global economy to grow just 0.5 percent this year. GDP in the 16-nation euro area is forecast to decline 2 percent. Japan’s exports plunged 45.7 percent in January from a year earlier as recessions in the U.S. and Europe smothered demand for the country’s cars and electronics, the Finance Ministry said today in Tokyo.

Germany’s statistics office said net trade was responsible for 2 percentage points of the fourth-quarter decline in GDP. German consumer spending fell 0.1 percent in the fourth quarter from the third and construction investment declined 1.3 percent. Inventories made a positive contribution to GDP. "Companies weren’t able to retract production as fast as demand waned," said Michael Holstein, an economist at DZ Bank AG in Frankfurt. "Thus, the risk for the first quarter is even bigger as firms try to reduce their inventories." Volkswagen AG, Europe’s biggest carmaker, said sales dropped 21 percent in January from a year earlier, while deliveries at Bayerische Motoren Werke AG, the world leader in luxury autos, fell 24 percent. MAN AG, Europe’s third-largest truckmaker, said it will cut costs further and extend reductions in employees’ working hours after declining sales caused fourth-quarter profit to plunge by almost half.

European heavy-truck sales plunged 35 percent last month, more than double the drop in December, the Brussels-based European Automobile Manufacturers Association said in a statement today. The European Central Bank has indicated it will cut interest rates to a record low at its next policy meeting on March 5. The bank has already reduced its key interest rate by 2.25 percentage points since early October to 2 percent in an effort to bolster the euro-region economy. Germany’s government has doubled its fiscal stimulus program, which includes tax cuts and infrastructure investment, to about 80 billion euros ($102 billion) over two years. "The economic stimulus packages, lower inflation and generous ECB rate cuts should bring the downturn to a halt in the second half of the year," said Simon Junker, an economist at Commerzbank AG in Frankfurt. Still, "the German economy will probably contract by 3 percent to 4 percent this year as a whole."

German CDS debt spreads hit record as economy crumbles
The cost of bankruptcy protection on German debt has reached an all-time high on spill-over from the financial crisis in Eastern Europe and mounting concerns about the stability of Germany's banking system. Credit default swaps measuring risk on five-year sovereign debt touched 90 basis points on Tuesday and looks poised to rise above French debt for the first time. The spike follows a warning by Deutsche Bank that Germany’s economy will contract by 5pc this year as industrial exports collapse at the fastest pace since the Great Depression. Norbert Walter, the bank’s chief economist, said there was a risk of an even deeper slump if the economy fails to stabilize by the summer. "A bigger contraction can’t be ruled out," he said.

The state governments of Hamburg and Schleswig-Holstein agreed on €3bn (£2.7bn) cash rescue on Tuesday for Landesbank HSH Nordbank, the world’s top source of finance for shipping, raising the public stake to 80pc. The bank has already drawn on a €10bn guarantee from the government’s bail-out fund Soffin. HSH lost €2.8bn last year, mostly on credit instruments and fall-out from the Lehman debacle. "Of course these costs will weigh on the budget. We had no choice," said Peter Harry Carstensen, the premier of Schleswig Holstein. He denied press reports that his own state was facing bankruptcy. There are eleven state-owned Landesbanken in Germany and most are in trouble. While their mission is to boost regional industry and finance the family Mittelstand firms, they strayed disastrously into almost every form of leveraged excess through off-books `conduits’, many based in Dublin.

"The entire Landesbanken system is rotten," said Hans Redeker, currency chief at BNP Paribas."Credit will collapse if they are allowed to fail so they have to be recapitalized. But it is not just the banks in trouble: Germany’s entire export structure has been hit drastically." "German CDS spreads are going massively higher. German bank exposure to Eastern Europe, although less than Austria, is still very high. The markets have started to price in a de facto bail-out of Eastern Europe and they think that Germany that will have to pay the bill," he said. The rating agency Standard & Poor’s said in a report on Tuesday that the region was "shuddering to a halt", with a number of countries were "crumbling under the weight of high foreign currency debt." It is unclear whether they can roll over debts as Western banks retreat to their home market. S&P said foreign debt is 115pc of GDP in Estonia, 103pc in Bulgaria, 93pc in Hungary, all far above danger level. "All the ingredients of a major crisis are in place," said Jean-Michel Six, the group’s Europe economist.

Germany's HSH Nordbank Saved from Collapse
Another day, another bailout: Yet another German bank is getting state aid to stop it from going under as a result of the global financial crisis. The troubled HSH Nordbank is to receive a capital injection of €3 billion ($3.8 billion) from the state of Schleswig-Holstein and the city-state of Hamburg under a deal announced Tuesday by Schleswig-Holstein Governor Peter Harry Carstensen and Hamburg Mayor Ole von Beust. The bank will also receive a state-backed credit guarantee worth €10 billion. The cabinets of the two states, each of which holds about 30 percent of the Hamburg-based bank, had met in Kiel to try to find a solution to the bank's woes. The two states will share the cost of the aid, which needs to be approved by the state assemblies. "We had to act in this way," explained Schleswig-Holstein Governor Carstensen, saying that there was no alternative as it was impossible to find a partner or buyer for the bank. The states were forced to intervene after the Soffin fund, which was set up by the federal government last year to stabilize the financial markets, said it could not help out HSH Nordbank until it got rid of all its bad debts. Carstensen said that Soffin may still help the bank out in the future, however.

But the €3 billion injection may not be enough to save the bank. Wolfgang Kubicki, floor leader for the business-friendly Free Democratic Party in the Schleswig-Holstein state assembly, told Reuters Tuesday that HSH may need up to €9 billion in fresh capital over the next four to five years. HSH Nordbank, which specializes in financing the shipbuilding industry, had posted a pre-tax loss of €2.8 billion in 2008 as a result of the global financial crisis. If the institute had not received state aid, it would have been closed down by the German financial services regulatory authority BaFin. As part of a major restructuring, HSH Nordbank plans to focus on its core business activities, such as ship financing, private banking and corporate clients, and spin other businesses and toxic assets off into a so-called "bad bank." The bank is planning to cut around 1,100 jobs from its staff of 4,000. Last week the German government agreed on a draft expropriation law which would allow the state to seize control of the crisis-ridden Munich-based lender Hypo Real Estate. US investor JC Flowers, which faces potential heavy losses over its 24 percent stake in HRE, also owns almost 26 percent of HSH Nordbank. It is not clear what role, if any, the US firm will play in the HSH Nordbank rescue.

Russian budget revenues to fall 30 pct
Russia's budget revenues are forecast to drop 30 percent this year, leaving the country with a budget deficit of 8 percent of gross domestic output -- the country's first budget defict in several years, the Russian finance minister said Wednesday. Expenditures meanwhile are expected to rise by 500 billion rubles ($14 billion) to 9.5 trillion ($266 billion), minister Alexei Kudrin said, according to Russian news agencies. Kudrin described the 8 percent shortfall as "the highest level of deficit we can afford in this country". The news came as the Federal Statistics Agency foreign investment in Russia dropped 14 percent in 2008, to $104 billion. Kudrin also pledged more support for domestic business.

"We are going to step up the government's effort to support the economy," Kudrin said, according to the RIA Novosti news agency. Some 2.7 trillion rubles ($75 billion) from Russia's 4.7 trillion Reserve Fund will be spent to prop up the economy, 650 billion ($18 billion) of which will go to Russian banks. The revised budget is to be submitted to the parliament by March 8, Kudrin said. The Economic Development Ministry said Tuesday that the country's economy contracted by 8.8 percent in January, indicating a faster and deeper economic slowdown than many had expected. The Russian economy is facing its bleakest outlook since the 1998 financial crisis as it struggles with massive capital outflows, large corporate debt and plunging commodity prices.

Poland Can’t Delay Asset Sales, Treasury’s Grad Says
Poland plans to accelerate asset sales to help state companies raise funds and prop up public finances as the country faces its worst economic slowdown in almost a decade, Treasury Minister Aleksander Grad said. The government seeks to raise 12 billion zloty ($3.4 billion) from asset sales this year, the most since 2000, even after Warsaw’s stock indexes fell to five-year lows last week and the zloty dropped to a near record against the euro. "One could always wait for better times, but the market is what it is, and companies need funds for investment now," Grad, 46, said in an interview in his Warsaw office late yesterday. "Some companies may lose value in two years if they stop investments or fail to acquire a private investor."

Poland, which has sold 96.4 billion zloty of assets since the 1989 collapse of communism, owns controlling stakes in power, coal-mining, transportation, chemical and financial companies. State-owned Polska Grupa Energetyczna SA, the country’s biggest power group, plans to raise as much as 5 billion zloty in an initial public offering in 2009 and coal producer Lubelski Wegiel Bogdanka SA may sell 500 million zloty of new stock. PKO Bank Polski SA, which started trading in 2004, may sell "several billion" zloty worth of shares, Grad said. The proceeds from the sales of new shares will go to the companies, not the government. "Power companies may be an attractive offer because their earnings are fairly stable," said Blazej Bogdziewicz, a fund manager at Allied Irish Banks Plc’s $2.1 billion Polish fund, based in Poznan. "Of course everything will depend on the price."

Initial public offerings have dwindled worldwide this year as companies struggle to lure investors amid the worst financial crisis since the Great Depression. Warsaw’s benchmark WIG20 Index has lost 22 percent this year, extending its record 48 percent drop in 2008. Polish shares rose 2.7 percent today. "For now it looks like we shouldn’t have problems finding buyers," said Grad, who is meeting investors in London today. "Compared with other countries in the region, we have a healthy economy, a large domestic market and a well-educated workforce." Poland’s economy is set to expand by 2 percent this year, compared with a 1.8 percent contraction in the European Union, according to EU forecasts published last month. Eastern Europe will slide into a recession this year as demand for exports collapses, the International Monetary Fund, which bailed out Belarus, Hungary, Latvia, Serbia and Ukraine, said in January.

The government this year will put up for sale its stakes in utility Enea SA, chemical producers Ciech SA, Azoty Tarnow and Zaklady Azotowe Kedzierzyn SA, as well as in the Warsaw Stock Exchange and national air carrier Polskie Linie Lotnicze LOT SA. Zaklady Azotowe Pulawy SA and Zaklady Chemiczne Police SA, the two largest fertilizer makers, could also be sold if the government finds "good investors," said Grad. "No discounts whatsoever" are being considered for the sales, Grad said. "We won’t sell assets at any price, we want to sell them for a decent, market price." The proceeds from the sale of state assets will help finance the 18.2 billion zloty budget deficit and limit government borrowing. "We know how difficult it is for all countries worldwide to finance public debt and sell bonds," said Grad. "Every zloty that will come from these privatizations will be pure savings for taxpayers, because we will pay less for debt servicing."

Standard & Poor's rates Latvia's bonds as junk
Eastern Europe's recent economic troubles intensified yesterday when the ratings agency Standard & Poor's cut the quality of its appraisal on one Baltic state and said it may cut the others, while Serbia applied for an extra $2bn (£1.4bn) loan from the International Monetary Fund in an attempt to offset its economic spiral. S&P cut the Baltic republic of Latvia to a junk credit rating – rare for a sovereign state – and said it may reduce its creditworthiness ranking for sister republics Lithuania and Estonia. It also said it may further cut Latvia's credit rating later this year or in 2010.

Economies in eastern Europe have suffered badly from the credit crunch as their high debt, built up as they borrowed in recent years for rapid expansion and more recently to try to fight the economic downturn, has become costly. Their currencies have tumbled too, making leverage more of a burden. Investment from Western countries, which was one of the factors fuelling the huge growth in the region until the credit crunch, has also dried up as investors redeem cash and try to reduce exposure to smaller, riskier economies. As City traders speculated that the Baltic states could default on their debt, the cost of insuring Latvian and Estonia sovereign debt for five years through credit default swaps (CDS) rose, while five-year CDS for Lithuania hit a record high. Serbia, meanwhile, said yesterday it will seek an additional $2bn loan from the International Monetary Fund to weather the increasingly severe effects of the global financial crisis.

Its Prime Minister, Mirko Cvetkovic, said Serbia will seek to change its current "precautionary" deal with the IMF to a "classic standby arrangement" – meaning it plans immediately to withdraw the $2bn once it is granted, instead of simply having access in case of need. Late last year, the Balkan country reached a 15-month deal with the IMF that gave it access to $520m only in case of a sudden halt in foreign investments. At the time, Serbian officials said the funds were not immediately needed because officials did not expect the global financial crisis to affect the economy as much as it did. But economists say that in view of the expected drop in economic production, foreign investments and exports, Serbia will need additional funds.

And as the former Yugoslav country, which unlike its Baltic counterparts has not yet become a member of the European Union, struggles, it received another blow as the Czech Foreign minister, Karel Schwarzenberg, said the European Union is becoming less enthusiastic about allowing Balkan countries to join due to the downturn. He was referring to plans to expand the 27-nation EU to include Balkan states such as Serbia and neighbouring Montenegro. The Czech Republic currently holds the EU's rotating presidency. Meanwhile, Joaquin Almunia, the European commissioner for economic affairs, said the group of states could soon have to bail out a member country, adding that countries such as Hungary and Latvia have received assistance from the EU, and others within the 27-member bloc might need a financial support programme.

The comments are some of the strongest yet by a leading European policymaker on the chances of collective support for ailing European economies. Mr Almunia added that he sees the upcoming G20 summit in London as a critical test for leadership during the financial crisis. He added that countries had to push for a co-ordinated response. The woes in eastern Europe echo the credit downgrade of Russia by the ratings agency Fitch earlier this month.

Ukraine Ratings Cut by S&P to Lowest Level in Europe, on Par With Pakistan
Ukraine’s credit rating was cut two levels by Standard & Poor’s to the lowest in Europe, a day after Latvia was downgraded to junk, as eastern Europe’s most debt- laden economies lurch closer to default. The long-term foreign currency rating was lowered to CCC+, seven levels below investment grade, the rating company said in an e-mailed statement today, saying political turmoil poses growing risks to the country’s International Monetary Fund loan. The rating is on a par with Pakistan and S&P left the outlook negative, indicating a possible further cut.

The global financial crisis is taking its toll on emerging Europe by cutting access to credit and investment after years of unprecedented growth as the region integrated with the wealthier west. The meltdown, coupled with political turmoil that has slowed economic restructuring, forced Ukraine to turn to the IMF for a $16.4 billion loan in November. "Ukraine has been near default since at least November, so this downgrade is recognizing reality," said Paul McNamara, who helps manage $1.2 billion of emerging-market debt at Augustus Asset Managers Ltd., on the sidelines of a conference in London. "Repayment of debt due this year depends on the success of the IMF rescue package, which isn’t looking good." Contracts to protect Ukraine’s government bonds against default cost 59.5 percent upfront and 5 percent a year, according to CMA Datavision prices for credit-default swaps at 11:40 a.m. in London. That means it costs $5.95 million in advance and $500,000 a year to protect $10 million of bonds for five years. The cost is higher than for any other government debt worldwide, Bloomberg data show.

The hyrvnia has lost more than 50 percent against the dollar in the past six months as reduced demand for exports and a lack of foreign credit causes Ukraine’s first economic contraction in a decade. The situation has been aggravated by a power struggle between President Viktor Yushchenko and Prime Minister Yulia Timoshenko, delaying decisions needed to revive the economy and putting the second installment of the IMF bailout at risk. "Hopefully S&P’s move will concentrate minds in the cabinet of ministers, the presidential palace and the central bank," said Timothy Ash, head of central Europe, Middle East and Africa research at Royal Bank of Scotland Group Plc in London, in an e- mailed note to clients.

Ukraine is not alone in its plight. East Europe as a whole will slide into a recession this year as demand for exports collapses, the IMF, which has also bailed out Latvia, Hungary, Serbia, and Belarus, said last month. The economies will shrink 0.4 percent, the IMF predicted. Latvia’s credit rating was cut to junk by S&P yesterday, the second European Union nation to receive such a grade, because of a "worsening external outlook" triggered by the global crisis. The Baltic state’s government collapsed this week, a month after street protests over the deteriorating state of the economy turned violent. Latvia’s economy shrank an annual 10.5 percent in the fourth quarter.

Fitch Ratings cut Ukraine’s ratings to B, the fifth-highest non-investment grade on Feb. 12 and kept the outlook "negative," indicating they may fall further. Moody’s said yesterday it may cut Ukraine’s ratings within three months. S&P lowered Ukraine’s credit ratings twice in 2008 on concern over the country’s banking system, weakening hryvnia and slowing economic growth. "If we continue cooperation with the IMF, we will get $9.6 billion this year from it, which would provide very good support for the stabilization of the economy and the currency," Ukraine’s central bank First Vice Governor Analtoliy Shapovalov told reporters in Kiev today.

S&P defines an obligation rated CCC as "currently vulnerable to nonpayment, and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation." Ukraine’s growth slowed to 2.1 percent last year, compared with 7.6 percent the previous year. The economy may contract 9 percent this year, according to Alexander Morozov, the chief economist in Moscow for HSBC Holdings Plc, Europe’s biggest bank.

China Fears Tremors as Jobs Vanish From Coast
Tan Tianying might not look like a troublemaker, but she and millions of other workers like her have government leaders fretting about the country’s stability. A man worked to replenish the soil in Tanjia. China has announced crop subsidies to help those who return to rural areas. Tanjia depends on migrants’ jobs in the Pearl River Delta. A shy, delicately built seamstress who makes aprons and coveralls in Guangzhou, Ms. Tan, 24, is part of an army of migrants, 130 million strong, who have flocked to cities for jobs, but whose prospects for continued employment are increasingly dim.

As the global economic crisis deepens and the demand for Chinese exports slackens, manufacturing jobs in the Pearl River Delta and all along the once-booming coast are disappearing at a stunning pace. Over the last few months, more than 20 million migrant workers have been cast into the ranks of the unemployed, depriving impoverished towns like Tanjia of the much-needed income the workers sent home. Since December, hundreds of employees at Ms. Tan’s uniform factory have been let go and wages have been cut by a third as orders from the United States dry up. Last year, 2,400 factories in and around Guangzhou closed.

"I hope I still have a job," Ms. Tan said this month, a few hours before leaving Tanjia on a train for the 10-hour ride that in recent years has carried away most of the town’s working-age residents. "I don’t want to go back to being a poor farmer." In a nation obsessed with social harmony, the well-being of China’s mobile work force has become the top priority for a government that has long seen its fortunes tied to those of the country’s 800 million rural dwellers. Mao’s revolution, after all, was fueled by embittered peasants, and it has not gone unnoticed in Beijing that decades of heady growth has fed a widening gap between urban residents and those who live in the rural interior.

Although the government has not released updated information about rural unrest, officials have been strategizing about how best to keep large protests and riots from spreading, should the dispossessed grow unruly. This week, more than 3,000 public security directors from across the country are gathering in the capital to learn how to neutralize rallies and strikes before they blossom into so-called mass incidents. At a meeting of the Chinese cabinet last month, Prime Minister Wen Jiabao told government leaders they should prepare for rough times ahead. "The country’s employment situation is extremely grim," he said.

To ameliorate the hardship of idled migrants, the central government has announced a series of initiatives that include vocational training, an expansion of rural health care and crop subsidies to ensure that those who return to the land can make a living despite a slump in agricultural prices. A $585 billion stimulus package introduced in November, much of it weighted toward labor-intensive construction projects, is also expected to absorb some of the newly unemployed.

But here in Tanjia and the surrounding countryside of northeast Hunan Province, most people say they have yet to see much in the way of government largess. As the Lunar New Year came to an end two weeks ago, many migrants who had come home for the holidays were anxious to return south, where they hoped to reclaim their old jobs or find new ones. About 40 percent of the town’s 2,000 residents work outside the province, and their remittances have been a lifeline for the children and elderly people who remain behind. Much of that money has been spent on motorcycles, high school educations and new homes, some trimmed with Corinthian columns and ceramic dragons, that are the brick-and-mortar embodiment of this newfound prosperity.

Ms. Tan’s family home, like those of her neighbors, is a work in progress. Since 2005, her mother, father and brother, all migrant workers, have poured $15,000 into the two-story house, but they still need another $9,000 for appliances, fixtures and a white tiled facade. "We have no savings," said her father, Tan Liangsheng, 52, a haggard-looking man who recently lost his job as a construction worker. "All our hard work and bitterness is invested in this house." Just behind him sat the mud-brick structure where the extended Tan clan used to live.

In some ways, Tanjia’s residents are luckier than most. Unlike China’s drought-stricken north and its chronically arid west, Hunan Province is well watered and blessed with a temperate climate that allows farmers to grow food much of the year. Still, with 64 million people squeezed into an area the size of Kansas, most people make do with tiny plots of land; in Tanjia the average size is a tenth of an acre. "Maybe we won’t starve to death, but life would become very difficult if everyone came back home," said Long Feng, 29, who works at a car repair shop in Shenzhen, not far from the Hong Kong border.

In Zhuzhou, the nearest city of any consequence, government officials are not very concerned about a surge in jobless farmers. Chen Shuxian, director of Zhuzhou’s employment center, said he was more worried about the 3.7 million people who live in and around his booming city, people who have become accustomed to relatively comfortable lives. "They have cellphone bills and rent to pay," he said. "The migrants don’t have a lot of expectations and they can always fall back on the land and their family savings."

Such sentiments are common in China, where rural laborers are often viewed as dime-a-dozen workhorses capable of enduring enormous hardship. He Xuefeng, a professor who studies rural life, said many manufacturers believed the most productive workers were spent by 40. "As workers grow older, they can’t work as quickly or accurately, so they are naturally eliminated," said Mr. He, who teaches at Huazhong University of Science and Technology in Hubei Province. "The financial crisis will simply speed up that process by two or three years and force them to return home earlier."

After he lost his job at a glass factory in Guangzhou last year, Wang Liming, 39, returned to his home on the outskirts of Zhuzhou thinking he could find employment nearby. Things turned more dire after his wife lost her job just before the New Year festivities. He acknowledged that there was work to be had in Zhuzhou, but those jobs generally pay less than $100 a month, about half what a semiskilled assembly line position pays in Guangzhou. "I couldn’t even afford my daughter’s high school tuition on that kind of salary," he said, standing in front of his home, a half-built box that lacks windows and a refrigerator.

A gruff, chain-smoking man, Mr. Wang said the decade he spent in the south turned him off to agricultural work. "I hate working the fields," he said as his neighbors nodded in agreement. Even if they wanted to, he and his fellow villagers could not make much money from farming: some of the best patches of land have been swallowed up by Zhuzhou’s rapid development, including the electric generating plant that dominates the view from his front door. Asked about his plans, Mr. Wang shook his head, glanced at his cellphone and said he was waiting for friends in Guangzhou to call him about a job. "I’m just hoping the phone rings," he said.

Hero pilot: Airlines in shambles
Capt. Chesley "Sully" Sullenberger, who has been heralded as a hero for successfully landing a crippled US Airways flight in the Hudson River, told U.S. lawmakers Tuesday that the state of the airline industry is in disarray. "Americans have experienced huge economic difficulties in recent months, but airline employees have been experiencing those challenges and more for eight years," Sullenberger said. "We've been hit by an economic tsunami, September 11, bankruptcies, fluctuating fuel prices, mergers, loss of pensions, and revolving door management teams who have used airline employees as an ATM." Sullenberger testified before a House subcommittee along with others involved in last month's emergency landing of Flight 1549 in the Hudson River. All five crew members and 150 passengers survived.

Sullenberger expressed concern that the economic decline has hit the airline industry so hard that "the airline piloting profession will not be able to continue to attract the best and the brightest." "I do not know a single professional airline pilot who wants his or her children to follow in their footsteps," he said. "The current experience and skills of our country's professional airline pilots come from investments made years ago when we were able to attract ambitious, talented people who now frequently seek professional careers elsewhere."

Should Germany Save Opel?
The economic crisis in Germany has reached a new dimension as the government in Berlin debates how to help ailing carmaker Opel. Will loan guarantees suffice, or will it need to partially nationalize the brand? It's an issue that could end up shaking the country's economic system to its core. Jürgen Rüttgers, the conservative governor of the German state of North Rhine-Westphalia, has always liked to refer to himself as a "labor leader". He wears good suits and is a loyal member of Chancellor Angela Merkel's Christian Democrats, but he regularly comes out with proposals for helping the poor, too. Right now thousands of auto workers from Opel, the German subsidiary of ailing US giant General Motors, are pinning their hopes on Rüttgers, and he's been trying to live up to the challenge. Last Wednesday he flew to Detroit, into the lion's den, in a bid to secure their future in talks with GM's management.

Some 5,300 of Opel's 29,000 jobs in Germany are located at its plant in Bochum, in Rüttgers' state. If state loan guarantees aren't enough to rescue Opel, the government will have to take a stake in the carmaker, Rüttgers said, even before he took off. Ever since GM CEO Rick Wagoner announced plans last week to cut 47,000 jobs worldwide and to close more than a dozen plants, politicians have been proposing ways to rescue the global carmaker hopelessly indebted with €70 billion ($89.3 billion) in liabilities. It almost seems as though the global economic crisis has reached a new level. The restlessness is mounting, the risks are becoming more tangible. Wagoner left no doubt that he expects aid from the German government. And what will happen if that aid isn't forthcoming? What will happen to GM, to Opel, to the plants in Germany? These were the issues Rüttgers discussed with Wagoner, who was at pains to praise the German Opel plants with their innovativeness and their hard-working employees. His tone was flattering and enticing. He spoke not like a corporate killer but like a shrewd salesman.

GM didn't necessarily have to remain the sole owner of Opel, Wagoner said. He would like to find outside investors, and why shouldn't the government take a stake? Wagoner told Rüttgers about GM's good experiences in Korea and China, whose governments hold up to 50 percent of GM's operations. At the same time he announced plans to axe 26,000 jobs outside the US -- most of them in Europe. "Never before has the public been confronted with such bare-faced blackmail," conservative daily Frankfurter Allgemeine Zeitung commented the next day. Rüttgers flew back to Germany both relieved and unsettled: relieved because there won't be massive job cuts for the time being and the Germans are to cooperate on a restructuring plan for GM's European operations. But unsettled because the government may be taking on more than it can handle in this crisis. Rüttgers said he had always been opposed to nationalization, and insisted last week that "the state isn't a good businessman." But it looks as if this role may be forced on him.

The crisis has reached the industrial core of Germany by endangering an auto manufacturer that remains deeply German even though it has a US parent company. The Opel brand symbolizes the solidity of the bourgeois 1950s, it evokes a sense of family as well as the economic miracle, which means that in some way it's part of the foundations of the German economy. These days, some laugh at the brand because it hasn't manage to shake off its somewhat staid image, but virtually every German family has an Opel in its photo album at least. And that's why there's more at stake with Opel than its 29,000 jobs at four plants in Eisenach, Kaiserlautern, Bochum and Rüsselsheim. This is also an emotional issue. Even Germans who would never drive an Opel can't imagine Germany without it. But beyond symbolism, the debate about Opel's future is also about the future of the German economy. At what point in this crisis will the economy cease to be a market economy? So much is in flux at the moment that even fundamental principles are suddenly being called into question.

Opel is only one case among many. The crisis has engulfed every area of the economy. Barely a day goes by without companies appealing for federal or regional government aid: car components supplier Schaeffler, porcelain manufacturer Rosenthal, chip factory Qimonda. Germans are almost used to the government shelling out billions to rescue the big banks. After all, if the banks go bust, the entire payments system will break down and the economy will grind to a halt. By contrast, the insolvency of an industrial firm would put thousands of jobs at risk but it wouldn't trigger a systemic crisis. Nevertheless, politicians in Berlin and the provinces are increasingly portraying themselves as corporate saviors. "These won't remain individual cases," says Patrick Adenauer, head of the Association of Family-Owned Businesses. "This could cause a conflagration." Never before since World War II has the German federal government had to intervene in the economy to such an extent. The new German Economy Fund totals €100 billion and is aimed at helping the private economy with a mixture of credit guarantees and direct loans.

The two economic stimulus programs already approved by the government total €61 billion and are aimed at reviving a broad array of business ranging from road haulage firms to car dealerships. But is the government capable of steering the economy properly or is it taking on too much responsibility? It's clear that if the government comes to Opel's rescue, it won't be able to deny help to other companies. And it may overstretch itself. In the past, politicians and civil servants have rarely been good at running businesses. On the contrary, as the fate of the publicly-owned Landesbanken regional banks shows: they all got into trouble with risky speculation deals. Rüttgers is skeptical about the government taking a stake in Opel. Roland Koch and Kurt Beck, the governors of Hesse and Rhineland-Palatinate which are also home to major Opel plants, have been watching the public debate with a mixture of irritation and helplessness. They weren't happy when Rüttgers mentioned the possibility of a government stake of his own accord before he had even arrived in the US. They're worried that the resulting public furore will only deter possible car buyers. Who wants to buy a car if the vultures are already circling over the manufacturer? Sources in Wiesbaden, Roland Koch's seat of government, say regional governments together with the federal government and Opel have already discussed the possibility of a public stake in the auto maker, but only as the very last resort.

Chancellor Angela Merkel, who grew up in communist East Germany, is well aware how a state-managed economy can wreck a country. She doubts whether Opel can be split off from the GM empire and whether it will be able to survive on its own. Experts say Opel is simply too small to go it alone. Now Merkel wants to wait for the carmaker to come up with its own restructuring plan, and to review it carefully before agreeing to any state involvement. But she's also facing a general election in September, and her rival for the chancellorship, center-left Social Democrat Frank-Walter Steinmeier, is siding with Opel's workers. Steinmeier, foreign minister in Merkel's government, said the government must "review all options" to rescue Opel. Wagoner's plan envisages closing a number of plants in Germany. He hasn't named any sites yet but there's a rumor that he wants to sell the Eisenach plant and close the plants in Bochum and Antwerp, Belgium. That would unleash a chain reaction. If European plants are shut down, European governments would be unlikely to grant any loan guarantees. But without such guarantees, Opel would run out of money for investments.

The carmaker "would collapse in the next one-and-a-half to two years at the latest," says Klaus Franz, head of Opel's employee council. Sweden's government said on Monday it wasn't prepared to consider loan guarantees to GM's Saab unit unless the carmaker finds a private investor to underwrite its business plan. Industry Minister Maud Olofsson said the government needed a private investor to steer Saab's turnaround and that the state should not own carmakers. Opel is deeply intertwined in GM's global production processes. It develops and assembles cars for group subsidiaries in the US and Korea. But the Germans also get models from the other brands. The Antara sports utility vehicle and the Agila small car are produced by GM subsidiaries Daewoo and Suzuki. If Opel is to be saved, it will have to be withdrawn from the global production and development network. But is that possible? And should the government support this process with billions of euros in credit guarantees or even a direct stake? Former Opel CEOs such as Louis Hughes followed a simple concept. They cut back on investment, which led to short-term profit increases. And if that meant the carmaker was short of fresh models after two or three years, that was problem for the next CEO to handle. It was the American way of management. And it's a mentality that is now responsible for the loss of tens of thousands of American jobs each day.

The only thing that mattered was the next set of quarterly results, rather than the long-term development of the brand, which has been in decline for the last 15 years. At the start of the 1990s, Opel's German market share of 17 percent almost matched Volkswagen's. Last year Opel only had just over eight percent and was even behind luxury manufacturers BMW and Mercedes. As a mass producer, Opel is being squeezed from two sides. It's under pressure from low-cost producers in Japan and Korea, and at the high end is losing market share to small models made by Mercedes, BMW and Audi. GM boss Wagoner refers to Opel like an old car he wants to get rid of. He was ready to sell it, he said last Tuesday. But so far no buyer had emerged, he added. Splitting off GM's European business would be difficult but not impossible. The group would have to place its plants and the Rüsselsheim development center into a separate company in which GM could retain a minority stake to ensure that its models could continue getting engines and technology from Europe. And Opel could keep on using models from the GM group, a standard practice among partners in the auto industry. But it remains unclear who could or would want to hold a majority stake in the German company.

The global auto industry is in crisis. It has had surplus capacity for years. All the world's assembly plants can produce well over 90 million cars annually, but only 50 million are likely to be bought this year. If there's something car manufacturers really don't need these days, it's new plants. It's not surprising that none of Opel's rivals has so far shown an interest in acquiring a stake in it. For the time being, a government stake looks like the only option. But the government has deep misgivings about taking such a step. A state-owned carmaker would be extremely hard to manage. It would be virtually impossible to base decisions on matters such as job cuts on economic criteria. Instead, management would be dictated by political considerations. Economists fear a government bailout of Opel would lead to a whole series of corporate rescues that could undermine Germany's economic foundations. How is the government to decide which company shall survive and which can be allowed to die? Should it decide based on the number of employees? Or on who has the most modern business model? Or would the company that yells the loudest get the government's cash? Or the firm that happens to be based in the constituency of a particularly influential politician?

That's the key problem with state intervention -- if the government helps one company, it automatically puts another at a disadvantage, even if that company had a better management. Companies are in effect punished for being more robust and competitive than ailing firms. In helping troubled companies, the government distorts competition because it unilaterally changes the rules of the game. Worse yet: If companies can rely on government aid in a crisis, they tend to risk more, because they know they'll be rescued if things go wrong. Economists call that kind of behavior a "moral hazard." Many bankers are irritated because Commerzbank, which has been part-nationalized, is currently wooing customers with especially generous interest rates and aggressive advertising. Insolvencies are part of financial crises, says Clemens Fuest, a professor of economics at Oxford University. That may be regrettable for the workers affected, but the government should nevertheless confine itself to cushioning the impact through welfare benefits and labor market policies, he believes. Otherwise "there's a danger the dam could burst," says Fuest. Nonetheless, it's clear that the government won't simply drop Opel. Federal and regional government experts have been discussing the case for weeks, but they haven't found a solution yet. In fact, the longer they deal with the case, the more difficult it seems.

Until recently, the federal government estimated that it would have to guarantee €1.8 billion worth of loans. But it recently revised up Opel's liquidity requirements to €3.3 billion. And it's unclear at this stage where the loans secured by the government would come from. No bank is prepared to provide Opel with funds at present, the government believes. It's also unclear how Germany could prevent billions of euros of German taxpayer's money from ending up in Detroit. Experts in Berlin say there's no way to guarantee that doesn't happen. That's why some politicians are pushing for the state to take a direct stake in Opel. Merkel, however, is reluctant to do that because it would open the floodgate to more nationalizations.

At present, the government is favoring loan guarantees. If that doesn't work, politicians would find it nigh-on impossible to veto a public stake in Opel. In that case, the federal states could obtain a direct stake and the federal government would provide loan guarantees. Hesse governor Koch, however, is insisting that any government stake be temporary. It's a lose-lose situation for the government. Even if it buys into Opel, the carmaker won't be able to avoid cutting jobs and possibly even closing a plant. The plant in Bochum is regarded as virtually impossible to save. Even a state-owned company can't afford to hold on to massive overcapacity in the longterm. Opel would be doomed to a gradual decline. But if the government leaves Opel to the mercy of the market forces, the company is at risk of collapsing in the medium term. Tens of thousands of employees at Opel and its components suppliers would lose their jobs. Letting Opel fail would be a tough course of action that would expose politicians to the anger and disappointment of many workers. But it would make economic sense. Otherwise the government would have no justification for rejecting the next company seeking aid. And they're already lining up.

Food crisis hits developing world farms
Farmers in developing countries are struggling despite recent rises in the price of commodities they produce, the Fairtrade Foundation says in a new report. The report, which interviewed farmers' groups in Uganda, Malawi, Nicaragua, India, Sri Lanka and the Caribbean, reveals that many families are spending up to 80% of their entire household budget on basic food items. The rocketing cost of food, fuel and fertiliser prices have had a devastating effect on their livelihoods. In some cases, families have been forced to cut out meals, take children out of school and reduce the amount of land they plant, the report says. Some farmers have even sold their land because they can no longer afford to farm it or buy fertilisers to keep up production. But the report says that fair trade schemes could help ease their plight, with demand for Fairtrade products remaining strong despite the economic downturn.

Some 450 million small farms around the world are home to one third of all humanity. They are vital for producing food for local and national consumption, as well as earning crucial export income to boost wider economic growth and development. But for many farmers, rises in the price of export commodities such as vanilla, coffee, tea or sugar have been outstripped by the dramatic increase in the cost of staple food. Tomy Mathew, a farmer and founder of the Fair Trade Alliance of Kerala in India who represents more than 3,000 small farmers growing coffee, peppers, and spices, says the last few months have been very difficult. "The price of rice has gone up 40% while the amount we receive for crops has remained the same or in some cases come down," he says. Mounting debt means that farmers have to cut back on the type schooling or healthcare they can afford for their families.

"These are hard times for consumers, but even harder times for producers and Fairtrade is needed more than ever," he says. Some critics however, maintain that offering a guaranteed premium for goods will deter farmers from implementing better production facilities and cost-effective measures. Ian Bretman of the Fairtrade Foundation disputes that assumption. "Unlike the European Union's agricultural subsidies, we only pay an agreed price for a product as long as there is a demand from the consumer," he says. "Providing the demand is upheld, farmers are guaranteed an income regardless of volatile prices and that enables them to conduct their business better by planning ahead."

In the UK, demand for Fairtrade product has bucked the global economic downturn by increasing 43% in the last 12 months. Products selling under similar banners have been equally successful in Europe, Japan and the United States, but Mr Bretman is more excited about what has been happening in the southern hemisphere. "South Africa has an established consumer market and the launch of Fairtrade goods sets a precedent for the rest of the continent," he says. Dismissing the idea that people who support Fairtrade objectives tend to be largely middle-class, middle-income shoppers, Mr Bretman says that the Co-op is not one of the most upmarket retailers, yet they stock 230 Fairtrade products. There is also less difference in the premium price a customer pays for Fairtrade products than there once was. "That is largely due to greater sales, which means savings can be made because of the cost efficiencies of higher volumes.

"Supermarkets also save money by only having one line of a particular product," Mr Bretman explains. "Sainsbury's only sells Fairtrade bananas and some supermarkets only sell Fairtrade coffee," he says. He agrees, however, that in the current economic climate, people might start looking to save money by switching to cheaper products. "Public awareness has grown and more businesses have become involved, but we cannot be complacent," he insists. Pointing out that Fairtrtade empowers both the producer and the consumer, he adds: "We have to state our case more strongly." One thing which has resonated with consumers is the choice of produce now available. Apart from the more established and familiar products such as Fairtrade coffee, tea and chocolate, cotton has seen the greatest increase in sales recently along with nuts, honey and spices. More than 4,500 items are licensed to carry the Fairtrade logo and at the start of the Fairtrade Fortnight another was added - in the form of Palestinian olive oil.

It is the first olive oil to bear the logo and the first produce which originates in Palestine. Almost 75% of Palestinians live below the poverty line as described by the United Nations. Initially, 265 olive growers will benefit from the Fairtrade status, but the intention is to bring as many people as possible into the scheme. Mahmoud Issa is typical of the olive grove owners who believe their lives will improve. His family has been growing olives for five or six generations. He hopes to earn enough money to ensure his children have a good education. "But I hope they retain an attachment to the farm," he says, "so the tradition of growing olives continues in our family."


Anonymous said...

You might thse 2items of interest:
Recipe for Disaster: The Formula That Killed Wall Street
Is MBIA About to Pull the Wool Over the Markets Eyes?
CORRECTED: Unpaid furloughs a trend for U.S. white-collar jobs

V said...

Stoneliegh and Ilargi,

I know that you are knowledgeable about peak oil. Given the current crisis which is causing a decline in investment for production many believe that we have reached peak oil. In a recent posting on the Oil Drum, it showed that Non-Opec production peaked in 2004 (some say it will peak in 2010). Before the crisis the price for oil reached $150 last summer and it was projected that production would not keep up with demand. The fundamentals around oil have not changed and in fact may be worse now that investment in production (such as tar sands) is declining with many projects being abandoned because oil is too cheap to cover the costs. Given the current economic climate what do you see happening as oil depletion overtakes production and the price of oil begins to rise? Stagflation?

Anonymous said...

Time for some Leonard Cohen..

"Give me back my broken night
my mirrored room, my secret life
it's lonely here,
there's no one left to torture
Give me absolute control
over every living soul
And lie beside me, baby,
that's an order!

Give me crack and **** sex
Take the only tree that's left
stuff it up the hole
in your culture
Give me back the Berlin wall
give me Stalin and St Paul
I've seen the future, brother:
it is murder.

Things are going to slide, slide in all directions
Won't be nothing
Nothing you can measure anymore
The blizzard, the blizzard of the world
has crossed the threshold
and it has overturned
the order of the soul
When they said REPENT REPENT
I wonder what they meant
When they said REPENT REPENT
I wonder what they meant
When they said REPENT REPENT
I wonder what they meant.

You don't know me from the wind
you never will, you never did
I was the little jew
who wrote the Bible
I've seen the nations rise and fall
I've heard their stories, heard them all
but love's the only engine of survival
Your servant here, he has been told
to say it clear, to say it cold:
It's over, it ain't going
any further
And now the wheels of heaven stop
you feel the devil's RIDING crop
Get ready for the future:
it is murder.

Things are going to slide ...

There'll be the breaking of the ancient
western code
Your private life will suddenly explode
There'll be phantoms
There'll be fires on the road
and a white man dancing
You'll see a woman
hanging upside down
her features covered by her fallen gown
and all the lousy little poets
coming round
tryin' to sound like Charlie Manson
and the white man dancin'.

Give me back the Berlin wall
Give me Stalin and St Paul
Give me Christ
or give me Hiroshima
Destroy another fetus now
We don't like children anyhow
I've seen the future, baby:
it is murder.

Things are going to slide ...

When they said REPENT REPENT ..."

Check out Teddy Thompsons fantastic cover of The Future on youtube. Those horns are something else.


Ilargi said...

V, oil demand falls much faster than depletion, while producing nations are pumping all they can because of too low prices (for them).

Peak oil will be an issue some years from now. Today it is not.

Anonymous said...

@ V:

Peak oil was probably 2007. 2008 would probably have exceeded 2007, but demand dropped off and so did production. 2009 might have exceeded 2008, but won't, for the same reason. Decline in field production is proceeding regardless, and even with full-scale drilling we will not be able to restore 86 million BPD in productive capacity.

Oil scarcity will depend on the "race to the bottom" between weakening demand and declining productive capacity.

Today's energy report for the US says:

* Total products supplied over the last four-week period as averaged 19.7 million barrels per day, down by 0.8 percent compared to the similar period last year.

* gasoline up 1.7% year-over-year, distallates down 1.6%, jet fuel down 15.4%.

That's your enormous demand destruction thus far. I would imagine that the rest of the world (which has a greater concentration of physical economic activity) has dropped some more.

The IEA (from memory) is predicting another 900,000 bpd decline in demand this year, worldwide.

With a raw decline rate of 9% against production of 86 million bpd, you are looking at a raw decline of 7.75 million bpd. We can speculate how much of that raw decline is currently being compensated for with reduced drilling activity. I can easily see 3 million bpd. Also, production cuts have come within OPEC which as a raw decline rate of more like 3%, versus a non-OPEC rate of 15% - i.e., actual declines may be larger than 3 million bpd.

So, things are nowhere near as out-of-balance as the price of crude would imply. OPEC may be able to increase quotas by the end of the year. By the end of 2010 we will almost certainly be in another supply crunch.

As to your question about stagflation: no.

The increase of prices (which will absolutely happen, probably as soon as May) in energy will not be able to compensate for the ongoing deflation of debt destruction (by whatever name and mechanism).

People will buy food (which will be in short supply all too soon). If they have any money left, they will buy some energy. If there is any money left after that, they will buy some health care. Those prices will decline less, hold stable, or increase. The rest of the economy will be in free-fall. Overall, across the entire economy, you should expect deflation for the years it takes to destroy the bad debt.

Except that everything you actually will be buying will cost more.

Anonymous said...

Gotta love WWII riveter juxtaposed with dating ads at top of your page.

Anonymous said...

"All the world's assembly plants can produce well over 90 million cars annually, but only 50 million are likely to be bought this year."

That's the quote of the day for me from the Opel article. I expect car sales will be much lower than that, 30 million anyone?

90 Mn cars brings the scale of production home. All the miners that will be affected, the suppliers, distributors/ dealers, tax revenue will fall, govts have to cut back, putting further pressure on stocks and companies will go bankrupt making the cycle even worse amidst rising borrowing costs.

What was a virtuous cycle on the way up is a vicious cycle on the way down.

I saw What a way to go: life at the end of empire today. One man's journey into peak oil, overpopulation, resource depletion,climate change and a whole host of other things. A must see documentary, hard hitting.

The frightening thing is that all these events are hitting simultaneously - "Peak everything".

Anonymous said...

Mexico the fiasco next door in the news today...
Mexico is in free fall
With cartels taking over cities and killing all anti-drug officials, the country is crying out for help – but is unlikely to get it from the US

Anonymous said...

Peak oil may have had a significant hand in tipping the global economy. Consider that oil production has been essentially flat since 2005, and high fuel prices had a material effect in changing peoples' attitude and behaviour.

Liebig's law of the minimum is now playing out on a planetary scale. Prior to 2007-08 the flow of energy and greater fools for the myriad of Ponzi schemes were the limiting resources. Now it may be capital and confidence, which are all but gone.

Anonymous said...

Ilargi: So Shiller and Standard and Poor's say prices came down 18.2%, and teh government regulator syas it's only 8.2%. Broader reserach blah blah blah. But does the US government really want to state that S&P and a Princetin professor are 60% off?

Shiller is with Yale.


Starcade said...

"Obama: The weight of this crisis will not determine the destiny of this nation.

Ilargi: Just the next two decades. After that, who knows?"

You're both wrong, frankly -- both your interpretation of Obama and Obama himself. But understand what's taking place here: the deck chairs are being aligned for when the ship goes down. We aren't making it two more decades as a nation -- we'll be lucky to make it two more _years_.

(Some I've been reading have been saying two more _MONTHS_!!)

O: "And though all these challenges went unsolved, we still managed to spend more money and pile up more debt, both as individuals and through our government, than ever before."

I: "So we've decided to spend trillions more and add trillions more in debt that we cannot pay back. Because this time we'll get it right. Put it all on red, Tim."

What do you think we've been doing for the last 20 years?

This is why I can't take the notational values of the derivatives as worthless. The entire fraud has to be based on something -- why not one-and-a-half quadrillion dollars in worthless paper as the basis of everything on the planet?

O: "You should also know that the money you've deposited in banks across the country is safe;..."

I: "No choice there, or so it would seem. A necessary lie, but still a lie. Can't have bank runs, can you?"

Bank runs are the end-game, and most believe they are also imminent (as in weeks, if not days).

O: ".... you can rely on the continued operation of our financial system. That's not the source of concern."

I: "Well, it obviously is the main concern for the markets. It's the one big whopper. Why else are CIti and Bank of America shares so low that both companies should have been legally delisted?"

Then there needs to be a crash and a reset, with new heads of state (Hell, a new _state_ would probably be in order then...).

There isn't a stock on the DOW or S&P 500 that would be listable if the true valuations of these stocks were performed. Not a one.

They're all insolvent. They're all bankrupt. ALL OF THEM. The only "value" they've had is a manipulated value set by the government (through the PPT -- the President's Working Group on Markets -- the only reason I wouldn't short EVERY STOCK ON THE MARKET).

The entirety of our country, after a given date, was based on these notational derivatives.

They go, and kiss the United States of America goodbye. Gone.

And that's EXACTLY what I see happening. Maybe _that's_ why the election was allowed to be held -- this was the only result in 2009.

O: ".... credit has stopped flowing the way it should."

I: "That’s a hard philosophical one. Who is to say how credit should be flowing? Is that knowable?"

If the entire basis of "growth" in this country is credit-based, then growth and credit become one. Even if that credit is fraudulently obtained or never really intended to have been paid back.

And, without that growth, the population must be forcibly decreased or it will do it for you.

It's all over. The country is finished.

Starcade said...

acrumb: Mexico will cease to exist as a nation even faster than we are. And I think the drug cartels are just waiting for the death of the United States to start invading and winning.

Anonymous said...

Hey everyone,

Posting a link to an essay in *Dissent*. It does not have to do with finance (sorry), but rather with how religious and secular people ground their aspirations for a better world, which aspirations I think are pretty widely shared at TAE, so I thought it might interest some of you.

The essay is a review of *The Secular Age* by Charles Taylor (another Canadian!), and has a slightly hopeful, or maybe hope-affirming, or at least hope-granting, feel to it. Enjoy.

Wyote said...


Blinky Adam Smith born 2-29-02, on the south side of Peace Warren, was laid to rest today after a brief illness. He was placed next to the grave of his beloved spouse Kari Smith in Dappled Meadows Cemetery. Mrs. Smith was killed in a wolf dog attack some few days ago, after the couple had been evicted from their burrow by the bank.

Among the many present at the service were friends Winthrop, Lila, James and Marty. His school teacher, Mr. Friedman, dubbed “Older Wiser Bunny” by his admiring students, was present and spoke to those gathered.

“Students, friends of the deceased and future colleagues: These troubled times have brought many hardships to our burrow. The deaths of Blinky and Kari have both saddened us and increased our deep faith in the system that allows us our freedom, our expansion of wealth and the legacy of a better life for our future generations...”

Mr. Friedman went on to say that while shocking, these deaths might serve as a “gift of example” to us all. It would, he felt, become part of the ongoing process of change and shipwrighting we so desperately need to produce a greater world.

Of curious note was Blinky’s epitaph which read:

“Vi va di quartierno.”

Jim R said...

Is this from Watership Down, the home game?

And Ilargi,
That's my current strategy, essentially (today's title). I have about a third of my 401K and various IRAs in ultrashorts now.

Sold about 4/5 of my Central Canada the other day... I'm thoroughly satisfied with that transaction, since it was near a local peak at about $12.55. And thanks for the encouragement, el galinazo. Every little bit helps.

Anonymous said...

Couldn't you guys have a humor section or something? Maybe s special April Fools edition?

Anonymous said...

Tick...tick...tick...Its starting to resemble The long wait of a condemned man for "the walk",or the long wait at a bedside...

And yet there is still that grain of hope that some way "they"will pull off re-set the game,as we all wipe the beads of sweat from our faces and head back into the comfortable numbness of 50-60 hr work weeks...good pay and dreams again,instead of dark thoughts and short checks and the waiting for god knows what...

Its probably just my nature to believe that somehow something will save our sorry asses..
such is life


scandia said...

I want to share this with the cat lovers out there.. This aft Mayacat began acting strangely walking as low to the floor as she could, looking for a place to hide.
No storms in the area, no winds,no loud noises in the building.When i went for a nap I put her under the blankets beside me and she seemed to settle down. this evening I couldn't find her anywhere. On calling she emerged from my closet still distressed. I worried she might be ill. Then I went downstairs to the lobby and saw a Dr. arrive.Strange to see a Dr. making a house call. I learned from other tenants that a lady upstairs is dying of cancer, within hours I was told. Ah ha, Mayacat knew this in the afternoon. This is the first time a tenant has chosen to die in their apt. Most go to hospital,hospice or to family.I think if I observe Mayacat I will know the moment of my neighbour's passing.

Wyote said...

There has been such an outpouring of concern about Blinky's fate that when the news arrived, I rushed it to print.I will forward all condolences to Mr. Friedman who has been appointed executor of the estate.

DYI: as for; "Is this from Watership Down, the home game?" Not having read it, I list the likelihood of a channeling event as improbable but not nill.

Scandia: It always amazes me how much our intelligence and sensory fields are enhanced by our animal friends. Truly we would be poorer without them.

Anonymous said...


Bad news, dude. This IS the humor section.

Occasionally though, it gets eclipsed by the front page, depending on what the Three Stooges are doing.

Anonymous said...

"Is this from Watership Down, the home game?"

It's from the secret of NIMH, the movie.

It should be called "The Secret of FDIC". Though that's not as catchy.

Wyote said...

Orion: It has nothing to do with nickle metal hydride batteries. These are Energizer Bunnies after all.

What movie?

Anonymous said...

@acrumb & Starcade:

Look at it strategically. The Drug Lords are better financed, have an unlimited (and growing) supply of money. And consequently, a growing supply of arms and soldiers.

The Government is known for its corruption, and the people are unarmed.

How can the Drug Lords not take over Mexico, the way things are going? I'd like to know that.

If one thinks that the U.S. will intervene, one might notice that all of our troops are tied up in Iraq and Afghanistan.

Anonymous said...


The movie is called "The Secret of NIMH".

Or perhaps it's "The Secret of Nimh".

Telling you what Nimh is will be a spoiler for the movie.

Hey - it'd be really cool if Bugs Bunny showed up. It's hard to say who should be Elmer Fudd though; there are a lot of candidates.

Wyote said...

We begin to fray around the edges.
We've moved our funds, such as they are, into mattresses, backyard hidey holes and crawl spaces. We have filled the shelves with tuna, toilet paper, kerosene and floss. We hang on to our jobs but count the days. The 401's gone like the neighbors place. Mom called, she is alone in the big old house, worried about taxes and the cost of groceries. Sis called, Dave's been laid off. The ARM is going to reset. (I wonder if it is attached to the Invisible Hand) I'm waiting for the garden to thaw, to see if the compost did any good over the winter. Funny, I don't feel "recessed".

Greyzone said...

"V, oil demand falls much faster than depletion, while producing nations are pumping all they can because of too low prices (for them).

Peak oil will be an issue some years from now. Today it is not."


While I agree with the above, the longer term oil situation is worsened by the financial crisis. The financial crisis is choking off critical investment needed right now just to maintain certain fields. Many of those fields are so old and so depleted that if they fall into disrepair, they may never be brought back to full potential production.

So even for peak oil, the economic crisis worsens things in the long run. Yes, it reduces our current consumption but we may never know how much future production will be lost due to lack of proper maintenance and development right now in already producing fields.

This "tyranny of incompetence" is perhaps the worst possible thing that could have happened to us as a species at this critical juncture.

Given our future resource constraints, I now wonder how much worse our overall situation will be just due to this financial disaster.

Starcade said...

Orion: That's why Mexico falls, and Texas, Southern California, New Mexico, and Arizona are next.

Anonymous said...


Excellent analysis of oil.

I see that the US gov is again buying for the Strategic Petroleum Reserve. Looks like they are heading back up to the high in July 2008.

SPR Stocks (millions of barrels)

July 2008 707.2 - all time high
Dec 2008 695.5 - recent low
Feb 2009 704.2 - latest

This should put a small bit of upward pressure on prices. Combined with OPEC's cuts and the declines in Russia, North Sea, & Cantarell means, for me at least, we will likely see oil over $50 by Summer. I would also wager OPEC will get to their $70 bbl target by late Fall.

You said OPEC is cutting production per their last meeting. I have once source of info that says everyone except the Saudi's are violating the production cuts.

Do you have any more info on that?

Anonymous said...

Little humor:

1. Teaching Math In 1950s
A logger sells a truckload of lumber for $100. His cost of production is 4/5 of the price. What is his profit ?

2. Teaching Math In 1960s
A logger sells a truckload of lumber for $100. His cost of production is 4/5 of the price, or $80. What is his profit?

3. Teaching Math In 1970s
A logger sells a truckload of lumber for $100. His cost of production is $80. Did he make a profit?

4. Teaching Math In 1980s
A logger sells a truckload of lumber for $100. His cost of production is $80 and his profit is $20. Your assignment: Underline the number 20 ..

5. Teaching Math In 1990s
A logger cuts down a beautiful forest because he is selfish and inconsiderate and cares nothing for the habitat of animals or the preservation of our woodlands. He does this so he can make a profit of $20. What do you think of this way of making a living? Topic for class participation after answering the question: How did the birds and squirrels feel as the logger cut down their homes? (There are no wrong answers, and if you feel like crying, it's okay.)

6. Teaching Math In 2000s
If you have special needs or just feel you need assistance because of race, color, religion, sex, sexual orientation, age, childhood memories, criminal background, then don't answer and the correct answer will be provided for you. There are no wrong answers.

7. Teaching Math In 2008
A logger sells a truckload of lumber. He writes his profit on a piece of paper and turns it into his TARP advisor. The profit swells bank reserves by several billion dollars. The bank in turn uses this to estimate the loggers future production and adds six zeroes to its 3rd tier asset values. The wood is burned because no one wants to build with it. The fumes become a carbon credit swelling bank reserves further making it profitable for the year.

. said...

The credit crunch has bit here and bit hard. Six hundred out of work - packing plant can't get credit, farmers going unpaid. The auto body maker has shut down. The door & window place is gone. That's -2,000 jobs in a town of 12,400.

Up the road a bit the commercial cooling equipment place laid off 223 in a town of 3,350. They'll have no customers with commercial real estate crashing.

Around the way a local independent lumber yard along the lines of a Home Depot is shut due to their bank being seized - 295 out of a job in a town of 7,900.

We're 370 miles from Detroit and still the waves from the auto industry collapse reverberate. There's been a hasty shotgun wedding between two banks in the area complete with branch closures.

I'm personally OK for the first time in a year and a half but it's damned scary to watch. I bet if TSHTF tomorrow I could limp thirty days on the food I've got here in the little studio my employer is providing. Friday is payday and I'll expand my stash a bit more. I'm walking distance from the gym, the library, and my place of work. Groceries are a problem but the bike is here, sans basket, and I should be able to lay hands on a new 125cc Yamaha Zuma which will get me to the remote work sites.

And best of all there is an Amtrak stop right around the corner from the house I'll likely end up sharing with a coworker when things get really grim. Till then I'm enjoying company funded privacy ...

After a year and a half of knowing it was coming it's right here, right now, at least from my perspective.

Bigelow said...

This "tyranny of incompetence"

I have no inside info to prove it but incompetence it was not, it was all on purpose.

Anonymous said...

I'll back up the 'pilot issue' For the past 5 years I've been dissuading any eager young aviators - the airlines are a disaster and 'peak oil' doesn't appear to be on the radar. For experienced pilots the next few (?) years might be OK but this career option has ended.

My pilot's license was about $50,000 20 years ago, paid in advance of course (you have to qualify before you can get paid). Anybody interested in spending that equivalent to get a job with a shrinking airline that may or may not be able to find jet fuel?

Maybe I'm wrong but I'm making sure there is a train between any places I want to be.

Sarfaraz Ahmed said...

Great blog

Anonymous said...

Actually, peak oil is not a problem for the future, it's the problem right now.

Oil plateaued in 05, the prices spiked for three years and drove a stake through the economy.

And so what if "demand" is currently falling? This is merely temporary. The net increase in world population happens to the tune of +200,000 peeps a day.

Peak oil is killing us right this moment. The masters of the Universe failed because they didn't expect growth to stop.

But it did.

westexas said...

Regarding oil, IMO it's all about net oil exports.

The top five net oil exporters--Saudi Arabia, Russia, Norway, Iran and the UAE--account for about half of total world net oil exports. Our middle case is that their post-2005 cumulative net oil exports will be about 120 billion barrels (Gb). Assuming a net export rate of about 20 mbpd, they are shipping about one percent of their remaining cumulative net oil exports every 50 days. By the end of 2012, our middle case is that their post-2005 cumulative net oil exports will be about 50% depleted.

Furthermore, I estimate that three of our top four sources of imported oil--Canada, Venezuela and Mexico--will be down to 2.7 mbpd of combined net oil exports in 2012, versus 5.0 mbpd in 2004.

And, if we use the 1930's as a model, oil consumption worldwide only fell one year, in 1930, with consumption rising after 1930, and in constant dollar terms oil prices rose at about +11%/year from 1931 to 1937.

The big difference between the Great Depression and the Greater Depression, IMO, is that we are now facing a long term accelerating decline rate in net oil exports, versus expanding oil supplies in the Thirties.

Stoneleigh said...


While I agree with the above, the longer term oil situation is worsened by the financial crisis. The financial crisis is choking off critical investment needed right now just to maintain certain fields. Many of those fields are so old and so depleted that if they fall into disrepair, they may never be brought back to full potential production.

So even for peak oil, the economic crisis worsens things in the long run. Yes, it reduces our current consumption but we may never know how much future production will be lost due to lack of proper maintenance and development right now in already producing fields.

I agree, and I'm sure Ilargi would too. In the short term lack of money will be more of a problem than than lack of energy, thanks to demand destruction that has much further to go, but the inevitable supply collapse is coming.

Before we see that dynamic in action, I think we could see a significant rebound in energy prices coincident with the large sucker rally I expect this year. The rally should be the largest we've seen since the peak, and should see liquidity (partially and temporarily) return to many sectors over perhaps a few months. Even housing could see a temporary respite, as unlikely as that currently sounds. Watch out when it's over though - we're still much closer to the top than to any lasting bottom. The deleveraging might be close to the end of the beginning, but the bulk of debt implosion is still to come.

But before we see any kind of rally get underway, we should be in for some really scary headlines as the market looks for a temporary bottom on maximum fear. It would be typical to see a major bankruptcy near that low, and there are certainly a number of potential candidates. (Last year near this time it was the failure of Bear Stearns that provided the springboard for a rally smaller than this coming one should be.)

As always during a bear market, rallies are best thought of as opportunities to cash out at an advantageous rate. Cash will be king for a long time to come.

Stoneleigh said...


The big difference between the Great Depression and the Greater Depression, IMO, is that we are now facing a long term accelerating decline rate in net oil exports, versus expanding oil supplies in the Thirties.

Yes, and the impact of that will be enormous.

Greenpa said...

Just be aware, folks- the Obituary for Blinky is pure coverup; typical of the mainstream media. The funeral was staged, and all those there complicit. The truth, already confessed to, is that Blinky showed up here, and being desperate- we ate him.

And yes, we had a fricasseeing rabbit licence.

For those feeling a bit of alienation these days:

Anonymous said...


It seems as if we've found somewhat of an equilibrium with gasoline at this price. Yesterday's EIA report showed gasoline demand up 1.7% yoy. There was also a 3.5 mb draw down in unleaded. This could get very interesting, and not in a good way, really fast.

bluebird said...

Stoneleigh - As part of the temporary bottom, before the stock rally, would people have so much fear that there would be global panic market selling?

Or after the market rally, then people realize it's not getting any better and panic globally to sell everything?

Or maybe you don't see any global market crash from worldwide fear at any time?

Anonymous said...

I just heard on the Diane Rehm Show (NPR) that US arm dealers are selling weapons to the Mexican drug cartel. I wonder if Michael Ruppert would say that the CIA is involved on what's transpiring...

bluebird said...

Ruppert had a cryptic post the other day.

Anonymous said...


Yes, it will be the recession or depression that never ends, as Richard Heinberg and others have said.

Anonymous said...

Thanks, Bluebird. I read it. Scary ...

Anonymous said...

A depression that never ends is not a depression since a depression needs two edges.

Anonymous said...

@ aitrader

Thanks for the kind words.

No, I have no further information regarding how effective OPEC is at enforcing quotas. It is, as Ilargi says, likely that many are shipping all they can in order to make the best of a bad (for them) situation.

We are just finishing what is typically the weakest period of the year for oil prices. There were a couple of articles recently about oil which had been stored in leased tankers being sold as the price contango eased, which would act to depress prices temporarily.

There was a post (over on financial sense, I think) which contained a diagram of oil prices against a set of horizontal bands - in the bottom price band you have supply destruction, in the central band you have BAU, in the top band you have demand destruction. Clearly, those bands would not be horizontal, but would change over time.

In the current environment I would expect demand destruction to set in at a lower price than a couple of years ago, which will tend to put a cap on prices. The cost of steel is down, rig lease rates are down, so the supply destruction point is also down. I would put (my own opinion here) the BAU band at $55 to $80 now. I expect to be in the lower part of that band as demand picks up in May.

One thing I touched on a couple of weeks ago, and again above, is that there are three distinct things we tend to lump under the label "Peak Oil", and we need to be a bit more careful in our use of language.

Peak Oil is about maximum rate of production, e.g. for all liquids in a calendar year.

Oil scarcity is the "absence of glut". Supply and demand are well within the range at which normal market forces can allocate the scarce resource by price. We saw oil prices climb fairly steadily for a decade as oil became increasingly scarce. At the end, prices were jumping sharply since demand destruction had to move into developed economies.

Oil shortages are cases where oil just isn't available at any price. This may be do to market distortion, such as a price control, where you can buy as much gas as you want for $1, but all the stations are empty. It may be due to temporary problems like the hurricane-induced pipeline shutdown last fall, which is not fixed by the market but by guys with wrenches. Or it may be the end game where there just isn't enough to go around - we can't operate the ambulances because we can't find any fuel at any price.

Oil scarcity and oil shortages can and did occur before Peak Oil. Now, as I believe, that Peak Oil is in the past, we will have more frequent and more severe occurrences of oil scarcity and shortages.

Anonymous said...


My bet is Arizona. Tucson is now the kidnapping capital of the US, I hear. What used to happen in one year (3 years ago) is now happening in one month.

Sorry, I don't have a source for that; it's just what I've heard.

The only way out that I see is legalization. And I'm not sure that's a net positive for society, but it's better than the Drug Lords or the War on Drugs.

@Iowa Boy:

That was interesting. Thanks for posting that.

Anonymous said...

Hey, Depression is a state of Mind.

I couldn't resist.

Anonymous said...

Drugs will be legalized in some form or another like booze was for the start of Depression I.

Recreational drugs will be part of the Ministry of Propaganda's new improved Bread & Circuses campaign to lull the masses into a stupor of resigned acceptance of their New Lot in Life.

Anonymous said...

Paul Craig Roberts just wrote a good article regarding the economy. He asserts that no economic recovery will ever happen since industry and tech jobs have been gutted in America:

Roberts is agast at the current state of affairs the American worker, but where was all this outrage when Reagan declared war on the American worker in the 80's?

Roberts now seems to think he can read the future; too bad his crystal ball was so dusty in 1982 when his outrage and consternation could have actually done some good.

Hey Paul, does Air Traffic controllers ring a bell? What about Cesar Chavez and the United Farm Workers?

Anonymous said...

* Andy from San Diego suggests a "Name that Depression" contest
* Obama sells ice to eskimos; Pitches this as solution to global warming
* Republicans and Democrats: two sides of the same douche bag
* George Mammon, Formerly of Lloyd Harbor, N.Y., bids clients farewell and is off to the Great White North
* The Chinese are not irrational but are transcendental; Americans, the root of the problem, are irrational
* Given an infinite amount of time and money Obama can fix all our problems; This gives some hope that he might still save our sorry asses
* Peak oil trumped by deflation; Oil production drops but demand drops further; Eventually production will fall lower than demand and then prices will rise; Some estimate this will take only one year or less
* Waning car production causes vicious cycle
* Mexico in free fall as drug cartels reign with help of US made weapons
* Peak oil as cause of credit crunch broached again; RTFA, dude
* Rapier suggests humor section; AITrader obliges
* National institute of mental health mistaken for rechargeable battery
* The Black Rabbit of Inle' claims to be posting to TAE
* Great prose: "Dave's been laid off. The ARM is going to reset. (I wonder if it is attached to the Invisible Hand)"
* Update from IowaBoy: Credit crunch has bit here
* Becoming a professional pilot discouraged
* Blinky, despondent, ingests cyanide and ends up in GreenPa's stew pot; We will miss them both

Anonymous said...

Regarding Mexico: a couple of articles

State of War from Foreign Policy.

Could a Sudden Collapse of Mexico Be Obama's Surprise Foreign Policy Challenge?
from alternet.

Apologies if either of these was previously linked from here, I read so much stuff I forget where I found it.

Unknown said...

Starcade, now from Leviathan said...

We aren't making it two more decades as a nation -- we'll be lucky to make it two more _years_.

(Some I've been reading have been saying two more _MONTHS_!!)

Some have been saying two months for a lot longer than two months.. this should tell you something.

Unknown said...

I might have to divert a small amount of my monthly TAE donation to the Noon Summary.

Greenpa said...

noon summary- well, someone has to lead the zombies, I suppose. What the hay. I'll be around.

Anonymous said...


Thanks for the review.

Couple of figures I keep my eye on.

Rotary Rig Count - North America

2/22/08 2,481

2/20/09 1,701

5/1/09 1,200 (if trendline continues)

At current rates of consumption there are over 52 days of finished gasoline stocks which is 3.4 days more than last year and 5 days higher than the average for February over the last 5-years. If the SPR is included, days coverage is 3.7 days higher than last year.

Crude stocks, excluding SPR, are 21.9% over last year's stocks at this time.


Seems fairly bearish for the short term. I wonder how long demand destruction will continue. Ilargi may be right that it will eclipse supply for a couple of years.

And Natural Gas is the real stinker. All of that expensive horizontal drilling in the oil shales is putting a lot of companies on the brink of bankruptcy (thinking CHK and HK here specifically).

Anonymous said...

The Media Education Foundation is about to release a new documentary called "Capitalism Hits the Fan." It's narrated by Richard Wolff, a UMass econ prof. Transcript available here:

Capitalism Hits the Fan (PDF file)

Seems to have a good background, big-picture view of history, but the prescriptions at the end are pretty weak: watered-down Marxism. No, really! Here's his description of what works:

Over the last 30 years, every year, hundreds and in some years
thousands of engineers in that little strip of land between San Francisco and San Jose
called Silicon Valley, have done the following interesting thing. They quit their jobs
working for big companies like Cisco or IBM or any of those, and together with a few
friends, having walked away from those jobs, they set up a little enterprise amongst
themselves, working out of one of their garages. And they come to work each day, not
wearing a suit and tie, the way they used to when working at IBM, not taking their orders
as to what to do as software engineers from a supervisor, whom they didn’t like. Instead
they came to work, with their laptops in tow, at the garage of their friend, wearing
Hawaiian shirts, grasping a Frisbee, maybe with a dog, maybe with a toddler, and having a
wonderful time in a new little enterprise. And here’s how they ran their enterprise, “We’re
all equal here. No one’s a supervisor. No one’s telling what else to do. We’re going to do
this all as a group. And from Monday to Thursday, we’re going to make software
programs the way we always did, but on Friday we’re going to come to work, and we’re
not going to open the laptops. We’re not going to make software. On Friday, we sit
around all day and have meetings because we’re our own board of directors. We decide
what to do with the profits we’ve earned, we decide what to do whether to change our
technology or to have more people working here or to move to another part of San
Mateo community, or whatever. We are our own board of directors.” This has been going
on for years. These people voted with their feet and their lives to leave one kind of
organization of production and establish another.

goritsas said...


Peak Oil is about maximum rate of production, e.g. for all liquids in a calendar year.

Peak Oil is the peak in production, and the onset of decline, of conventional crude, C&C (crude and condensate). It has nothing to do with all liquids. All that matters, and all that has mattered, and all that will matter, is good, old fashioned crude oil. The stuff that roughnecks get out of the ground. Peak all liquids is not Peak Oil. If you’re going to define your terms, at least define them correctly.

Depletion is not decline. Depletion tells us how much recoverable resource is left. Decline tells how fast the flow is falling. Flow is what matters. Not enough flow means somebody somewhere is going to do without. No matter how much still remains to recover.

Anonymous said...

Another interesting speech that I don't think got any MSM reporting concerns former Fed Chairman Paul Volcker. Apparently he escaped from whatever cell they've been holding him in, and he spoke in Canada. Transcript here, courtesy of

Volcker Speech in Toronto

It's sort of off-the-cuff, but here's one tidbit:

So I think we have a problem which is not an ordinary business cycle problem. It is much more difficult to get out of and it has shaken the foundations of our financial institutions. The system is broken. I’m not going to linger over what to do about it. It is very difficult. It is going to take a lot of money and a lot of losses in the banking system. It is not unique to the United States. It is probably worse in the UK and it is just about as bad in Europe and it has infected other economies as well. Canada is relatively less infected, for reasons that are consistent with the direction in which I think the financial markets and financial institutions should go.

Anonymous said...


A collapse by Mexico's central government would be a godsend to -0- and to the US economy. In fact, as we each puzzle through each day's announcements (or non-announcements as it were), the one thing that isn't being addressed is ... Mexico.

Why is that? Could it be that it would take millions of previously unemployed & freshly minted troops to occupy the country and restore some semblance of order?

Could it be that Mexico has thousands upon thousands of pristine beaches just begging for development? Could it be that Mexico has multiple deep water ports on both coasts? Could it be that Mexico needs 10s of $trillions in infrastructure (highways, railroads, water, sewage, power, etc) improvements?

Could it be the very thing we need to jump start our productive industrial capacity? If we go into Mexico, stop reading the doomer blogs, get out of cash, and go long in every asset class you can possibly find.

It's been said before, we are like sharks. We need to keep moving forward or we die. This sitting around stuff waiting for the banks, gov't or whatever else is for the birds.

We're going in, kickin' ass and taking names. Count on it.

Anonymous said...


Excuse my ignorance but what is "net oil exports" as opposed to "gross oil exports" or just "oil exports"?

Anonymous said...

acrumb wrote:
"Mexico is in free fall
With cartels taking over cities and killing all anti-drug officials, the country is crying out for help – but is unlikely to get it from the US"

Just the opposite. The Mexican gov't has repeatedly turned down requests from the US for help. The are concerned that the US may close down or limit border traffic, which would be devistating to the Mexican economy that exports lots of goods to the US. Not to meantion all of the illegals that bring cash home.

Anonymous said...

acrumb wrote:
"Mexico is in free fall
With cartels taking over cities and killing all anti-drug officials, the country is crying out for help – but is unlikely to get it from the US"

Just the opposite. The Mexican gov't has repeatedly turned down requests from the US for help. The are concerned that the US may close down or limit border traffic, which would be devistating to the Mexican economy that exports lots of goods to the US. Not to meantion all of the illegals that bring cash home.

Anonymous said...

@ goritsas

Two of the big problems in discussing Peak Oil is defining what we mean by "peak", and what we mean by "oil".

My statement, which you quoted, used an "e.g." as in "this is one definition".

C+C peak was some time back (2004? 2005? I forget).

There is nothing magical about the January-December time frame - one could also use a running 12 month interval, which could shift the date from one calendar year to another.

I have seen some claim a definition of the year in which the peak monthly production occurred.

I suppose you could claim a definition of the year in which the peak daily production occurred, but nobody publishes those figures, so we wouldn't know.

It might be interesting to define it as peak productive capacity, but we don't have any reliable figures for that, so it would be useless in practice.

It might be most useful to define it as peak production of BTUs in liquid form, since different liquids have different BTUs per unit volume (NGL and ethanol are only about 70% the energy density of crude). One could probably derive such a figure from available sources, but I haven't seen it.

I go with all liquids because petroleum has uses other than as a liquid fuel, so ethylene production is also relevant.

The terminology point I'm trying to make is that Peak Oil is one thing, and shortages and scarcity is another thing. By any useful definition, Peak Oil is behind us. Scarcity and shortages due to the peaking of oil production are still ahead.

@ aitrader

I don't think westexas visits us more than once per day, so let me give you a quick answer. I think westexas is the originator of the concept, and has written about it extensively over at TOD, you can search there for more info.

In order for a country to import oil, somebody else has to have a surplus of oil to export. That country will consume some oil on its own. The surplus is "net oil export". The concept is that as production peaks in a country, its internal consumption continues to grow, and its exports are eroded both from the top (lower production) and the bottom (higher consumption). Exports drop rapidly. This was observed, for example, in the UK.

Just as world production mostly comes from a handful of mega-fields, exports come mostly from a handful of exporters.

As westexas notes, above, there just won't be a lot of oil on the market, available to be imported, in a decade. Countries will be reduced to what they can produce domestically, which will make shortages and scarcity worse in currently oil-importing countries than it would appear from looking at aggregate world production and consumption figures.

Anonymous said...


Thanks. Familiar with the concept but not the terminology. In my terms the "net oil exports" concept means that exports follow a decline curve but suddenly drop to zero when the curve intersects the minimum domestic supply requirements.

I've seen the graphical projections for the UK. I do not completely agree with the concept as there must be some export-price elasticity. I would expect the export curve to steepen but not go to zero.

What I think will be really interesting is what happens in places like Iran and Venezuela where the populace is placated with heavily subsidized oil. The catch-22 of export income versus a docile domestic popluation will be an interesting trade-off. My bet is export income will win the day and these governments will increasingly use force to keep order.

Anonymous said...

I was in Vancouver on business recently and noticed a Sauvignon Blanc from New Zealand called "Stoneleigh" on a restaurant wine list! Is that where you got your pseudonym? Just curious.

Stoneleigh said...

Dr Chaos,

I was in Vancouver on business recently and noticed a Sauvignon Blanc from New Zealand called "Stoneleigh" on a restaurant wine list! Is that where you got your pseudonym? Just curious.

I've tried a bottle of that wine, as it simply had to be done :)

My pseudonym actually comes from a beautiful village near where I used to live in England (in the Midlands).

Anonymous said...

Excellent, so now I know!

westexas said...

Re: aitrader

Greenman pretty well described the Net Export concept. Here is a link to our paper on the top five net oil exporters:

Regarding your inventory numbers, I think you have a typo regarding gasoline inventories. In any case, we need to look at inventories in terms of Minimum Operating Level (MOL), probably about 270 mb for crude and about 170 mb for gasoline.

Currently, we have about six days of crude oil supply in excess of MOL and about five days of gasoline supply in excess of MOL.

Also, total product inventories are basically flat year over year. While crude inventories are higher year over year, it's basically the difference between three to four days of supply in excess of minimum, versus six days.

I discussed the topic in the following article:

Declining Net Oil Exports Versus “Near Record High” Crude Oil Inventories: What is going on? (September, 2007)

Anonymous said...

this is for the recently deceased ones mentioned at the end of today's Noon Summary.


Anonymous said...


Thanks for the links.

The figures aren't mine. They come from an energy newsletter I subscribe to - James Williams, The Energy Economist.

westexas said...

In any case, here is the EIA website:

The EIA shows that we have 24 Days of Supply of total gasoline stocks, and as noted above, about five days of supply in excess of MOL.

Anonymous said...


You're looking at the EIA Weekly Supply Estimates, which is a summary report. I believe the stocks figures James Williams uses come from the weekly status report, which is a detail report.

The SPR figures I posted above came from the weekly status reports as, I believe, do the summary figures Williams compiled that I reposted from his newsletter.

Thanks for the feedback.

westexas said...

Yes, and both reports show 215 mb of gasoline stocks. MOL is about 170 mb. We use about 9 mbpd, so we have about five days of supply in excess of MOL.

This graph also puts crude inventories in perspective:

westexas said...

Yes, and both reports show 215 mb of gasoline stocks. MOL is about 170 mb. We use about 9 mbpd, so we have about five days of supply in excess of MOL.

This graph also puts crude inventories in perspective:

Anonymous said...

Stoneleigh - do you do any public speaking on these issues? I am looking for a speaker to provide an orientation for a meeting of health officers. I can be reached at wortman dot md at gmail dot com.

Greenpa said...

wow, z; gorgeous music. Who's the artist? I was expecting Chopin at first- but I think not.

Thanks! It's serving as a lullaby, at the moment!

Anonymous said...


so we have about five days of supply in excess of MOL

isn't that the same figure I quoted from Williams...?